0001069157 us-gaap:CreditRiskContractMember us-gaap:NondesignatedMember 2019-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-24939
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-4703316
(I.R.S. Employer Identification No.)
135 North Los Robles Ave., 7th Floor, Pasadena, California91101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(626) 768-6000
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | |
| Title of each class | | DelawareTrading
(State or other jurisdiction of incorporation or organization)Symbol(s)
| | 95-4703316Name of each exchange
(I.R.S. Employer Identification No.) on which registered
|
| Common Stock, $0.001 Par Value | | EWBC |
135 North Los Robles Ave., 7th Floor, Pasadena, California 91101
(Address of principal executive offices)(Zip Code)
| The Nasdaq Global Select Market |
Registrant’s telephone number, including area code:
(626) 768-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
| Large accelerated filer | x☒ | | Accelerated filer | ¨☐ |
| Non-accelerated filer | ¨☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨☐ |
| | | Emerging growth company | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨☐ No x☒
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 144,542,911141,486,290 shares as of October 31, 2017.
TABLE OF CONTENTS
Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q (“Form 10-Q”) contain or incorporate statements that East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) believes are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company.
There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such differences, some of which are beyond the Company’s control, include, but are not limited to:
the Company’s ability to compete effectively against other financial institutions in its banking markets;
changes in the commercial and consumer real estate markets;
changes in the Company’s costs of operation, compliance and expansion;
changes in the United States (“U.S.”) economy, including inflation, employment levels, rate of growth and general business conditions;
changes in government interest rate policies;
changes in laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Consumer Financial Protection Bureau and the California Department of Business Oversight — Division of Financial Institutions;
heightened regulatory and governmental oversight and scrutiny of the Company’s business practices, including dealings with consumers;
changes in the economy of and monetary policy in the People’s Republic of China;
changes in income tax laws and regulations;
changes in accounting standards as may be required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies and their impact on critical accounting policies and assumptions;
changes in the equity and debt securities markets;
future credit quality and performance, including the Company’s expectations regarding future credit losses and allowance levels;
fluctuations in the Company’s stock price;
fluctuations in foreign currency exchange rates;
success and timing of the Company’s business strategies;
ability of the Company to adopt and successfully integrate new technologies into its business in a strategic manner;
impact of reputational risk from negative publicity, fines and penalties and other negative consequences from regulatory violations and legal actions;
impact of potential federal tax changes and spending cuts;
impact of adverse judgments or settlements in litigation;
impact of regulatory enforcement actions;
changes in the Company’s ability to receive dividends from its subsidiaries;
impact of political developments, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;
impact of natural or man-made disasters or calamities or conflicts or other events that may directly or indirectly result in a negative impact on the Company’s financial performance;
continuing consolidation in the financial services industry;
the Company’s capital requirements and its ability to generate capital internally or raise capital on favorable terms;
impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Company’s business, business practices and cost of operations;
impact of adverse changes to the Company’s credit ratings from the major credit rating agencies;
impact of failure in, or breach of, the Company’s operational or security systems or infrastructure, or those of third parties with whom the Company does business, including as a result of cyber attacks; and other similar matters which could result in, among other things, confidential and/or proprietary information being disclosed or misused;
adequacy of the Company’s risk management framework, disclosure controls and procedures and internal control over financial reporting;
the effect of the current low interest rate environment or changes in interest rates on the Company’s net interest income and net interest margin;
the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; and
a recurrence of significant turbulence or disruption in the capital or financial markets, which could result in, among other things, a reduction in the availability of funding or increased funding costs, reduced investor demand for mortgage loans and declines in asset values and/or recognition of other-than-temporary impairment (“OTTI”) on securities held in the Company’s available-for-sale investment securities portfolio.
For a more detailed discussion of some of the factors that might cause such differences, see the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the U.S. Securities and Exchange Commission on February 27, 2017 (the “Company’s 2016 Form 10-K”), under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “ITEM 1A. RISK FACTORS” in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSSHEET
($ in thousands, except shares)
(Unaudited)
| | | | | | September 30,
2017 | | December 31,
2016 | | March 31,
2020 | | December 31,
2019 |
| | | (Unaudited) | | | | (Unaudited) | | |
| ASSETS | | | | | | | | |
| Cash and due from banks | | $ | 364,328 |
| | $ | 460,559 |
| | $ | 427,415 |
| | $ | 536,221 |
|
| Interest-bearing cash with banks | | 1,372,421 |
| | 1,417,944 |
| | 2,652,627 |
| | 2,724,928 |
|
| Cash and cash equivalents | | 1,736,749 |
| | 1,878,503 |
| | 3,080,042 |
| | 3,261,149 |
|
| Interest-bearing deposits with banks | | 404,946 |
| | 323,148 |
| | 293,509 |
| | 196,161 |
|
| Securities purchased under resale agreements (“resale agreements”) | | 1,250,000 |
| | 2,000,000 |
| | 860,000 |
| | 860,000 |
|
| Securities : | | | | | |
| Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $584,907 in 2017 and $767,437 in 2016) | | 2,956,776 |
| | 3,335,795 |
| |
| Held-to-maturity investment security, at cost (fair value of $144,593 in 2016) | | — |
| | 143,971 |
| |
| Securities: | | | | | |
| Available-for-sale (''AFS'') debt securities, at fair value (amortized cost of $3,660,413 in 2020; includes assets pledged as collateral of $742,410 in 2020 and $479,432 in 2019) | | | 3,695,943 |
| | 3,317,214 |
|
| Restricted equity securities, at cost | | 73,322 |
| | 72,775 |
| | 78,745 |
| | 78,580 |
|
| Loans held-for-sale | | 178 |
| | 23,076 |
| | 1,594 |
| | 434 |
|
| Loans held-for-investment (net of allowance for loan losses of $285,926 in 2017 and $260,520 in 2016; includes assets pledged as collateral of $18,182,265 in 2017 and $16,441,068 in 2016) | | 28,239,431 |
| | 25,242,619 |
| |
| Loans held-for-investment (net of allowance for loan losses of $557,003 in 2020 and $358,287 in 2019; includes assets pledged as collateral of $23,107,287 in 2020 and $22,431,092 in 2019) | | | 35,336,390 |
| | 34,420,252 |
|
| Investments in qualified affordable housing partnerships, net | | 178,344 |
| | 183,917 |
| | 198,653 |
| | 207,037 |
|
| Investments in tax credit and other investments, net | | 203,758 |
| | 173,280 |
| | 268,330 |
| | 254,140 |
|
| Premises and equipment (net of accumulated depreciation of $109,296 in 2017 and $114,890 in 2016) | | 131,311 |
| | 159,923 |
| |
| Premises and equipment (net of accumulated depreciation of $120,156 in 2020 and $116,790 in 2019) | | | 115,393 |
| | 118,364 |
|
| Goodwill | | 469,433 |
| | 469,433 |
| | 465,697 |
| | 465,697 |
|
| Operating lease right-of-use assets | | | 101,381 |
| | 99,973 |
|
| Other assets | | 663,718 |
| | 782,400 |
| | 1,452,868 |
| | 917,095 |
|
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 45,948,545 |
| | $ | 44,196,096 |
|
| LIABILITIES | | |
| | |
| | | | |
| Customer deposits: | | |
| | |
| |
| Deposits: | | | | | |
| Noninterest-bearing | | $ | 10,992,674 |
| | $ | 10,183,946 |
| | $ | 11,833,397 |
| | $ | 11,080,036 |
|
| Interest-bearing | | 20,318,988 |
| | 19,707,037 |
| | 26,853,561 |
| | 26,244,223 |
|
| Total deposits | | 31,311,662 |
| | 29,890,983 |
| | 38,686,958 |
| | 37,324,259 |
|
| Short-term borrowings | | 24,813 |
| | 60,050 |
| | 66,924 |
| | 28,669 |
|
| Federal Home Loan Bank (“FHLB”) advances | | 323,323 |
| | 321,643 |
| | 646,336 |
| | 745,915 |
|
| Securities sold under repurchase agreements (“repurchase agreements”) | | 50,000 |
| | 350,000 |
| | 450,000 |
| | 200,000 |
|
| Long-term debt | | 176,513 |
| | 186,327 |
| |
| Long-term debt and finance lease liabilities | | | 152,162 |
| | 152,270 |
|
| Operating lease liabilities | | | 109,356 |
| | 108,083 |
|
| Accrued expenses and other liabilities | | 639,759 |
| | 552,096 |
| | 933,824 |
| | 619,283 |
|
| Total liabilities | | 32,526,070 |
| | 31,361,099 |
| | 41,045,560 |
| | 39,178,479 |
|
| COMMITMENTS AND CONTINGENCIES (Note 11) | |
|
| |
|
| |
| COMMITMENTS AND CONTINGENCIES (Note 10) | | |
|
| |
|
|
| STOCKHOLDERS’ EQUITY | | | | | | | | |
| Common stock, $0.001 par value, 200,000,000 shares authorized; 165,178,075 and 164,604,072 shares issued in 2017 and 2016, respectively | | 165 |
| | 164 |
| |
| Common stock, $0.001 par value, 200,000,000 shares authorized; 167,091,420 and 166,621,959 shares issued in 2020 and 2019, respectively | | | 167 |
| | 167 |
|
| Additional paid-in capital | | 1,745,181 |
| | 1,727,434 |
| | 1,833,617 |
| | 1,826,345 |
|
| Retained earnings | | 2,520,817 |
| | 2,187,676 |
| | 3,695,759 |
| | 3,689,377 |
|
| Treasury stock at cost — 20,667,132 shares in 2017 and 20,436,621 shares in 2016 | | (452,050 | ) | | (439,387 | ) | |
| Accumulated other comprehensive loss, net of tax | | (32,217 | ) | | (48,146 | ) | |
| Treasury stock, at cost — 25,656,321 shares in 2020 and 20,996,574 shares in 2019 | | | (633,439 | ) | | (479,864 | ) |
| Accumulated other comprehensive loss (“AOCI”), net of tax | | | 6,881 |
| | (18,408 | ) |
| Total stockholders’ equity | | 3,781,896 |
| | 3,427,741 |
| | 4,902,985 |
| | 5,017,617 |
|
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 45,948,545 |
| | $ | 44,196,096 |
|
|
See accompanying Notes to Consolidated Financial Statements.
53
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF INCOME
($ and shares in thousands, except per share data)
| | | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended March 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
| INTEREST AND DIVIDEND INCOME | | | | | | |
| | |
| | | | |
| Loans receivable, including fees | | $ | 306,939 |
| | $ | 255,316 |
| | $ | 872,039 |
| | $ | 763,189 |
| | $ | 411,869 |
| | $ | 423,534 |
|
| Investment securities | | 14,828 |
| | 13,388 |
| | 43,936 |
| | 37,433 |
| |
| AFS debt securities | | | 20,142 |
| | 15,748 |
|
| Resale agreements | | 7,901 |
| | 7,834 |
| | 25,222 |
| | 22,479 |
| | 5,565 |
| | 7,846 |
|
| Restricted equity securities | | 612 |
| | 611 |
| | 1,859 |
| | 2,008 |
| | 446 |
| | 713 |
|
| Interest-bearing cash and deposits with banks | | 9,630 |
| | 3,168 |
| | 22,298 |
| | 10,245 |
| | 11,168 |
| | 15,470 |
|
| Total interest and dividend income | | 339,910 |
| | 280,317 |
| | 965,354 |
| | 835,354 |
| | 449,190 |
| | 463,311 |
|
| INTEREST EXPENSE | | | | | | |
| | |
| | | | |
| Customer deposits | | 31,086 |
| | 21,049 |
| | 81,803 |
| | 60,708 |
| |
| Deposits | | | 76,403 |
| | 92,005 |
|
| Federal funds purchased and other short-term borrowings | | 212 |
| | 212 |
| | 877 |
| | 390 |
| | 556 |
| | 616 |
|
| FHLB advances | | 1,947 |
| | 1,361 |
| | 5,738 |
| | 4,153 |
| | 4,166 |
| | 2,979 |
|
| Repurchase agreements | | 2,122 |
| | 2,319 |
| | 7,538 |
| | 6,441 |
| | 3,991 |
| | 3,492 |
|
| Long-term debt | | 1,388 |
| | 1,228 |
| | 4,030 |
| | 3,726 |
| |
| Long-term debt and finance lease liabilities | | | 1,367 |
| | 1,758 |
|
| Total interest expense | | 36,755 |
| | 26,169 |
| | 99,986 |
| | 75,418 |
| | 86,483 |
| | 100,850 |
|
| Net interest income before provision for credit losses |
| 303,155 |
| | 254,148 |
| | 865,368 |
| | 759,936 |
|
| 362,707 |
| | 362,461 |
|
| Provision for credit losses | | 12,996 |
| | 9,525 |
| | 30,749 |
| | 17,018 |
| | 73,870 |
| | 22,579 |
|
| Net interest income after provision for credit losses | | 290,159 |
| | 244,623 |
| | 834,619 |
| | 742,918 |
| | 288,837 |
| | 339,882 |
|
| NONINTEREST INCOME | | | | | | |
| | |
| | | | |
| Branch fees | | 10,803 |
| | 10,408 |
| | 31,799 |
| | 30,983 |
| |
| Letters of credit fees and foreign exchange income | | 10,154 |
| | 10,908 |
| | 33,209 |
| | 31,404 |
| |
| Ancillary loan fees and other income | | 5,987 |
| | 6,135 |
| | 16,876 |
| | 13,997 |
| |
| Lending fees | | | 15,773 |
| | 14,969 |
|
| Deposit account fees | | | 10,447 |
| | 9,468 |
|
| Foreign exchange income | | | 7,819 |
| | 5,015 |
|
| Wealth management fees | | 3,615 |
| | 4,033 |
| | 11,682 |
| | 9,862 |
| | 5,357 |
| | 3,812 |
|
| Derivative fees and other income | | 6,663 |
| | 5,791 |
| | 12,934 |
| | 9,778 |
| |
| Interest rate contracts and other derivative income | | | 7,073 |
| | 3,216 |
|
| Net gains on sales of loans | | 2,361 |
| | 2,158 |
| | 6,660 |
| | 6,965 |
| | 950 |
| | 915 |
|
| Net gains on sales of available-for-sale investment securities | | 1,539 |
| | 1,790 |
| | 6,733 |
| | 8,468 |
| |
| Net gains on sales of fixed assets | | 1,043 |
| | 486 |
| | 74,092 |
| | 2,916 |
| |
| Net gain on sale of business | | 3,807 |
| | — |
| | 3,807 |
| | — |
| |
| Other fees and operating income | | 3,652 |
| | 7,632 |
| | 15,255 |
| | 19,745 |
| |
| Net gains on sales of AFS debt securities | | | 1,529 |
| | 1,561 |
|
| Other investment income | | | 1,921 |
| | 1,202 |
|
| Other income | | | 3,180 |
| | 1,973 |
|
| Total noninterest income | | 49,624 |
| | 49,341 |
| | 213,047 |
| | 134,118 |
| | 54,049 |
| | 42,131 |
|
| NONINTEREST EXPENSE | | | | | | |
| | |
| | | | |
| Compensation and employee benefits | | 79,583 |
| | 75,042 |
| | 244,930 |
| | 220,166 |
| | 101,960 |
| | 102,299 |
|
| Occupancy and equipment expense | | 16,635 |
| | 15,456 |
| | 47,829 |
| | 45,619 |
| | 17,076 |
| | 17,318 |
|
| Deposit insurance premiums and regulatory assessments | | 5,676 |
| | 6,450 |
| | 17,384 |
| | 17,341 |
| | 3,427 |
| | 3,088 |
|
| Legal expense | | 3,316 |
| | 5,361 |
| | 8,930 |
| | 12,714 |
| | 3,197 |
| | 2,225 |
|
| Data processing | | 3,004 |
| | 2,729 |
| | 9,009 |
| | 8,712 |
| | 3,826 |
| | 3,157 |
|
| Consulting expense | | 4,087 |
| | 4,594 |
| | 10,775 |
| | 19,027 |
| | 1,217 |
| | 2,059 |
|
| Deposit related expense | | 2,413 |
| | 3,082 |
| | 7,283 |
| | 7,675 |
| | 3,563 |
| | 3,504 |
|
| Computer software expense | | 4,393 |
| | 3,331 |
| | 13,823 |
| | 9,267 |
| | 6,166 |
| | 6,078 |
|
| Other operating expense | | 19,830 |
| | 19,814 |
| | 55,357 |
| | 58,508 |
| | 21,119 |
| | 22,289 |
|
| Amortization of tax credit and other investments | | 23,827 |
| | 32,618 |
| | 66,059 |
| | 60,779 |
| | 17,325 |
| | 24,905 |
|
| Amortization of core deposit intangibles | | 1,735 |
| | 2,023 |
| | 5,314 |
| | 6,177 |
| |
| Total noninterest expense | | 164,499 |
| | 170,500 |
| | 486,693 |
| | 465,985 |
| | 178,876 |
| | 186,922 |
|
| INCOME BEFORE INCOME TAXES | | 175,284 |
| | 123,464 |
| | 560,973 |
| | 411,051 |
| | 164,010 |
| | 195,091 |
|
| INCOME TAX EXPENSE | | 42,624 |
| | 13,321 |
| | 140,247 |
| | 90,108 |
| | 19,186 |
| | 31,067 |
|
| NET INCOME | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
| | $ | 144,824 |
| | $ | 164,024 |
|
| EARNINGS PER SHARE (“EPS”) | | | | | | | | | | | | |
| BASIC | | $ | 0.92 |
| | $ | 0.76 |
| | $ | 2.91 |
| | $ | 2.23 |
| | $ | 1.00 |
| | $ | 1.13 |
|
| DILUTED | | $ | 0.91 |
| | $ | 0.76 |
| | $ | 2.88 |
| | $ | 2.21 |
| | $ | 1.00 |
| | $ | 1.12 |
|
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | | | | | | | | |
| WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | | | | | |
| BASIC | | 144,498 |
| | 144,122 |
| | 144,412 |
| | 144,061 |
| | 144,814 |
| | 145,256 |
|
| DILUTED | | 145,882 |
| | 145,238 |
| | 145,849 |
| | 145,086 |
| | 145,285 |
| | 145,921 |
|
| DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.60 |
| | $ | 0.60 |
| |
|
See accompanying Notes to Consolidated Financial Statements.
64
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
| | | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended March 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
| Net income | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
| | $ | 144,824 |
| | $ | 164,024 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
| Net change in unrealized (losses) gains on available-for-sale investment securities | | (1,906 | ) | | (4,907 | ) | | 7,916 |
| | 12,993 |
| |
| Net changes in unrealized gains on AFS debt securities | | | 27,453 |
| | 22,011 |
|
| Foreign currency translation adjustments | | 3,870 |
| | (555 | ) | | 8,013 |
| | (5,226 | ) | | (2,164 | ) | | 3,180 |
|
| Other comprehensive income (loss) | | 1,964 |
| | (5,462 | ) | | 15,929 |
| | 7,767 |
| |
| Other comprehensive income | | | 25,289 |
| | 25,191 |
|
| COMPREHENSIVE INCOME | | $ | 134,624 |
| | $ | 104,681 |
| | $ | 436,655 |
| | $ | 328,710 |
| | $ | 170,113 |
| | $ | 189,215 |
|
|
See accompanying Notes to Consolidated Financial Statements.
75
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except share data)shares)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Common Stock and Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss, Net of Tax | | Total Stockholders’ Equity |
| | | Shares | | Amount | | | | |
| BALANCE, JANUARY 1, 2016 | | 143,909,233 |
| | $ | 1,701,459 |
| | $ | 1,872,594 |
| | $ | (436,162 | ) | | $ | (14,941 | ) | | $ | 3,122,950 |
|
| Net income | | — |
| | — |
| | 320,943 |
| | — |
| | — |
| | 320,943 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 7,767 |
| | 7,767 |
|
| Stock compensation costs | | — |
| | 13,973 |
| | — |
| | — |
| | — |
| | 13,973 |
|
| Net activity of common stock pursuant to various stock compensation plans and agreements, and related tax benefits | | 224,071 |
| | 2,981 |
| | — |
| | (3,144 | ) | | — |
| | (163 | ) |
| Cash dividends on common stock | | — |
| | — |
| | (87,416 | ) | | — |
| | — |
| | (87,416 | ) |
| BALANCE, SEPTEMBER 30, 2016 | | 144,133,304 |
| | $ | 1,718,413 |
| | $ | 2,106,121 |
| | $ | (439,306 | ) | | $ | (7,174 | ) | | $ | 3,378,054 |
|
| BALANCE, JANUARY 1, 2017 | | 144,167,451 |
| | $ | 1,727,598 |
| | $ | 2,187,676 |
| | $ | (439,387 | ) | | $ | (48,146 | ) | | $ | 3,427,741 |
|
| Net income | | — |
| | — |
| | 420,726 |
| | — |
| | — |
| | 420,726 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 15,929 |
| | 15,929 |
|
| Stock compensation costs | | — |
| | 15,780 |
| | — |
| | — |
| | — |
| | 15,780 |
|
| Net activity of common stock pursuant to various stock compensation plans and agreements | | 343,492 |
| | 1,968 |
| | — |
| | (12,663 | ) | | — |
| | (10,695 | ) |
| Cash dividends on common stock | | — |
| | — |
| | (87,585 | ) | | — |
| | — |
| | (87,585 | ) |
| BALANCE, SEPTEMBER 30, 2017 | | 144,510,943 |
| | $ | 1,745,346 |
| | $ | 2,520,817 |
| | $ | (452,050 | ) | | $ | (32,217 | ) | | $ | 3,781,896 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Common Stock and
Additional Paid-in Capital | | Retained
Earnings | | Treasury
Stock | | AOCI,
Net of Tax | | Total
Stockholders’
Equity |
| | | Shares | | Amount | | | | |
| Balance, January 1, 2019 | | 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 (1) | | — |
| | — |
| | 14,668 |
| | — |
| | — |
| | 14,668 |
|
| Net income | | — |
| | — |
| | 164,024 |
| | — |
| | — |
| | 164,024 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | 25,191 |
| | 25,191 |
|
| Warrants exercised | | 180,226 |
| | 1,711 |
| | — |
| | 2,732 |
| | — |
| | 4,443 |
|
| Net activity of common stock pursuant to various stock compensation plans and agreements | | 359,712 |
| | 7,436 |
| | — |
| | (14,036 | ) | | — |
| | (6,600 | ) |
| Cash dividends on common stock ($0.23 per share) | | — |
| | — |
| | (33,770 | ) | | — |
| | — |
| | (33,770 | ) |
| BALANCE, MARCH 31, 2019 | | 145,501,301 |
| | $ | 1,799,124 |
| | $ | 3,305,054 |
| | $ | (479,265 | ) | | $ | (32,983 | ) | | $ | 4,591,930 |
|
| Balance, January 1, 2020 | | 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 (2) | | — |
| | — |
| | (97,967 | ) | | — |
| | — |
| | (97,967 | ) |
| Net income | | — |
| | — |
| | 144,824 |
| | — |
| | — |
| | 144,824 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 25,289 |
| | 25,289 |
|
| Net activity of common stock pursuant to various stock compensation plans and agreements | | 281,396 |
| | 7,272 |
| | — |
| | (7,609 | ) | | — |
| | (337 | ) |
| Repurchase of common stock pursuant to the Stock Repurchase Program | | (4,471,682 | ) | | — |
| | — |
| | (145,966 | ) | | — |
| | (145,966 | ) |
| Cash dividends on common stock ($0.275 per share) | | — |
| | — |
| | (40,475 | ) | | — |
| | — |
| | (40,475 | ) |
| BALANCE, MARCH 31, 2020 | | 141,435,099 |
| | $ | 1,833,784 |
| | $ | 3,695,759 |
| | $ | (633,439 | ) | | $ | 6,881 |
| | $ | 4,902,985 |
|
| |
| |
| (1) | Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and subsequent related ASUsin the first quarter of 2019. |
| |
| (2) | Represents the impact of the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020. Refer to Note 2 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q (“this Form 10-Q”) for additional information. |
See accompanying Notes to Consolidated Financial Statements.
86
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
|
| | | | | | | | |
| |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
| Net income | | $ | 144,824 |
| | $ | 164,024 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
| Depreciation and amortization | | 31,186 |
| | 39,498 |
|
| Accretion of discount and amortization of premiums, net | | (4,519 | ) | | (4,414 | ) |
| Stock compensation costs | | 7,209 |
| | 7,444 |
|
| Deferred income tax expense (benefit) | | 28 |
| | (406 | ) |
| Provision for credit losses | | 73,870 |
| | 22,579 |
|
| Net gains on sales of loans | | (950 | ) | | (915 | ) |
| Net gains on sales of AFS debt securities | | (1,529 | ) | | (1,561 | ) |
| Net loss on sales of fixed assets | | 3 |
| | — |
|
| Loans held-for-sale: | | | | |
| Originations and purchases | | (5,802 | ) | | (2,167 | ) |
| Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | | 4,657 |
| | 2,454 |
|
| Proceeds from distributions received from equity method investees | | 973 |
| | 1,150 |
|
| Net change in accrued interest receivable and other assets | | (462,766 | ) | | (27,639 | ) |
| Net change in accrued expenses and other liabilities | | 304,680 |
| | (60,806 | ) |
| Other net operating activities | | (161 | ) | | — |
|
| Total adjustments | | (53,121 | ) | | (24,783 | ) |
| Net cash provided by operating activities | | 91,703 |
| | 139,241 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| | |
|
| Net (increase) decrease in: | | |
| | |
|
| Investments in qualified affordable housing partnerships, tax credit and other investments | | (27,581 | ) | | (33,261 | ) |
| Interest-bearing deposits with banks | | (115,419 | ) | | 245,375 |
|
| Resale agreements: | | | | |
| Proceeds from paydowns and maturities | | 250,000 |
| | — |
|
| AFS debt securities: | | | | |
| Proceeds from sales | | 306,463 |
| | 151,339 |
|
| Proceeds from repayments, maturities and redemptions | | 308,620 |
| | 55,712 |
|
| Purchases | | (987,130 | ) | | (69,805 | ) |
| Loans held-for-investment: | | | | |
| Proceeds from sales of loans originally classified as held-for-investment | | 110,945 |
| | 92,887 |
|
| Purchases | | (133,185 | ) | | (147,938 | ) |
| Other changes in loans held-for-investment, net | | (1,116,358 | ) | | (409,930 | ) |
| Premises and equipment: | | |
| | |
|
| Purchases | | (916 | ) | | (3,336 | ) |
| Proceeds from sales of other real estate owned (“OREO”) | | 295 |
| | — |
|
| Proceeds from distributions received from equity method investees | | 374 |
| | 1,005 |
|
| Other net investing activities | | (1,438 | ) | | (729 | ) |
| Net cash used in investing activities | | (1,405,330 | ) | | (118,681 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| | |
|
| Net increase in deposits | | 1,374,287 |
| | 800,053 |
|
| Net increase (decrease) in short-term borrowings | | 39,962 |
| | (19,514 | ) |
| FHLB advances: | | | | |
| Proceeds | | — |
| | 300,000 |
|
| Repayment | | (99,999 | ) | | (282,000 | ) |
| Repayment of long-term debt and lease liabilities | | (289 | ) | | (217 | ) |
| Common stock: | | | | |
| Repurchase of common stock pursuant to the Stock Repurchase Program | | (145,966 | ) | | — |
|
| Stocks tendered for payment of withholding taxes | | (7,609 | ) | | (14,036 | ) |
| Cash dividends paid | | (41,358 | ) | | (34,916 | ) |
| Net cash provided by financing activities | | 1,119,028 |
| | 749,370 |
|
| Effect of exchange rate changes on cash and cash equivalents | | 13,492 |
| | 14,018 |
|
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (181,107 | ) | | 783,948 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | 3,261,149 |
| | 3,001,377 |
|
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 3,080,042 |
| | $ | 3,785,325 |
|
| |
|
| | | | | | | | |
| |
| | | Nine Months Ended September 30, |
| | | 2017 | | 2016 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | |
| | |
|
| Net income | | $ | 420,726 |
| | $ | 320,943 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
| Depreciation and amortization | | 123,008 |
| | 98,561 |
|
| Accretion of discount and amortization of premiums, net | | (19,237 | ) | | (37,881 | ) |
| Stock compensation costs | | 15,780 |
| | 13,973 |
|
| Deferred income tax (benefit) expense | | (14,500 | ) | | 3,730 |
|
| Provision for credit losses | | 30,749 |
| | 17,018 |
|
| Net gains on sales of loans | | (6,660 | ) | | (6,965 | ) |
| Net gains on sales of available-for-sale investment securities | | (6,733 | ) | | (8,468 | ) |
| Net gains on sales of premises and equipment | | (74,092 | ) | | (2,916 | ) |
| Net gain on sale of business | | (3,807 | ) | | — |
|
| Originations and purchases of loans held-for-sale | | (15,069 | ) | | (10,901 | ) |
| Proceeds from sales and paydowns/payoffs in loans held-for-sale | | 15,792 |
| | 15,065 |
|
| Net change in accrued interest receivable and other assets | | 105,729 |
| | (2,591 | ) |
| Net change in accrued expenses and other liabilities | | 95,432 |
| | 19,217 |
|
| Other net operating activities | | (2,135 | ) | | (1,181 | ) |
| Total adjustments | | 244,257 |
| | 96,661 |
|
| Net cash provided by operating activities | | 664,983 |
| | 417,604 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| | |
|
| Net increase in: | | |
| | |
|
| Loans held-for-investment | | (2,967,873 | ) | | (776,277 | ) |
| Interest-bearing deposits with banks | | (74,254 | ) | | (13,469 | ) |
| Investments in qualified affordable housing partnerships, tax credit and other investments, net | | (121,590 | ) | | (57,742 | ) |
| Purchases of: | | |
| | |
|
| Resale agreements | | (550,000 | ) | | (1,150,000 | ) |
| Available-for-sale investment securities | | (501,669 | ) | | (1,330,724 | ) |
| Loans held-for-investment | | (441,141 | ) | | (1,038,083 | ) |
| Premises and equipment | | (11,598 | ) | | (10,412 | ) |
| Proceeds from sale of: | | |
| | |
|
| Available-for-sale investment securities | | 676,776 |
| | 1,008,256 |
|
| Loans held-for-investment | | 448,679 |
| | 545,256 |
|
| Other real estate owned (“OREO”) | | 5,431 |
| | 3,271 |
|
| Premises and equipment | | 116,021 |
| | 8,163 |
|
| Business, net of cash transferred | | 3,633 |
| | — |
|
| Paydowns and maturities of resale agreements | | 1,000,000 |
| | 1,450,000 |
|
| Repayments, maturities and redemptions of available-for-sale investment securities | | 323,463 |
| | 870,965 |
|
| Other net investing activities | | 27,914 |
| | 17,527 |
|
| Net cash used in investing activities | | (2,066,208 | ) | | (473,269 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| | |
|
| Net increase (decrease) in: | | |
| | |
|
| Customer deposits | | 1,385,625 |
| | 1,130,022 |
|
| Short-term borrowings | | (36,604 | ) | | 37,699 |
|
| Proceeds from: | | | | |
| Issuance of common stock pursuant to various stock compensation plans and agreements | | 1,008 |
| | 1,962 |
|
| Payments for: | | |
| | |
|
| Repayment of FHLB advances | | — |
| | (700,000 | ) |
| Repayment of long-term debt | | (10,000 | ) | | (15,000 | ) |
| Repurchase of vested shares due to employee tax liability | | (12,663 | ) | | (3,144 | ) |
| Cash dividends on common stock | | (87,880 | ) | | (86,984 | ) |
| Other net financing activities | | — |
| | 1,019 |
|
| Net cash provided by financing activities | | 1,239,486 |
| | 365,574 |
|
| Effect of exchange rate changes on cash and cash equivalents | | 19,985 |
| | (3,964 | ) |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (141,754 | ) | | 305,945 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | 1,878,503 |
| | 1,360,887 |
|
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 1,736,749 |
| | $ | 1,666,832 |
|
| |
See accompanying Notes to Consolidated Financial Statements.
97
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
|
| | | | | | | | |
| |
| | | Nine Months Ended September 30, |
| | | 2017 | | 2016 |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | | |
| Cash paid during the period for: | | |
| | |
|
| Interest paid | | $ | 98,409 |
| | $ | 76,750 |
|
| Income taxes paid | | $ | 11,800 |
| | $ | 20,652 |
|
| Noncash investing and financing activities: | | |
| | |
|
| Loans transferred from held-for-investment to held-for-sale | | $ | 418,489 |
| | $ | 720,670 |
|
| 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 |
|
| Loans transferred to OREO | | $ | 456 |
| | $ | 6,086 |
|
| | | | | |
|
| | | | | | | | |
| |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | |
| Cash paid during the period for: | | | | |
| Interest | | $ | 88,520 |
| | $ | 97,930 |
|
| Income taxes, net | | $ | 2,904 |
| | $ | 303 |
|
| Noncash investing and financing activities: | | | | |
| Loans transferred from held-for-investment to held-for-sale | | $ | 110,223 |
| | $ | 92,228 |
|
| Loans transferred to OREO | | $ | 19,504 |
| | $ | — |
|
| |
See accompanying Notes to Consolidated Financial Statements.
108
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) is a registered bank holding company that offers a full range of banking services to individuals and businesses through its subsidiary bank, East West Bank and its subsidiaries (“East West Bank” or the “Bank”). The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West, East West Bank and East West’s various subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of September 30, 2017,March 31, 2020, East West also has six6 wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with FASBFinancial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 810,Consolidation, the Trusts are not included on the Consolidated Financial Statements. East West also owns East West Insurance Services, Inc. In 2019, the Company acquired Enstream Capital Markets, LLC, a private broker dealer and also established East West Investment Management LLC, a registered investment adviser. Both East West Markets, LLC and East West Investment Management LLC are wholly-owned subsidiaries of East West.
The unaudited interim Consolidated Financial Statements are presented in accordance with United States Generally Accepted Accounting Principles (“U.S.”) generally accepted accounting principles (“GAAP”), applicable guidelines prescribed by regulatory authorities, and general practices in the banking industry,industry. They reflect all adjustments that, in the opinion of management, are necessary for fair statement of the interim period Consolidated Financial Statements. Certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.
The current period’s results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. While the COVID-19 outbreak had a material impact on our provision for credit losses, the Company is unable to fully predict the impact that COVID-19 will have on its financial position and results of operations due to numerous uncertainties, and will continue to assess the potential impacts on its financial position and results of operations. Events subsequent to the Consolidated Balance Sheet date have been evaluated through the date the Consolidated Financial Statements are issued for inclusion in the accompanying Consolidated Financial Statements. The unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto, included in the Company’s 2016annual report on Form 10-K.10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on February 27, 2020 (the “Company’s 2019 Form 10-K”).
Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies
New Accounting Pronouncements Adopted
In March 2016, the FASB issued 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 flow 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. |
| | | |
| Standard | Required Date of Adoption | Description | Effect on Financial Statements |
| Standards Adopted in 2020 |
ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent related ASUs | January 1, 2020
Early adoption is permitted on January 1, 2019.
| The ASU introduces a new current expected credit loss (“CECL”) model that applies to most financial assets measured at amortized cost and certain instruments, including trade and other receivables, loan receivables, AFS and held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted in each period for changes in expected lifetime credit losses. ASU 2016-13 also eliminates the guidance for purchased credit impaired (“PCI”) loans, but requires an allowance for loan losses for purchased financial assets with more than an insignificant deterioration of credit since origination. The ASU also modifies the other-than-temporary impairment (“OTTI”) model for AFS debt securities to require an allowance for credit losses instead of a direct write-down. A reversal of the allowance for credit losses is allowed in future periods based on improvements in credit performance expectations. This ASU also 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 Company has completed its implementation efforts, which includes the implementation of new processes and controls over the new credit and loss aggregation models, completion of parallel runs, updates to the allowance documentation, policies and reporting processes.
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. The Company also recorded an after-tax decrease to opening retained earnings of $98.0 million on January 1, 2020. The increase to allowance for loan losses was primarily related to the commercial and industrial (“C&I”) and commercial real estate (“CRE”) loan portfolios. The Company did not record an allowance for credit losses on the Company’s AFS debt securities as a result of this adoption. Disclosures for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in the Company’s 2019 Form 10-K.
The Company has elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital for two years, followed by a three-year transition period. |
ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | January 1, 2020
Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017. | The ASU simplifies the accounting for goodwill impairment. Under this guidance, an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, an impairment loss will be recognized when the carrying amount of a reporting unit exceeds its fair value. 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. |
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, which requires an entity to use a four-step decision model when assessing contingent call (put) options that can accelerate the payment of principal on debt instruments to determine whether they are clearly and closely related to their debt hosts. The Company adopted this guidance on a modified retrospective basis in the first quarter of 2017. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.
New Accounting Pronouncements Adopted
In March 2016, the FASB issued ASU 2016-07, Investments — Equity Method and Joint Ventures (Topic 323):Simplifying the Transition to the Equity Method of Accounting, to eliminate the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. The amendments in ASU 2016-07 also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income (loss) (“AOCI”) at the date the investment becomes qualified for use of the equity method. 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. |
| | | |
| Standard | Required Date of Adoption | Description | Effect on Financial Statements |
| Standards Adopted in 2020 |
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. |
In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the statements of cash flows. The Company adopted this guidance in the first quarter of 2017. The changes that impacted the Company included a requirement that excess tax benefits and deficiencies be recognized as a component of Income tax expense on the Consolidated Statements of Income rather than Additional paid-in capital on the Consolidated Statements of Changes in Stockholders’ Equity as required in the previous guidance. The adoption of this guidance results in increased volatility to the Company’s income tax expense, but does not have a material impact on the Consolidated Balance Sheets or the Consolidated Statements of Changes in Stockholders’ Equity. The income tax expense volatility is dependent on the Company’s stock price on the dates the restricted stock units (“RSUs”) vest, which occur primarily in the first quarter of each year. Net excess tax benefits for RSUs of $4.6 million have been recognized by the Company as a component of Income tax expense on the Consolidated Statements of Income during the nine months ended September 30, 2017. The guidance also removes the impact of the excess tax benefits and deficiencies from the calculation of diluted EPS. In addition, ASU 2016-09 no longer requires a presentation of excess tax benefits and deficiencies as both an operating outflow and a financing inflow on the Consolidated Statements of Cash Flows. Instead, excess tax benefits and deficiencies are recorded along with other income tax cash flows as an operating activity. These changes to the guidance were applied on a prospective basis. The Company has also elected to retain its existing accounting policy election to estimate award forfeitures.
Recent Accounting Pronouncements
|
| | | |
| 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 a new accounting standard related to contracts or hedging relationships that reference LIBOR or other reference rates that are expected to be discontinued due to reference rate reform. This ASU provide optional expedients and exceptions regarding the accounting 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 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 dedesignation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. This one time election may be made at any time after March 12, 2020, but no later than December 31, 2022. | The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment. We will continue to assess the impact as the reference rate transition occurs over the next two years. |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue for contracts to provide goods or services to customers and will replace most existing revenue recognition guidance in the U.S. GAAP when it becomes effective. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty
Summary of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 is effective on January 1, 2018. The guidance should be applied on either a modified retrospective or full retrospective basis. The Company’s revenue is mainly comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income, as well as other revenues from financial instruments such as loans, leases, securities and derivatives. Significant Accounting Policies
The Company has completedrevised the following significant accounting policies as a comprehensive scoping exercise to determine the revenue streams that are in the scoperesult of the guidance and the review of its contracts to ascertain whether certain noninterest income revenue items are within the scope of the new guidance. Based on the completed contract reviews thus far, the adoption of this guidanceASU 2016-13.
Allowance for Loan Losses — The allowance for loan losses is notestablished as management’s estimate of expected credit losses inherent in the Company’s lending activities and increased by the provision for credit losses and decreased by net charge-offs. Subsequent recoveries, if any, are credited to have a material impactthe allowance for loan losses. The allowance for loan losses is evaluated quarterly by management based on its Consolidated Balance Sheets or Consolidated Statements of Income. The next phaseperiodic review of the Company’s implementation workcollectability of the loans, and more often if deemed necessary. The Company develops and documents the allowance for loan losses methodology at the portfolio segment level —commercial loan portfolio comprising C&I, CRE, multifamily residential, and construction and land loans; and the consumer loan portfolio comprising single-family residential, home equity lines of credit (“HELOC”) and other consumer loans.
The allowance for loan losses represents the portion of the loan’s amortized cost basis that the Company does not expect to collect due to anticipated credit losses over the loan’s contractual life. The Company measures the expected loan losses on a collective pool basis when similar risk characteristics exist. Models consisting of quantitative and qualitative components are designed for each pool to develop the expected credit loss estimates. Reasonable and supportable forecast periods vary by loan portfolio. The collectively evaluated loans include non-classified and classified loans that have been determined as not impaired. The Company has adopted lifetime loss rate models for the portfolios, which use historical loss rates and forecast economic variables to calculate the expected credit losses for each loan pool.
When the loans do not share similar risk characteristics, the Company evaluates the loan for expected credit losses on an individual basis (e.g., impaired loans). The Company considers loans to be impaired if, based on current information and events, it is probable that the Company will be unable to evaluate any changes that may be requiredcollect all amounts due according to its applicable disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurementoriginal contractual terms of Financial Assets and Financial Liabilities, which requires equity investments, except those accounted for under the equity method of accounting or consolidated,loan agreement. For loans determined to be measured at fairimpaired, three different asset valuation measurement methods are available: (1) the present value with changes recognized in net income, thus eliminating eligibility for the current available-for-sale category. If there is no readily determinable fair value, the guidance allows entities to measure equity investments at cost less impairment, whereby impairment is based on a qualitative assessment. Furthermore, investments in Federal Reserve Bank and FHLB stock are not subject to this guidance and will continue to be presented at cost. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimateof expected future cash flows, (2) the fair value of financial instruments measured atcollateral less costs to sell, and (3) the loan's observable market price. The allowance for loan losses for collateral-dependent loans is determined based on the fair value of the collateral less costs to sell. For loans that are not collateral-dependent, the Company applies the present value of expected future cash flows valuation or the market value of the loan. When the loan is deemed uncollectible, the Company’s policy is to promptly charge off the estimated impaired amount.
The amortized cost and changes the presentation of financialloans held-for-investment excludes accrued interest, which is included in Other assets and financial liabilities on the Consolidated Balance Sheets or in the footnotes. If an entity has elected the fair value option to measure liabilities, the guidance requires the portion of the change in the fair value of a liability resulting from credit risk to be presented in Other comprehensive income. ASU 2016-01 is effective on January 1, 2018. Early adoption is not permitted except for certain specific changes under the fair value option guidance. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the adoption date.Sheet. The Company does not have a significant amount of equity securities classified as available-for-sale. Additionally, the Company does not have any financial liabilities accounted for under the fair value option. For the guidance that is applicable to us, thehas made an accounting will be implemented on a modified retrospective basis through a cumulative-effect adjustment to the Consolidated Balance Sheets as of January 1, 2018, except for the guidance related to equity securities without readily determinable fair values, which should be applied on a prospective basis. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Balance Sheets or Consolidated Statements of Income.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability in the accounting for lease transactions. The guidance requires lessees to recognize right-of-use assets and related lease liabilities for all leases with lease terms of more than 12 months on the Consolidated Balance Sheets, and provide quantitative and qualitative disclosures regarding key information about the leasing arrangements. For short-term leases with a term of 12 months or less, lessees can make a policy election not to recognize lease assetsan allowance for credit losses for accrued interest receivables on nonaccrual loans since the Company timely reverses any previously accrued interest when the borrower remains in default for an extended period.
The allowance for loan losses is reported separately on the Consolidated Balance Sheet and lease liabilities. Lessor accountingthe Provision for credit losses is largely unchanged. ASU 2016-02 is effectivereported on January 1, 2019, with early adoption permitted.the Consolidated Statement of Income.
Allowance for Unfunded Credit Commitments — The guidance should be applied using a modified retrospective transition method through a cumulative-effect adjustment.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 currently evaluatingexposed to credit risk via a present contractual obligation to extend credit. Within the potential impactperiod 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, including unfunded lending commitments, letters of credit, SBLCs and recourse obligations for loans sold, the unfunded credit exposure is calculated using utilization assumptions based on the Company's historical utilization experience in related portfolio segments. Loss rates are applied to the calculated exposure balances to estimate the allowance for unfunded credit commitments. Other elements such as credit risk factors for loans outstanding, terms and expiration dates of the unfunded credit facilities, and other pertinent information are considered to determine the adequacy of the allowance.
The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. Changes to the allowance for unfunded credit commitments are included in Provision for credit losses on the Consolidated Income Statements.
Allowance for Credit Losses on Available-for-Sale Debt Securities — ASU 2016-13 modifies the impairment model for AFS debt securities. For each reporting period, AFS debt securities that are in an unrealized loss position are individually analyzed as part of the Company’s ongoing assessments to determine whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. The initial indicator of impairment is a decline in fair value below the amortized cost, excluding accrued interest, of the AFS debt security. In determining whether an impairment is due to credit related factors, the Company considers the severity of the decline in fair value, the financial condition of the issuer, changes in the AFS debt securities’ ratings and other qualitative factors, as well as whether the Company either plans to sell the debt security or it is more-likely-than-not that it will be required to sell the debt security before recovery of the amortized cost. ASU 2016-13 removes the ability to consider the length of time the debt security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist.
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 Financial Statements by reviewing its existing lease contractsStatement of Income and service contractsthe non-credit component is recognized in Other comprehensive income (loss), 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 may include embedded leases. The Company expects the adoption of ASU 2016-02 to result in additional assets and liabilities, as the Company will be required to recognize operating leasessell 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 itsthe 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 Sheets.Sheet. The Company doeshas made an accounting policy election not expectto measure an allowance for credit losses for accrued interest receivables on AFS debt securities since the Company timely reverses any previously accrued interest when the debt security remains in default for an extended period. As each AFS debt security has a material impactunique 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.
Collateral-Dependent Financial Assets— A financial asset is considered collateral-dependent if repayment is expected to its recognition of operating lease expense on its Consolidated Statements of Income. Upon completionbe provided substantially through the operation or sale of the contract reviewscollateral. The allowance for credit losses is measured on an individual basis for collateral-dependent financial assets and considerationdetermined by comparing the fair value of system requirements,the collateral, minus the cost to sell, to the amortized cost basis of the related financial asset at the reporting date. Other than impaired loans, collateral-dependent financial assets could also include resale agreements. In arrangements in 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 will evaluateestimates the impacts of adopting the new accounting guidance on its disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to introduce a new approach based on expected losses to estimate credit losses on certain typesthe basis of financial instruments, which modifies the impairment model for available-for-sale debt securitiesunsecured 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 provides for a simplifiedthe amortized cost basis of the resale agreement.
Purchased Credit Deteriorated Assets — ASU 2016-13 replaces the concept of PCI accounting model forunder ASC 310-30 Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality with the concept of purchased financial assets with credit deterioration since their origination.(“PCD”). The new “expected credit loss” impairment model will apply to mostCompany adopted ASU 2016-13 using the prospective transition approach for PCD that were previously classified as PCI assets. PCD financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loan receivables, available-for-sale and held-to-maturityare 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 net investments in leases and off-balance sheet credit exposures. For available-for-sale debt securities with unrealized losses, ASU 2016-13 does not changePCD loans, the measurement method of credit losses, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimatingcompany records the allowance for loan and leasecredit losses and requires disclosure ofby grossing up the initial amortized cost, balancewhich includes the purchase price and the allowance for each classcredit losses. The expected credit losses of financial asset byPCD debt securities are measured at the individual security level. The expected credit quality indicator, disaggregated bylosses for PCD loans are measured based on the year of origination (i.e., by vintage year). ASU 2016-13 is effective onloan’s unpaid principal balance. Beginning January 1, 2020, with early adoption permitted on January 1, 2019. The guidance should be applied usingfor any asset designated as a modified retrospective approach through a cumulative-effect adjustmentPCD asset at the time of acquisition, the Company estimates and records an allowance for credit losses, which is added to retained earnings asthe purchase price to establish the initial amortized cost basis of the beginning of the reporting period of adoption. While the Companyfinancial asset. Hence, there is still evaluating theno income statement impact on its Consolidated Financial Statements, the Company expects that ASU 2016-13 may result in an increaseacquisition. Subsequent changes in the allowance for credit losses dueon PCD assets will be recognized in Provision for credit losses on the Consolidated Statement of Income. The noncredit discount or premium will be accreted to interest income based on the following factors: 1)effective interest rate on the PCD assets determined after the gross-up for the allowance for credit losses provides for expected credit losses over the remaining expected life of the loan portfolio, and will consider expected future changes in macroeconomic conditions; 2) the nonaccretable difference on the purchased credit impaired (“PCI”) loans will be recognized as an allowance, offset by an increase in the carrying value of the PCI loans; and 3) an allowance may be established for estimated credit losses on available-for-sale and held-to-maturity debt securities. The amount of the increase will be impacted by the portfolio composition and quality, as well as the economic conditions and forecasts as of the adoption date. The Company has begun its implementation efforts by identifying key interpretive issues, assessing its processes and identifying the system requirements against the new guidance to determine what modifications may be required.losses.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance on eight specific issues related to classification on the Consolidated Statements of Cash Flows in order to reduce diversity in practice. The specific issues cover cash payments for debt prepayment or debt extinguishment costs; cash outflows for settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments that are not made soon after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests received in securitization transactions; and clarification regarding when no specific U.S. GAAP guidance exists and the sources of the cash flows are not separately identifiable, the classification should be based on the activity that is likely to be the predominant source or use of the cash flows. ASU 2016-15 is effective on January 1, 2018, with early adoption permitted. The guidance should be applied using a retrospective transition method. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
13
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, whichrequires the Company to include those amounts that are deemed to be restricted cash and restricted cash equivalents in its cash and cash equivalent balances on the Consolidated Statements of Cash Flows. In addition, the Company is required to explain the changes in the combined total of restricted and unrestricted balances on the Consolidated Statements of Cash Flows. ASU 2016-18 is effective on January 1, 2018, with early adoption permitted. The guidance should be applied using a retrospective transition method to each period presented. The Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the accounting for goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The guidance also eliminates the requirements for any reporting units with a zero or negative carrying amount to perform a qualitative assessment. ASU 2017-04 is effective on January 1, 2020 and should be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The guidance does not require any accounting changes for debt securities held at a discount; the discount continues to be amortized as an adjustment of yield over the contractual life (to maturity) of the instrument. ASU 2017-08 is effective on January 1, 2019, with early adoption permitted. The guidance should be applied using a modified retrospective transition method, with the cumulative-effect adjustment recognized to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact on its Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective on January 1, 2018, with early adoption permitted. The guidance should be applied prospectively to awards modified on or after the adoption date. The Company plans to adopt this guidance in the first quarter of 2018 prospectively.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which better aligns the Company’s risk management activities and financial reporting for hedging relationships through changes to both the description and measurement guidance for qualifying hedging relationships and the presentation of hedge results, expands and refines hedge accounting for both nonfinancial and financial risk components, and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item on the Consolidated Financial Statements. ASU 2017-12 is effective on January 1, 2019, with early adoption permitted. Upon adoption, the guidance should be applied using a retrospective transition method to any existing cash flows or net investment hedges through a cumulative-effect adjustment to AOCI to eliminate the separate measurement of ineffectiveness. The amended presentation and disclosure guidance is applied prospectively. The Company is currently evaluating the impact on its Consolidated Financial Statements.
Note 3 — Dispositions
In the first quarter of 2017, the Company completed the sale and leaseback of a commercial property in San Francisco, California for cash consideration of $120.6 million and entered into a leaseback with the buyer for part of the property, consisting of a retail branch and office facilities. The property had a net book value of $31.6 million at the time of sale, resulting in a pre-tax gain of $85.4 million after considering $3.6 million in selling costs. As the leaseback is an operating lease, $71.7 million of the gain was recognized on the closing date, and $13.7 million was deferred and will be recognized over the term of the lease agreement. The first quarter 2017 diluted EPS impact from the sale of the commercial property was $0.28 per share, net of tax.
In the third quarter of 2017, the Company sold its insurance brokerage business, East West Insurance Services, Inc., for $4.3 million, and recorded a pre-tax gain of $3.8 million. The third quarter 2017 diluted EPS impact from the sale of the Company’s insurance brokerage business was $0.02 per share, net of tax.
Note 4 —Fair Value Measurement and Fair Value of Financial Instruments
Fair Value Determination
Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value of financial instruments, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing an asset or a liability. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:
|
| | | |
• | Level 1 | — | Valuation is based on quoted prices for identical instruments traded in active markets. |
• | Level 2 | — | Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data. |
• | Level 3 | — | Level 1 — Valuation is based on quoted prices for identical instruments traded in active markets. Level 2 — Valuation is based on quoted prices for similar instruments traded in active markets; quoted prices for identical or similar instruments traded in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 — Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities. |
In determining the appropriate hierarchy levels,fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the Company performs an analysisassets or liabilities.
The classification of the assets and liabilities thatwithin the hierarchy is based on whether inputs to the valuation methodology used are subject toobservable or unobservable, and the significance of those inputs in the fair value disclosure.measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of September 30, 2017 |
| ($ 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 | | $ | 526,332 |
| | $ | 526,332 |
| | $ | — |
| | $ | — |
| |
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 189,185 |
| | — |
| | 189,185 |
| | — |
| |
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | |
| | |
| | |
| | |
| |
| Commercial mortgage-backed securities | | 315,172 |
| | — |
| | 315,172 |
| | — |
| |
| Residential mortgage-backed securities | | 1,150,934 |
| | — |
| | 1,150,934 |
| | — |
| |
| Municipal securities | | 117,242 |
| | — |
| | 117,242 |
| | — |
| |
| Non-agency residential mortgage-backed securities: | | |
| | |
| | |
| | |
| |
| Investment grade | | 9,694 |
| | — |
| | 9,694 |
| | — |
| |
| Corporate debt securities: | | |
| | |
| | |
| | |
| |
| Investment grade | | 2,327 |
| | — |
| | 2,327 |
| | — |
| |
| Non-investment grade | | 9,615 |
| | — |
| | 9,615 |
| | — |
| |
| Foreign bonds: | | | | | | | | | |
| Investment grade | | 489,140 |
| | — |
| | 489,140 |
| | — |
| |
| Other securities | | 147,135 |
| | 31,418 |
| | 102 |
| | 115,615 |
| (1) |
| Total available-for-sale investment securities | | $ | 2,956,776 |
| | $ | 557,750 |
| | $ | 2,283,411 |
| | $ | 115,615 |
| |
| | | | | | | | | | |
| Derivative assets: | | | | | | | | | |
| Interest rate swaps and options | | $ | 64,822 |
| | $ | — |
| | $ | 64,822 |
| | $ | — |
| |
| Foreign exchange contracts | | 14,187 |
| | — |
| | 14,187 |
| | — |
| |
| Credit risk participation agreements (“RPAs”) | | 2 |
| | — |
| | 2 |
| | — |
| |
| Warrants | | 1,455 |
| | — |
| | 856 |
| | 599 |
| |
| Total derivative assets | | $ | 80,466 |
| | $ | — |
| | $ | 79,867 |
| | $ | 599 |
| |
| | | | | | | | | | |
| Derivative liabilities: | | | | | | | | | |
| Interest rate swaps on certificates of deposit | | $ | (6,648 | ) | | $ | — |
| | $ | (6,648 | ) | | $ | — |
| |
| Interest rate swaps and options | | (64,212 | ) | | — |
| | (64,212 | ) | | — |
| |
| Foreign exchange contracts | | (20,054 | ) | | — |
| | (20,054 | ) | | — |
| |
| RPAs | | (1 | ) | | — |
| | (1 | ) | | — |
| |
| Total derivative liabilities | | $ | (90,915 | ) | | $ | — |
| | $ | (90,915 | ) | | $ | — |
| |
| | | | | | | | | | |
| |
(1) | During the third quarter of 2017, the Company transferred a non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held- to-maturity to available-for-sale. |
|
| | | | | | | | | | | | | | | | |
| |
| | | Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of December 31, 2016 |
| ($ 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 | ) | | $ | — |
|
| | | | | | | | | |
At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. There were no assets or liabilities measured using significant unobservable inputs (Level 3) on a recurring basis as of December 31, 2016, and during the three and nine months ended September 30, 2016. The following table presents a reconciliation of the beginning and ending balances for other securities and warrants measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| ($ in thousands) | | Other securities | | Warrants | | Other securities | | Warrants |
| Beginning balance | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Issuances | | — |
| | 599 |
| | — |
| | 599 |
|
| Transfer from held-to-maturity investment security to available-for-sale investment security | | 115,615 |
| | — |
| | 115,615 |
| | — |
|
| Ending balance | | $ | 115,615 |
|
| $ | 599 |
|
| $ | 115,615 |
|
| $ | 599 |
|
| | | | | | | | | |
Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities become unobservable or observable in the current marketplace. The Company’s policy, with respect to transfers between levels of the fair value hierarchy, is to recognize transfers into and out of each level as of the end of the reporting period. There were no transfers of assets and liabilities measured on a recurring basis into and out of Level 1, Level 2 and Level 3 during the three and nine months ended September 30, 2017 and 2016. During the three and nine months ended September 30, 2017, the Company transferred a non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale to reflect the Company’s intent to sell the security under active liquidity management.
The following table presents quantitative information about significant unobservable inputs used in the valuation of assets measured on a recurring basis classified as Level 3 as of September 30, 2017. Significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets or liabilities. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets or liabilities would be impacted by a predetermined percentage change.
|
| | | | | | | | | | |
| | | | | | | | | |
| ($ in thousands) | | Fair Value Measurements (Level 3) | | Valuation Technique | | Unobservable Input(s) | | Weighted Average |
Available-for-sale investment securities:
| | | | | | | | |
| Other securities | | $ | 115,615 |
| | Discounted cash flows | | Discount margin | | 191 Basis points |
| | | | | | | | | |
| Derivative assets: | | | | | | | | |
| Warrants | | $ | 599 |
| | Black-Scholes option pricing model | | Volatility | | 44% |
| | | | | | | Liquidity discount | | 47% |
| | | | | | | | | |
Assets measured at fair value on a nonrecurring basis include certain non-purchased credit impaired (“non-PCI”) loans that were impaired, OREO and loans held-for-sale. These fair value adjustments result from impairments recognized during the period on certain non-PCI impaired loans, application of fair value less cost to sell on OREO and application of the lower of cost or fair value on loans held-for-sale.
The following tables present the carrying amounts of assets included on the Consolidated Balance Sheets that had fair value changes measured on a nonrecurring basis as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Assets Measured at Fair Value on a Nonrecurring Basis
as of September 30, 2017 |
| ($ 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) |
| Non-PCI impaired loans: | | |
| | |
| | |
| | |
|
| Commercial real estate (“CRE”) | | $ | 9,172 |
| | $ | — |
| | $ | — |
| | $ | 9,172 |
|
| Commercial and industrial (“C&I”) | | 32,053 |
| | — |
| | — |
| | 32,053 |
|
| Residential | | 6,079 |
| | — |
| | — |
| | 6,079 |
|
| Consumer | | 633 |
| | — |
| | — |
| | 633 |
|
| Total non-PCI impaired loans | | $ | 47,937 |
| | $ | — |
| | $ | — |
| | $ | 47,937 |
|
| OREO | | $ | 1,789 |
| | $ | — |
| | $ | — |
| | $ | 1,789 |
|
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Assets Measured at Fair Value on a Nonrecurring 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) |
| Non-PCI impaired loans: | | |
| | |
| | |
| | |
|
| CRE | | $ | 14,908 |
| | $ | — |
| | $ | — |
| | $ | 14,908 |
|
| C&I | | 52,172 |
| | — |
| | — |
| | 52,172 |
|
| Residential | | 2,464 |
| | — |
| | — |
| | 2,464 |
|
| Consumer | | 610 |
| | — |
| | — |
| | 610 |
|
| Total non-PCI impaired loans | | $ | 70,154 |
| | $ | — |
| | $ | — |
| | $ | 70,154 |
|
| OREO | | $ | 345 |
| | $ | — |
| | $ | — |
| | $ | 345 |
|
| Loans held-for-sale | | $ | 22,703 |
| | $ | — |
| | $ | 22,703 |
| | $ | — |
|
| | | | | | | | | |
The following table presents the fair value adjustments of assets measured on a nonrecurring basis recognized during the three and nine months ended and which were included on the Consolidated Balance Sheets as of September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Non-PCI impaired loans: | | | | | | |
| | |
|
| CRE | | $ | 6 |
| | $ | (282 | ) | | $ | (66 | ) | | $ | 1,741 |
|
| C&I | | (16,954 | ) | | 77 |
| | (17,648 | ) | | (5,497 | ) |
| Residential | | (3 | ) | | (14 | ) | | 49 |
| | (14 | ) |
| Consumer | | — |
| | — |
| | 25 |
| | 17 |
|
| Total non-PCI impaired loans | | $ | (16,951 | ) | | $ | (219 | ) | | $ | (17,640 | ) | | $ | (3,753 | ) |
| OREO | | $ | (285 | ) | | $ | (41 | ) | | $ | (286 | ) | | $ | (994 | ) |
| Loans held-for-sale | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2,351 | ) |
| | | | | | | | | |
The following table presents the quantitative information about the significant unobservable inputs used in the valuation of assets measured on a nonrecurring basis classified as Level 3 as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Fair Value
Measurements
(Level 3) | | Valuation
Technique(s) | | Unobservable Input(s) | | Range of Input(s) | | Weighted
Average |
| September 30, 2017 | | |
| | | | | | | | |
| Non-PCI impaired loans | | $ | 30,563 |
| | Discounted cash flows | | Discount | | 0% — 82% | | 19% |
| | | $ | 17,374 |
| | Market comparables | | Discount (1) | | 0% — 100% | | 40% |
| OREO | | $ | 1,789 |
| | Appraisal | | Selling cost | | 8% | | 8% |
| December 31, 2016 | | | | | | | | | | |
| Non-PCI impaired loans | | $ | 31,835 |
| | Discounted cash flows | | Discount | | 0% — 62% | | 7% |
| | | $ | 38,319 |
| | Market comparables | | Discount (1) | | 0% — 100% | | 18% |
| OREO | | $ | 345 |
| | Appraisal | | Selling cost | | 8% | | 8% |
| | | | | | | | | | | |
| |
(1) | Discount is adjusted for factors such as liquidation cost of collateral and selling cost. |
The following tables present the carrying and fair values per the fair value hierarchy of certain financial instruments, excluding those measured at fair value on a recurring basis, as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Estimated Fair Value |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,736,749 |
| | $ | 1,736,749 |
| | $ | — |
| | $ | — |
| | $ | 1,736,749 |
|
| Interest-bearing deposits with banks | | $ | 404,946 |
| | $ | — |
| | $ | 404,946 |
| | $ | — |
| | $ | 404,946 |
|
Resale agreements (1) | | $ | 1,250,000 |
| | $ | — |
| | $ | 1,236,413 |
| | $ | — |
| | $ | 1,236,413 |
|
| Restricted equity securities | | $ | 73,322 |
| | $ | — |
| | $ | 73,322 |
| | $ | — |
| | $ | 73,322 |
|
| Loans held-for-sale | | $ | 178 |
| | $ | — |
| | $ | 178 |
| | $ | — |
| | $ | 178 |
|
| Loans held-for-investment, net | | $ | 28,239,431 |
| | $ | — |
| | $ | — |
| | $ | 27,635,961 |
| | $ | 27,635,961 |
|
| Accrued interest receivable | | $ | 111,710 |
| | $ | — |
| | $ | 111,710 |
| | $ | — |
| | $ | 111,710 |
|
| Financial liabilities: | | |
| | |
| | |
| | |
| | |
|
| Customer deposits: | | |
| | |
| | |
| | |
| | |
|
| Demand, checking, savings and money market deposits | | $ | 25,517,121 |
| | $ | — |
| | $ | 25,517,121 |
| | $ | — |
| | $ | 25,517,121 |
|
| Time deposits | | $ | 5,794,541 |
| | $ | — |
| | $ | 5,787,188 |
| | $ | — |
| | $ | 5,787,188 |
|
| Short-term borrowings | | $ | 24,813 |
| | $ | — |
| | $ | 24,813 |
| | $ | — |
| | $ | 24,813 |
|
| FHLB advances | | $ | 323,323 |
| | $ | — |
| | $ | 336,741 |
| | $ | — |
| | $ | 336,741 |
|
Repurchase agreements (1) | | $ | 50,000 |
| | $ | — |
| | $ | 105,269 |
| | $ | — |
| | $ | 105,269 |
|
| Long-term debt | | $ | 176,513 |
| | $ | — |
| | $ | 139,649 |
| | $ | — |
| | $ | 139,649 |
|
| Accrued interest payable | | $ | 11,017 |
| | $ | — |
| | $ | 11,017 |
| | $ | — |
| | $ | 11,017 |
|
| |
| |
(1) | Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of September 30, 2017, $400.0 millionout of $450.0 millionof repurchase agreements were eligible for netting against resale agreements.
|
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 |
|
| |
| |
(1) | Resale and repurchase agreements are reported net pursuant to ASC 210-20-45, Balance Sheet Offsetting. As of December 31, 2016, $100.0 millionout of $450.0 millionof repurchase agreements were eligible for netting against resale agreements.
|
The following is a description ofsection describes the valuation methodologies and significant assumptions used by the Company to measure financial assets and liabilities at fair value, andon a recurring basis, as well as the general classification of these instruments pursuant to estimate fair value for certain financial instruments not recorded at fair value. The description also includes the level of the fair value hierarchy in which the assets or liabilities are classified.hierarchy.
Cash and Cash Equivalents — The carrying amount approximates fair value due to the short-term nature of these instruments. As such, the estimated fair value is classified as Level 1.
Interest-bearing Deposits with Banks — The fair value of interest-bearing deposits with banks generally approximates their book value due to their short maturities. In addition, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Resale Agreements — The fair value of resale agreements is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates. In addition, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Held-to-Maturity Investment Security — The held-to-maturity investment security as of December 31, 2016 was comprised of a floating rate non-agency commercial mortgage-backed security that was subsequently transferred from held-to-maturity to available-for-sale during the three months ended September 30, 2017. This security was categorized under Available-for-sale investment securities — other securities as of September 30, 2017.The fair value of this security is estimated by discounting the future expected cash flows utilizing the underlying index and a discount margin. Other unobservable inputs include conditional prepayment rate, constant default rate and loss severity. Due to the significant unobservable inputs used in estimating the fair value, this security is classified as Level 3.
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. Other than the non-agency commercial mortgage-backed security, the fair value of which is described above, theThe fair value of other available-for-sale investmentAFS debt securities areis 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 values. 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.
Loans Held-for-SaleEquity Securities — The Company’s loans held-for-sale are carried at the lower Equity securities consisted of cost or fair value. Loans held-for-sale were comprised of single-family residential loansmutual funds as of September 30, 2017,both March 31, 2020 and were primarily comprised of consumer loans as of December 31, 2016.2019. The Company uses Net Asset Value (“NAV”) information to determine the fair value of loans held-for-salethese equity securities. When NAV is derived from current market pricesavailable periodically and comparative current sales. The Company records any fair value adjustments on a nonrecurring basis. Loans held-for-sale are classified as Level 2.
Non-PCI Impaired Loans — The fair value of non-PCI impaired loans is measured using the market comparables or discounted cash flow techniques. For CRE and C&I loans,equity securities can be put back to the fair value is based on each loan’s observable market price ortransfer agents at the publicly available NAV, the fair value of the collateral less cost to sell, if the loan is collateral dependent. The fair value of collateral is generally based on third party appraisals (or internal evaluation if third party appraisal is not required by regulations) which utilize one or more valuation techniques (income, market and/or cost approaches). All third party appraisals and evaluations are reviewed and validated by independent appraisers or the Company’s appraisal department staffed by licensed appraisers and/or experienced real estate reviewers. The third party appraisals are ordered through the appraisal department (except for one-to-four unit residential appraisals which are typically ordered through an approved appraisal management company or an approved residential appraiser) at the inception, renewal or, for all real estate related loans, upon the occurrence of any events causing a downgrade to an adverse grade (i.e., “substandard” or “doubtful”). Updated appraisals and evaluations are generally obtained within the last 12 months. The Company increases the frequency of obtaining updated appraisals for adversely graded credits when declining market conditions exist. All appraisals include an “as is” market value without conditions as of the effective date of the appraisal. For certain impaired loans, the Company utilizes the discounted cash flow approach and applies a discount derived from historical data. The significant unobservable inputs used in the fair value measurement of non-PCI impaired loans are discounts applied based on the liquidation cost of collateral and selling cost. On a quarterly basis, all nonperforming assets are reviewed to assess whether the current carrying value is supported by the collateral or cash flow and to ensure that the current carrying value is appropriate. Non-PCI impaired loans are classified as Level 3.
Loans Held-for-Investment, net — The fair value of loans held-for-investment other than non-PCI impaired loans is determined based on a discounted cash flow approach considered for an exit price value. The discount rate is derived from the associated yield curve plus spreads that reflect the rates in the market for loans with similar financial characteristics. No adjustments have been made for changes in credit within any of the loan portfolios. It is management’s opinion that the allowance for loan losses pertaining to performing and nonperforming loans results in a fair value adjustment of credit for such loans. Due to the unobservable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 3.
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment, which are recorded at estimated fair value less cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less the cost to sell subsequent to acquisition. The fair values of OREO properties are based on third party appraisals or accepted written offers. Refer to the Non-PCI Impaired Loans section above for a detailed discussion on the Company’s policies and procedures related to appraisals and evaluations. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. The significant unobservable input used is the selling cost. OREO properties are classified as Level 3.
Restricted Equity Securities — Restricted equity securities are comprised of Federal Reserve Bank stock and FHLB stock. Ownership of these securities is restricted to member banks and these securities do not have a readily determinable fair value. Purchases and sales of these securities are at par value. The carrying amounts of the Company’s restricted equity securities approximate fair value. The valuation of these investments is classified as Level 2.
Accrued Interest Receivable — The carrying amount approximates1. When NAV is available periodically but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value due to the short-term nature of these instruments. Considering the observable nature of the inputs used in deriving the estimated fair value, these instruments areequity securities is classified as Level 2.
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 floating rate funding. 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 floor (cap) 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 September 30, 2017,March 31, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts and has determined that the credit valuation adjustments arewere not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative instruments as Level 2 of the fair value hierarchy due to the observable nature of the significant inputs utilized.
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 rate.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 resultedresult 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 isare classified as Level 2. As of September 30, 2017, foreign exchange forward contracts used to economically hedge the Company’s net investment in East West Bank (China) Limited, a non-U.S. Dollar (“USD”) functional currency subsidiary in China, are included in this caption. See Foreign Currency Forward Contracts in the section below for details on valuation methodologiesMarch 31, 2020 and significant assumptions.
Customer Deposits — The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking, savings and money market deposits, approximates the carrying amount as these deposits are payable on demand at the measurement date. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2. For time deposits, the fair value is based on the discounted value of contractual cash flows using current market rates for instruments with similar maturities. Due to the observable nature of the inputs used in deriving the estimated fair value, time deposits are classified as Level 2.
Federal Home Loan Bank Advances — The fair value of FHLB advances is estimated based on the discounted value of contractual cash flows, using rates currently offered by the FHLB of San Francisco for advances with similar remaining maturities at each reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Repurchase Agreements — The fair value of the repurchase agreements is calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates and taking into consideration the call features of each instrument. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Accrued Interest Payable — The carrying amount approximates fair value due to the short-term nature of these instruments. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Long-Term Debt — The fair value of long-term debt is estimated by discounting the cash flows through maturity based on current market ratesDecember 31, 2019, the Company would pay for new issuances. Due to the observable nature of the inputs used in deriving the estimated fair value, long-term debt is classified as Level 2.
Foreign Currency Forward Contracts — During the three months ended December 31, 2015, the Company began entering intoheld foreign currency non-deliverable forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited. Previously, theLimited, a non-U.S. dollar (“USD”) functional currency subsidiary in China. These foreign currency non-deliverable forward contracts were eligible for hedge accounting. During the nine months ended September 30, 2017, the foreign currency forward contracts were dedesignated when 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 includeddesignated as part of the “Foreign Exchange Contracts” caption as of September 30, 2017.net investment hedges. The fair value of foreign currency forward contracts is valueddetermined by comparing the contracted foreign exchange rate to the current market foreign exchange rate. InputsKey inputs of the current market exchange rate include spot rates and forward rates and the interest rate curves of the domestic and foreign currency. Interest ratecontractual currencies. Foreign exchange forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Credit Risk Participation Agreements Contracts — The Company entersmay periodically enter into RPAs, under which the Company assumes its pro-rata share ofcredit risk participation agreements (“RPAs”) 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 protection purchased RPAs with institutional counterparties. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The credit spreads of the borrowers used in the calculation are estimated by the Company based on current market conditions, including consideration of current borrowing spreads for similar customers and transactions, review of existing collateralization or other credit enhancements, and changes in credit sector and entity-specific credit information. The Company has determined that the majority of the inputs used to value the RPAs are observable. observable. Accordingly, RPAs fall within Level 22.
Equity Contracts — As part of the fair value hierarchy.
Warrants — Theloan origination process, from time to time, the Company obtainedobtains warrants to purchase preferred andand/or common stock of technology and life sciences companies as part of the loan origination process.it provides loans to. As of September 30, 2017,March 31, 2020 and December 31, 2019, the warrants included on the Consolidated Financial Statements were from both public and private companies. The Company valuedvalues these warrants based on the Black-Scholes option pricing model. For warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on a duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The option volatility assumption wasCompany applies proxy volatilities based on public market indices that include members that operate in similar industries as the companies in ourindustry sectors of the private company portfolio.companies. The model values were furtherare then adjusted for a general lack of liquidity due to the private nature of the underlying companies. Due to the unobservable nature of the option volatility and liquidity discount assumptions used in deriving the estimated fair value, warrants from private companies are classified as Level 3. ThereSince both option volatility and liquidity discount assumptions are subject to management’s judgment, measurement uncertainty is a direct correlation between changesinherent in the valuation of private companies’ warrants. Given that the Company holds long positions in all warrants, an increase in volatility assumption and thewould generally result in an increase in fair value measurement of warrants from private companies, while there is an inverse correlation between changes in thevalue. A higher liquidity discount assumption and thewould result in a decrease in fair value measurement of warrants from private companies.value. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a sensitivitymeasurement uncertainty analysis on the option volatility and liquidity discount assumptions is performed.
Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. The fair value estimates presented hereinof the commodity option contracts is determined using the Black-Scholes model and assumptions that include expectations of future commodity price and volatility. The future commodity contract price is derived from observable inputs such as the market price of the commodity. Commodity swaps are structured as an exchange of fixed cash flows for floating cash flows. The fixed cash flows are predetermined based on pertinent information availablethe known volumes and fixed price as specified in the swap agreement. The floating cash flows are correlated with the change of forward commodity prices, which is derived from market corroborated futures settlement prices. The fair value of the commodity swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments) based on the market prices of the commodity. As a result, the Company classifies these derivative instruments as Level 2 due to managementthe observable nature of the significant inputs utilized.
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of each reporting date. AlthoughMarch 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of March 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 | | $ | 51,428 |
| | $ | — |
| | $ | — |
| | $ | 51,428 |
|
| U.S. government agency and U.S. government- sponsored enterprise debt securities | | — |
| | 518,408 |
| | — |
| | 518,408 |
|
| U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | — |
| | 697,948 |
| | — |
| | 697,948 |
|
| Residential mortgage-backed securities | | — |
| | 1,352,367 |
| | — |
| | 1,352,367 |
|
| Municipal securities | | — |
| | 309,626 |
| | — |
| | 309,626 |
|
| Non-agency mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | — |
| | 87,114 |
| | — |
| | 87,114 |
|
| Residential mortgage-backed securities | | — |
| | 62,134 |
| | — |
| | 62,134 |
|
| Corporate debt securities | | — |
| | 10,963 |
| | — |
| | 10,963 |
|
| Foreign bonds | | — |
| | 284,521 |
| | — |
| | 284,521 |
|
| Asset-backed securities | | — |
| | 61,556 |
| | — |
| | 61,556 |
|
| Collateralized loan obligations (“CLOs”) | | — |
| | 259,878 |
| | — |
| | 259,878 |
|
| Total AFS debt securities | | $ | 51,428 |
| | $ | 3,644,515 |
| | $ | — |
| | $ | 3,695,943 |
|
| | | | | | | | | |
| Investments in tax credit and other investments: | | | | | | | | |
Equity securities (1) | | $ | 22,195 |
| | $ | 8,135 |
| | $ | — |
| | $ | 30,330 |
|
| Total investments in tax credit and other investments | | $ | 22,195 |
| | $ | 8,135 |
| | $ | — |
| | $ | 30,330 |
|
| | | | | | | | | |
| Derivative assets: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 605,122 |
| | $ | — |
| | $ | 605,122 |
|
| Foreign exchange contracts | | — |
| | 64,383 |
| | — |
| | 64,383 |
|
| Credit contracts | | — |
| | 8 |
| | — |
| | 8 |
|
| Equity contracts | | — |
| | 415 |
| | 713 |
| | 1,128 |
|
| Commodity contracts | | — |
| | 163,563 |
| | — |
| | 163,563 |
|
| Gross derivative assets | | $ | — |
| | $ | 833,491 |
| | $ | 713 |
| | $ | 834,204 |
|
Netting adjustments (2) | | $ | — |
| | $ | (178,774 | ) | | $ | — |
| | $ | (178,774 | ) |
| Net derivative assets | | $ | — |
| | $ | 654,717 |
| | $ | 713 |
| | $ | 655,430 |
|
| | | | | | | | | |
| Derivative liabilities: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 403,351 |
| | $ | — |
| | $ | 403,351 |
|
| Foreign exchange contracts | | — |
| | 55,658 |
| | — |
| | 55,658 |
|
| Credit contracts | | — |
| | 218 |
| | — |
| | 218 |
|
| Commodity contracts | | — |
| | 199,288 |
| | — |
| | 199,288 |
|
| Gross derivative liabilities | | $ | — |
| | $ | 658,515 |
| | $ | — |
| | $ | 658,515 |
|
Netting adjustments (2) | | $ | — |
| | $ | (243,101 | ) | | $ | — |
| | $ | (243,101 | ) |
| Net derivative liabilities | | $ | — |
| | $ | 415,414 |
| | $ | — |
| | $ | 415,414 |
|
| |
| |
| (1) | Equity securities consist of mutual funds with readily determinable fair values. |
| |
| (2) | Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information. |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of December 31, 2019 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
| AFS debt securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 176,422 |
| | $ | — |
| | $ | — |
| | $ | 176,422 |
|
| U.S. government agency and U.S. government- sponsored enterprise debt securities | | — |
| | 581,245 |
| | — |
| | 581,245 |
|
| U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities: | | | | | | | |
|
|
| Commercial mortgage-backed securities | | — |
| | 603,471 |
| | — |
| | 603,471 |
|
| Residential mortgage-backed securities | | — |
| | 1,003,897 |
| | — |
| | 1,003,897 |
|
| Municipal securities | | — |
| | 102,302 |
| | — |
| | 102,302 |
|
| Non-agency mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | — |
| | 88,550 |
| | — |
| | 88,550 |
|
| Residential mortgage-backed securities | | — |
| | 46,548 |
| | — |
| | 46,548 |
|
| Corporate debt securities | | — |
| | 11,149 |
| | — |
| | 11,149 |
|
| Foreign bonds | | — |
| | 354,172 |
| | — |
| | 354,172 |
|
| Asset-backed securities | | — |
| | 64,752 |
| | — |
| | 64,752 |
|
| CLOs | | — |
| | 284,706 |
| | — |
| | 284,706 |
|
| Total AFS debt securities | | $ | 176,422 |
| | $ | 3,140,792 |
| | $ | — |
| | $ | 3,317,214 |
|
| | | | | | | | | |
| Investments in tax credit and other investments: | | | | | | | | |
Equity securities (1) | | $ | 21,746 |
| | $ | 9,927 |
| | $ | — |
| | $ | 31,673 |
|
| Total investments in tax credit and other investments | | $ | 21,746 |
| | $ | 9,927 |
| | $ | — |
| | $ | 31,673 |
|
| | | | | | | | | |
| Derivative assets: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 192,883 |
| | $ | — |
| | $ | 192,883 |
|
| Foreign exchange contracts | | — |
| | 54,637 |
| | — |
| | 54,637 |
|
| Credit contracts | | — |
| | 2 |
| | — |
| | 2 |
|
| Equity contracts | | — |
| | 993 |
| | 421 |
| | 1,414 |
|
| Commodity contracts | | — |
| | 81,380 |
| | — |
| | 81,380 |
|
| Gross derivative assets | | $ | — |
| | $ | 329,895 |
| | $ | 421 |
| | $ | 330,316 |
|
Netting adjustments (2) | | $ | — |
| | $ | (125,319 | ) | | $ | — |
| | $ | (125,319 | ) |
| Net derivative assets | | $ | — |
| | $ | 204,576 |
| | $ | 421 |
| | $ | 204,997 |
|
| | | | | | | | | |
| Derivative liabilities: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 127,317 |
| | $ | — |
| | $ | 127,317 |
|
| Foreign exchange contracts | | — |
| | 48,610 |
| | — |
| | 48,610 |
|
| Credit contracts | | — |
| | 84 |
| | — |
| | 84 |
|
| Commodity contracts | | — |
| | 80,517 |
| | — |
| | 80,517 |
|
| Gross derivative liabilities | | $ | — |
| | $ | 256,528 |
| | $ | — |
| | $ | 256,528 |
|
Netting adjustments (2) | | $ | — |
| | $ | (159,799 | ) | | $ | — |
| | $ | (159,799 | ) |
| Net derivative liabilities | | $ | — |
| | $ | 96,729 |
| | $ | — |
| | $ | 96,729 |
|
| |
| |
| (1) | Equity securities consist of mutual funds with readily determinable fair values. |
| |
| (2) | Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information. |
For the three months ended March 31, 2020 and 2019, Level 3 fair value measurements that were measured on a recurring basis consist of warrants issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity warrants for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Equity Contracts | | | | |
| Beginning balance | | $ | 421 |
| | $ | 673 |
|
Total gains (losses) included in earnings (1) | | 292 |
| | (231 | ) |
| Ending balance |
| $ | 713 |
| | $ | 442 |
|
| |
| |
| (1) | Includes unrealized gains (losses) of $292 thousand and $(43) thousand for the three months ended March 31, 2020 and 2019, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income. |
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of March 31, 2020 and December 31, 2019, respectively. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Fair Value Measurements (Level 3) | | Valuation Technique | | Unobservable Inputs | | Range of Inputs | | Weighted- Average (1) |
| March 31, 2020 | | | | | | | | | | |
| Derivative assets: | | | | | | | | | | |
| Equity contracts | | $ | 713 |
| | Black-Scholes option pricing model | | Equity volatility | | 72% — 86% | | 82% |
| | | | | | | 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 March 31, 2020 and December 31, 2019. |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis include certain loans, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, and loans held-for-sale. Nonrecurring fair value adjustments result from impairment on certain loans and investments in qualified affordable housing partnerships, tax credit and other investments, write-downs of OREO, or from the application of lower of cost or fair value on loans held-for-sale.
Impaired Loans — The Company typically adjusts the carrying amount of impaired loans when there is evidence of probable loss and when the expected fair value of the loan is less than its carrying amount. Impaired loans with specific reserves are classified as Level 3 assets. The following two methods are used to derive the fair value of impaired loans:
Discounted cash flows valuation techniques that consist of developing an expected stream of cash flows over the life of the loans and then valuing the loans at the present value by discounting the expected cash flows at a designated discount rate.
A specific reserve is established for an impaired loan based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of the underlying collateral is generally based on third-party appraisals, or an internal valuation if a third-party appraisal is not awarerequired by regulations, which utilize one or more valuation techniques such as income, market and/or cost approaches.
Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of anythe Company’s monitoring process, the Company conducts ongoing due diligence on the Company’s investments in its qualified affordable housing partnerships, tax credit and other investments after the initial investment date and prior to the being placed in service date. After these investments are either acquired or placed into service, periodic monitoring is performed, which includes the quarterly review of the financial statements of the tax credit investment entity and the annual review of the financial statements of the guarantor (if any), as well as the review of the annual tax returns of the tax credit investment entity; and comparison of the actual cash distributions received against the financial projections prepared at the time when the investment was made. The Company assesses its tax credit investments for possible OTTI on an annual basis or when events or circumstances suggest that the carrying amount of the tax credit investments may not be realizable. These circumstances can include, but are not limited to the following factors:
The current fair value of the tax credit investment based upon the expected future cash flows is less than the carrying amount;
Change in the economic, market or technological environment that could adversely affect the investee’s operations; and
Other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment.
All available evidence is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, an impairment charge would significantly affect theonly 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 amounts, such amounts have not been comprehensively revalued for purposesless the costs to sell at the time of these Consolidated Financial Statements sinceforeclosure 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 date, and therefore,the current carrying value is appropriate. OREO properties are classified as Level 3.
Other nonperforming assets—Other nonperforming assets are recorded at fair value upon transfers from loans to foreclosed assets. Subsequently, foreclosed assets are recorded at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised values of the collateral or management’s estimates of the foreclosed asset. The Company records an impairment when the foreclosed asset’s fair value may differ significantly from the amounts presented herein.declines below its carrying value. Other nonperforming assets are classified as Level 3.
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 March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Assets Measured at Fair Value on a Nonrecurring Basis
as of March 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 |
Impaired loans (1): | | | | | | | | |
| Commercial: | | | | | | | | |
| C&I | | $ | — |
| | $ | — |
| | $ | 28,877 |
| | $ | 28,877 |
|
| CRE: | | | | | | | | |
| CRE | | — |
| | — |
| | 735 |
| | 735 |
|
| Total commercial | | — |
| | — |
| | 29,612 |
| | 29,612 |
|
| Consumer: | | | | | | | | |
| Residential mortgage: | | | | | | | | |
| HELOCs | | — |
| | — |
| | 1,798 |
| | 1,798 |
|
| Other consumer | | — |
| | — |
| | 2,491 |
| | 2,491 |
|
| Total consumer | | — |
| | — |
| | 4,289 |
| | 4,289 |
|
| Total impaired loans | | $ | — |
| | $ | — |
| | $ | 33,901 |
| | $ | 33,901 |
|
| Investments in tax credit and other investments, net | | $ | — |
| | $ | — |
| | $ | 3,076 |
| | $ | 3,076 |
|
| Other nonperforming assets | | $ | — |
| | $ | — |
| | $ | 867 |
| | $ | 867 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2019 |
| | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
Measurements |
| Non-PCI impaired loans: | | | | | | | | |
| Commercial: | | | | | | | | |
| C&I | | $ | — |
| | $ | — |
| | $ | 47,554 |
| | $ | 47,554 |
|
| CRE: | | | | | | | | |
| CRE | | — |
| | — |
| | 753 |
| | 753 |
|
| Total commercial | | — |
| | — |
| | 48,307 |
| | 48,307 |
|
| Consumer: | | | | | | | | |
| Residential mortgage: | | | | | | | | |
| HELOCs | | — |
| | — |
| | 1,372 |
| | 1,372 |
|
| Total consumer | | — |
| | — |
| | 1,372 |
| | 1,372 |
|
| Total non-PCI impaired loans | | $ | — |
| | $ | — |
| | $ | 49,679 |
| | $ | 49,679 |
|
OREO (2) | | $ | — |
| | $ | — |
| | $ | 125 |
| | $ | 125 |
|
| Investments in tax credit and other investments, net | | $ | — |
| | $ | — |
| | $ | 3,076 |
| | $ | 3,076 |
|
| |
| |
| (1) | The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total impaired loans as of March 31, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 includes only non-PCI loans. |
| |
| (2) | Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO. |
The following table presents the increase (decrease) in fair value of assets for which a fair value adjustment has been recognized for the three months ended March 31, 2020 and 2019, related to assets that were still held as of those dates:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Impaired loans: | | Total Impaired Loans (1) | | Non-PCI Impaired Loans |
| Commercial: | | | | |
| C&I | | $ | (21,501 | ) | | $ | (2,734 | ) |
| CRE: | | | | |
| CRE | | (5 | ) | | 2 |
|
| Total commercial | | (21,506 | ) | | (2,732 | ) |
| Consumer: | | | | |
| Residential mortgage: | | | | |
| HELOCs | | (193 | ) | | (78 | ) |
| Other consumer | | 2,491 |
| | — |
|
| Total consumer | | 2,298 |
| | (78 | ) |
| Total impaired loans | | $ | (19,208 | ) | | $ | (2,810 | ) |
| Investments in tax credit and other investments, net | | $ | 150 |
| | $ | (6,978 | ) |
| Other nonperforming assets | | $ | (300 | ) | | $ | — |
|
| |
| |
| (1) | The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total impaired loans during the three months ended March 31, 2020 considers PCD loans, if impaired, whereas impaired loans during the three months ended March 31, 2019 includes only non-PCI loans. |
The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Fair Value
Measurements
(Level 3) | | Valuation
Technique(s) | | Unobservable Input(s) | | Range of Input(s) | | Weighted- Average (1) |
| March 31, 2020 | | | | | | | | | | |
Impaired loans (1) | | $ | 25,140 |
| | Discounted cash flows | | Discount | | 4% — 15% | | 12% |
| | | $ | 5,712 |
| | Fair value of collateral | | Discount | | 8% — 9% | | 9% |
| | | $ | 2,491 |
| | Fair value of collateral | | Contract value | | NM | | NM |
| | | $ | 558 |
| | Fair value of property | | Selling cost | | 8% | | 8% |
| Other nonperforming assets | | $ | 867 |
| | 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 |
| December 31, 2019 | | | | | | | | | | |
| Non-PCI impaired loans | | $ | 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 |
| OREO | | $ | 125 |
| | Fair value of property | | Selling cost | | 8% | | 8% |
| Investments in tax credit and other investments, net | | $ | 3,076 |
| | Individual analysis of each investment | | Expected future tax benefits and distributions | | NM | | NM |
| |
NM — Not meaningful.
| |
| (1) | Presented on a total impaired loan basis due to the adoption of ASU 2016-13 PCD loans (formerly, PCI loans) are assessed for impairment in the same manner as non-PCD loans. |
| |
| (2) | Weighted-average is based on the relative fair value of the respective assets as of March 31, 2020 and December 31, 2019. |
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of March 31, 2020 and December 31, 2019, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in this Note. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable and mortgage servicing rights that are included in Other assets, and accrued interest payable that is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet.
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Estimated Fair Value |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 3,080,042 |
| | $ | 3,080,042 |
| | $ | — |
| | $ | — |
| | $ | 3,080,042 |
|
| Interest-bearing deposits with banks | | $ | 293,509 |
| | $ | — |
| | $ | 293,509 |
| | $ | — |
| | $ | 293,509 |
|
Resale agreements (1) | | $ | 860,000 |
| | $ | — |
| | $ | 867,872 |
| | $ | — |
| | $ | 867,872 |
|
| Restricted equity securities, at cost | | $ | 78,745 |
| | $ | — |
| | $ | 78,745 |
| | $ | — |
| | $ | 78,745 |
|
| Loans held-for-sale | | $ | 1,594 |
| | $ | — |
| | $ | 1,594 |
| | $ | — |
| | $ | 1,594 |
|
| Loans held-for-investment, net | | $ | 35,336,390 |
| | $ | — |
| | $ | — |
| | $ | 35,736,331 |
| | $ | 35,736,331 |
|
| Mortgage servicing rights | | $ | 5,711 |
| | $ | — |
| | $ | — |
| | $ | 7,926 |
| | $ | 7,926 |
|
| Accrued interest receivable | | $ | 148,294 |
| | $ | — |
| | $ | 148,294 |
| | $ | — |
| | $ | 148,294 |
|
| Financial liabilities: | | | | | | | | | | |
| Demand, checking, savings and money market deposits | | $ | 28,720,425 |
| | $ | — |
| | $ | 28,720,425 |
| | $ | — |
| | $ | 28,720,425 |
|
| Time deposits | | $ | 9,966,533 |
| | $ | — |
| | $ | 9,992,060 |
| | $ | — |
| | $ | 9,992,060 |
|
| Short-term borrowings | | $ | 66,924 |
| | $ | — |
| | $ | 66,924 |
| | $ | — |
| | $ | 66,924 |
|
| FHLB advances | | $ | 646,336 |
| | $ | — |
| | $ | 657,859 |
| | $ | — |
| | $ | 657,859 |
|
Repurchase agreements (1) | | $ | 450,000 |
| | $ | — |
| | $ | 470,230 |
| | $ | — |
| | $ | 470,230 |
|
| Long-term debt | | $ | 147,169 |
| | $ | — |
| | $ | 152,942 |
| | $ | — |
| | $ | 152,942 |
|
| Accrued interest payable | | $ | 25,209 |
| | $ | — |
| | $ | 25,209 |
| | $ | — |
| | $ | 25,209 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 |
| | $ | — |
| | $ | — |
| | $ | 3,261,149 |
|
| Interest-bearing deposits with banks | | $ | 196,161 |
| | $ | — |
| | $ | 196,161 |
| | $ | — |
| | $ | 196,161 |
|
Resale agreements (1) | | $ | 860,000 |
| | $ | — |
| | $ | 856,025 |
| | $ | — |
| | $ | 856,025 |
|
| Restricted equity securities, at cost | | $ | 78,580 |
| | $ | — |
| | $ | 78,580 |
| | $ | — |
| | $ | 78,580 |
|
| Loans held-for-sale | | $ | 434 |
| | $ | — |
| | $ | 434 |
| | $ | — |
| | $ | 434 |
|
| Loans held-for-investment, net | | $ | 34,420,252 |
| | $ | — |
| | $ | — |
| | $ | 35,021,300 |
| | $ | 35,021,300 |
|
| Mortgage servicing rights | | $ | 6,068 |
| | $ | — |
| | $ | — |
| | $ | 8,199 |
| | $ | 8,199 |
|
| Accrued interest receivable | | $ | 144,599 |
| | $ | — |
| | $ | 144,599 |
| | $ | — |
| | $ | 144,599 |
|
| Financial liabilities: | | | | | | | | | | |
| Demand, checking, savings and money market deposits | | $ | 27,109,951 |
| | $ | — |
| | $ | 27,109,951 |
| | $ | — |
| | $ | 27,109,951 |
|
| Time deposits | | $ | 10,214,308 |
| | $ | — |
| | $ | 10,208,895 |
| | $ | — |
| | $ | 10,208,895 |
|
| Short-term borrowings | | $ | 28,669 |
| | $ | — |
| | $ | 28,669 |
| | $ | — |
| | $ | 28,669 |
|
| FHLB advances | | $ | 745,915 |
| | $ | — |
| | $ | 755,371 |
| | $ | — |
| | $ | 755,371 |
|
Repurchase agreements (1) | | $ | 200,000 |
| | $ | — |
| | $ | 232,597 |
| | $ | — |
| | $ | 232,597 |
|
| Long-term debt | | $ | 147,101 |
| | $ | — |
| | $ | 152,641 |
| | $ | — |
| | $ | 152,641 |
|
| Accrued interest payable | | $ | 27,246 |
| | $ | — |
| | $ | 27,246 |
| | $ | — |
| | $ | 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. Out of gross repurchase agreements of $450.0 million, $0.0 million and $250.0 million as of March 31, 2020 and December 31, 2019, respectively, were eligible for netting against gross resale agreements |
Note 54 —Securities Purchased under Resale Agreements and Sold under Repurchase Agreements
Resale Agreements
Resale agreements are recorded at the balances at which the securities were acquired. The market values of the underlying securities collateralizing the related receivable of the resale agreements, including accrued interest, are monitored. Additional collateral may be requested by the Company from the counterparty when deemed appropriate. Gross resale agreements were $1.65 billion$860.0 million and $2.10$1.11 billion as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The weighted average interest ratesweighted-average yields were 2.30%2.54% and 1.84% as of September 30, 20172.80% for the three months ended March 31, 2020 and December 31, 2016,2019, respectively.
Repurchase Agreements
Long-term repurchase agreements are accounted for as collateralized financing transactions and recorded atAs of March 31, 2020, the balances at which the securities were sold. The collateral for the repurchase agreements is primarily comprised of U.S. Treasury securities, U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities and U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise debtmortgage-backed securities. The Company may have to provide additional collateral for the repurchase agreements, as necessary. Gross repurchase agreements were $450.0 million as of each of September 30, 2017both March 31, 2020 and December 31, 2016.2019. The weighted averageweighted-average interest rates were 3.56%4.10% and 3.15% as5.01% for the three months ended March 31, 2020 and 2019, respectively. As of September 30, 2017March 31, 2020, $150.0 million of repurchase agreements will mature in 2022 and December 31, 2016, respectively.$300.0 million will mature in 2023.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that provide the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance SheetsSheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45.210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral acceptedreceived includes securities that are not recognized on the Consolidated Balance Sheets.Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance SheetsSheet against the related collateralized liability. Collateral acceptedreceived or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, butand is usually delivered to and held by the third partythird-party trustees. The collateral amounts received/postedpledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.
The following tables present the resale and repurchase agreements included on the Consolidated Balance SheetsSheet as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | | | ($ in thousands) | | As of September 30, 2017 | | March 31, 2020 |
| | | Gross Amounts
of Recognized
Assets | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | | |
| 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 |
| | Gross Amounts
of Recognized
Assets | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets | | Financial
Instruments | | Collateral
Pledged | | Net Amount | | | Collateral Received | |
| Resale agreements | | $ | — |
| | $ | (1,240,568 | ) | (2) | $ | 9,432 |
| | $ | 860,000 |
| | $ | — |
| | $ | 860,000 |
| | $ | (859,842 | ) | (1) | $ | 158 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross Amounts
of Recognized
Liabilities | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Liabilities
Presented on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | | |
| 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 |
| | Gross Amounts
of Recognized
Liabilities | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Liabilities
Presented on the
Consolidated
Balance Sheets | | Financial
Instruments | | Collateral
Posted | | Net Amount | | | Collateral Pledged | |
| Repurchase agreements | | $ | — |
| | $ | (50,000 | ) | (3) | $ | — |
| | $ | 450,000 |
| | $ | — |
| | $ | 450,000 |
| | $ | (441,246 | ) | (2) | $ | 8,754 |
|
|
| | | | ($ in thousands) | | As of December 31, 2016 | | December 31, 2019 |
| | | Gross Amounts
of Recognized
Assets | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | | |
| 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 |
| | Gross Amounts
of Recognized
Assets | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Assets Presented
on the
Consolidated
Balance Sheets | | Financial
Instruments | | Collateral
Pledged | | Net Amount | | | Collateral Received | |
| Resale agreements | | $ | (150,000 | ) | (1) | $ | (1,839,120 | ) | (2) | $ | 10,880 |
| | $ | 1,110,000 |
| | $ | (250,000 | ) | | $ | 860,000 |
| | $ | (856,058 | ) | (1) | $ | 3,942 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross Amounts
of Recognized
Liabilities | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Liabilities
Presented
on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | | |
| 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 |
| | Gross Amounts
of Recognized
Liabilities | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts of
Liabilities
Presented
on the
Consolidated
Balance Sheets | | Financial
Instruments | | Collateral
Posted | | Net Amount | | | Collateral Pledged | |
| Repurchase agreements | | $ | (150,000 | ) | (1) | $ | (200,000 | ) | (3) | $ | — |
| | $ | 450,000 |
| | $ | (250,000 | ) | | $ | 200,000 |
| | $ | (200,000 | ) | (2) | $ | — |
|
|
| |
| (1) | Represents financial instruments subject to enforceable master netting arrangements that are not eligible to be offset under ASC 210-20-45 but would be eligible for offsetting to the extent that an event of default has occurred. |
| |
(2) | Represents the fair value of securities 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. |
| |
(3)(2) | Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability oweddue 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 7 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
Note 65 — 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 September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | |
| |
| | | As of September 30, 2017 |
| ($ in thousands) | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| Available-for-sale investment securities: | | |
| | |
| | |
| | |
|
| U.S. Treasury securities | | $ | 533,035 |
| | $ | — |
| | $ | (6,703 | ) | | $ | 526,332 |
|
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 191,727 |
| | 81 |
| | (2,623 | ) | | 189,185 |
|
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | |
| | |
| | |
| | |
|
| Commercial mortgage-backed securities | | 321,943 |
| | 326 |
| | (7,097 | ) | | 315,172 |
|
| Residential mortgage-backed securities | | 1,154,026 |
| | 4,790 |
| | (7,882 | ) | | 1,150,934 |
|
| Municipal securities | | 116,798 |
| | 900 |
| | (456 | ) | | 117,242 |
|
| Non-agency residential mortgage-backed securities: | | | | | | | | |
|
Investment grade (1) | | 9,680 |
| | 21 |
| | (7 | ) | | 9,694 |
|
| Corporate debt securities: | | | | | | | | |
|
Investment grade (1) | | 2,464 |
| | — |
| | (137 | ) | | 2,327 |
|
Non-investment grade (1) | | 10,191 |
| | — |
| | (576 | ) | | 9,615 |
|
| Foreign bonds: | | | | | | | |
|
|
Investment grade (1) (2) | | 505,395 |
| | 229 |
| | (16,484 | ) | | 489,140 |
|
Other securities (3) | | 147,504 |
| | 3 |
| | (372 | ) | | 147,135 |
|
| Total available-for-sale investment securities | | $ | 2,992,763 |
| | $ | 6,350 |
| | $ | (42,337 | ) | | $ | 2,956,776 |
|
| Held-to-maturity investment security: | | | | | | | | |
| Non-agency commercial mortgage-backed security | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total investment securities | | $ | 2,992,763 |
| | $ | 6,350 |
| | $ | (42,337 | ) | | $ | 2,956,776 |
|
| | | | | | | | | |
| | | | | | | | | |
| | | As of December 31, 2016 |
| ($ in thousands) | | 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 (3) | | $ | 143,971 |
| | $ | 622 |
| | $ | — |
| | $ | 144,593 |
|
| Total investment securities | | $ | 3,529,412 |
| | $ | 7,317 |
| | $ | (56,341 | ) | | $ | 3,480,388 |
|
| | | | | | | | | |
| |
(1) | Available-for-sale investment securities rated BBB- or higher by Standard &Poor’s (“S&P”) or Baa3 or higher by Moody’s are considered investment grade. Conversely, available-for-sale investment securities rated lower than BBB- by S&P or lower than Baa3 by Moody’s are considered non-investment grade. Classifications are based on the lower of the credit ratings by S&P or Moody’s. |
| |
(2) | Fair values of foreign bonds include $458.9 million and $353.6 million of multilateral development bank bonds as of September 30, 2017 and December 31, 2016, respectively. |
| |
(3) | During the third quarter of 2017, the Company transferred a non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale. |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | Amortized
Cost (1) | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| AFS debt securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 50,606 |
| | $ | 822 |
| | $ | — |
| | $ | 51,428 |
|
| U.S. government agency and U.S. government-sponsored enterprise debt securities | | 511,176 |
| | 7,232 |
| | — |
| | 518,408 |
|
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | 677,644 |
| | 24,472 |
| | (4,168 | ) | | 697,948 |
|
| Residential mortgage-backed securities | | 1,316,009 |
| | 38,770 |
| | (2,412 | ) | | 1,352,367 |
|
| Municipal securities | | 300,551 |
| | 10,147 |
| | (1,072 | ) | | 309,626 |
|
| Non-agency mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | 85,843 |
| | 2,008 |
| | (737 | ) | | 87,114 |
|
| Residential mortgage-backed securities | | 64,112 |
| | 156 |
| | (2,134 | ) | | 62,134 |
|
| Corporate debt securities | | 11,250 |
| | 1 |
| | (288 | ) | | 10,963 |
|
| Foreign bonds | | 283,822 |
| | 749 |
| | (50 | ) | | 284,521 |
|
| Asset-backed securities | | 65,400 |
| | — |
| | (3,844 | ) | | 61,556 |
|
| CLOs | | 294,000 |
| | — |
| | (34,122 | ) | | 259,878 |
|
| Total AFS debt securities | | $ | 3,660,413 |
| | $ | 84,357 |
| | $ | (48,827 | ) | | $ | 3,695,943 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2019 |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| AFS debt securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 177,215 |
| | $ | — |
| | $ | (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 bonds | | 354,481 |
| | 198 |
| | (507 | ) | | 354,172 |
|
| Asset-backed securities | | 66,106 |
| | — |
| | (1,354 | ) | | 64,752 |
|
| CLOs | | 294,000 |
| | — |
| | (9,294 | ) | | 284,706 |
|
| Total AFS debt securities | | $ | 3,320,648 |
| | $ | 19,805 |
| | $ | (23,239 | ) | | $ | 3,317,214 |
|
| |
As of March 31, 2020, the amortized cost of AFS debt securities excludes accrued interest receivable of $14.4 million which is included in Other assets on the Consolidated Balance Sheet. For our accounting policy related to AFS debt securities’ accrued interest receivable, see Note 2 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses and related fair values of the Company’s investment portfolio,AFS debt securities, aggregated by investment category and the length of time that individualthe securities have been in a continuous unrealized loss position as of September 30, 2017March 31, 2020 and December 31, 2016:2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | As of September 30, 2017 |
| ($ in thousands) | | 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 | | $ | 415,507 |
| | $ | (4,615 | ) | | $ | 110,825 |
| | $ | (2,088 | ) | | $ | 526,332 |
| | $ | (6,703 | ) |
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 96,681 |
| | (367 | ) | | 54,512 |
| | (2,256 | ) | | 151,193 |
| | (2,623 | ) |
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Commercial mortgage-backed securities | | 120,070 |
| | (1,721 | ) | | 155,128 |
| | (5,376 | ) | | 275,198 |
| | (7,097 | ) |
| Residential mortgage-backed securities | | 365,038 |
| | (2,344 | ) | | 288,768 |
| | (5,538 | ) | | 653,806 |
| | (7,882 | ) |
| Municipal securities | | 22,010 |
| | (222 | ) | | 11,256 |
| | (234 | ) | | 33,266 |
| | (456 | ) |
| Non-agency residential mortgage-backed securities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Investment grade | | 4,715 |
| | (7 | ) | | — |
| | — |
| | 4,715 |
| | (7 | ) |
| Corporate debt securities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Investment grade | | — |
| | — |
| | 2,327 |
| | (137 | ) | | 2,327 |
| | (137 | ) |
| Non-investment grade | | — |
| | — |
| | 9,615 |
| | (576 | ) | | 9,615 |
| | (576 | ) |
| Foreign bonds: | | | | | | | | | | | | |
| Investment grade | | 73,619 |
| | (873 | ) | | 344,298 |
| | (15,611 | ) | | 417,917 |
| | (16,484 | ) |
| Other securities | | 31,223 |
| | (372 | ) | | — |
| | — |
| | 31,223 |
| | (372 | ) |
| Total available-for-sale investment securities | | $ | 1,128,863 |
| | $ | (10,521 | ) | | $ | 976,729 |
| | $ | (31,816 | ) | | $ | 2,105,592 |
| | $ | (42,337 | ) |
| Held-to-maturity investment security: | | | | | | | | | | | | |
| Non-agency commercial mortgage-backed security | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total investment securities | | $ | 1,128,863 |
| | $ | (10,521 | ) | | $ | 976,729 |
| | $ | (31,816 | ) | | $ | 2,105,592 |
| | $ | (42,337 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | As of December 31, 2016 |
| ($ in thousands) | | 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) | | March 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 mortgage-backed securities: | | | | | | | | | | | | |
| Commercial mortgage-backed securities | | $ | 116,225 |
| | $ | (2,277 | ) | | $ | 19,252 |
| | $ | (1,891 | ) | | $ | 135,477 |
| | $ | (4,168 | ) |
| Residential mortgage-backed securities | | 192,572 |
| | (2,408 | ) | | 193 |
| | (4 | ) | | 192,765 |
| | (2,412 | ) |
| Municipal securities | | 18,705 |
| | (1,072 | ) | | — |
| | — |
| | 18,705 |
| | (1,072 | ) |
| Non-agency mortgage-backed securities: | | | | | | | | | | | | |
| Commercial mortgage-backed securities | | 31,087 |
| | (737 | ) | | — |
| | — |
| | 31,087 |
| | (737 | ) |
| Residential mortgage-backed securities | | 47,044 |
| | (2,134 | ) | | — |
| | — |
| | 47,044 |
| | (2,134 | ) |
| Corporate debt securities | | — |
| | — |
| | 9,713 |
| | (288 | ) | | 9,713 |
| | (288 | ) |
| Foreign bonds | | 49,950 |
| | (50 | ) | | — |
| | — |
| | 49,950 |
| | (50 | ) |
| Asset-backed securities | | 50,097 |
| | (2,657 | ) | | 11,459 |
| | (1,187 | ) | | 61,556 |
| | (3,844 | ) |
| CLOs | | 259,878 |
| | (34,122 | ) | | — |
| | — |
| | 259,878 |
| | (34,122 | ) |
| Total AFS debt securities | | $ | 765,558 |
| | $ | (45,457 | ) | | $ | 40,617 |
| | $ | (3,370 | ) | | $ | 806,175 |
| | $ | (48,827 | ) |
| |
For each |
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 | | $ | — |
| | $ | — |
| | $ | 176,422 |
| | $ | (793 | ) | | $ | 176,422 |
| | $ | (793 | ) |
| U.S. government agency and U.S. government-sponsored enterprise debt securities | | 310,349 |
| | (4,407 | ) | | — |
| | — |
| | 310,349 |
| | (4,407 | ) |
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | | | | | | | | | | | | |
| Commercial mortgage-backed securities | | 204,675 |
| | (2,346 | ) | | 108,314 |
| | (2,548 | ) | | 312,989 |
| | (4,894 | ) |
| Residential mortgage-backed securities | | 325,354 |
| | (1,234 | ) | | 34,337 |
| | (243 | ) | | 359,691 |
| | (1,477 | ) |
| Municipal securities | | 31,130 |
| | (109 | ) | | — |
| | — |
| | 31,130 |
| | (109 | ) |
| Non-agency mortgage-backed securities: | | | | | | | | | | | | |
| Commercial mortgage-backed securities | | 7,914 |
| | (6 | ) | | — |
| | — |
| | 7,914 |
| | (6 | ) |
| Residential mortgage-backed securities | | 42,894 |
| | (285 | ) | | — |
| | — |
| | 42,894 |
| | (285 | ) |
| Corporate debt securities | | — |
| | — |
| | 9,888 |
| | (113 | ) | | 9,888 |
| | (113 | ) |
| Foreign bonds | | 129,074 |
| | (407 | ) | | 9,900 |
| | (100 | ) | | 138,974 |
| | (507 | ) |
| Asset-backed securities | | 52,565 |
| | (902 | ) | | 12,187 |
| | (452 | ) | | 64,752 |
| | (1,354 | ) |
CLOs
| | 284,706 |
| | (9,294 | ) | | — |
| | — |
| | 284,706 |
| | (9,294 | ) |
| Total AFS debt securities | | $ | 1,388,661 |
| | $ | (18,990 | ) | | $ | 351,048 |
| | $ | (4,249 | ) | | $ | 1,739,709 |
| | $ | (23,239 | ) |
| |
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, see Note 1 2 — Summary of Significant Accounting Policies — Available-for-Sale InvestmentAllowance for Credit Losses on Available-For-Sale Debt Securitiestoto the Consolidated Financial Statements ofin this Form 10-Q. Prior to January 1, 2020, the Company’s 2016 Form 10-K.Company assessed individual securities that were in an unrealized loss position for OTTI.
The gross unrealized losses across all major security types presented in the above tables were primarily attributable to the yield curve movement, in additionmovements and widened spreads arising from the negative outlook and uncertainty as a result of the COVID-19 pandemic. The Company believes that the credit support levels of the Company’s AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received even if the credit performance deteriorates under the impact of the COVID-19 pandemic.
As of March 31, 2020, the Company has the intent to widened liquidityhold the AFS debt securities with unrealized losses through the anticipated recovery period and credit spreads.it is 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 loss was recorded on the Company’s Consolidated Statements0 allowance for credit losses as of IncomeMarch 31, 2020, nor provision for credit losses for the three and nine months ended September 30, 2017 and 2016. March 31, 2020 were recorded. In comparison, 0 OTTI credit loss was recognized for the three months ended March 31, 2019.
As of September 30, 2017,March 31, 2020, the Company had 146 available-for-sale investment56 AFS debt securities in ana gross unrealized loss position with no0 credit impairment, primarily comprisedconsisting of 793 CLOs, 32 U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise mortgage-backed securities, 22 U.S. Treasury securities and 14 investment grade foreign bonds.4 asset-backed securities. In comparison, as of December 31, 2016,2019, the Company had 170 available-for-sale investment101 AFS debt securities in ana gross unrealized loss position with no0 credit impairment, primarily comprisedconsisting of 823 CLOs, 57 U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise mortgage-backed securities, 26and 14 U.S. Treasury securitiesgovernment agency and 13 investment grade foreign bonds.U.S. government-sponsored enterprise debt securities.
During the first quarter of 2016, the Company obtained a non-agency commercial mortgage-backed security, through the securitization of multifamily real estate loans, which was classified as held-to-maturity and recorded at amortized cost. During the third quarter of 2017, the Company transferred this non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale. The transfer reflects the Company’s intent to sell the security under active liquidity management.
Other-Than-Temporary Impairment
No OTTI credit losses were recognized for the three and nine months ended September 30, 2017 and 2016.
Realized Gains and Losses
The following table presents the proceeds, gross realized gains and losses, and tax expense related to the sales of available-for-sale investmentAFS debt securities for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Proceeds from sales | | $ | 306,463 |
| | $ | 151,339 |
|
| Gross realized gains | | $ | 1,529 |
| | $ | 1,561 |
|
| Related tax expense | | $ | 452 |
| | $ | 461 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Proceeds from sales | | $ | 124,887 |
| | $ | 143,513 |
| | $ | 676,776 |
| | $ | 1,008,256 |
|
| Gross realized gains | | $ | 1,539 |
| | $ | 1,790 |
| | $ | 6,733 |
| | $ | 8,593 |
|
| Gross realized losses | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (125 | ) |
| Related tax expense | | $ | 647 |
| | $ | 752 |
| | $ | 2,831 |
| | $ | 3,560 |
|
| |
ScheduledContractual Maturities of InvestmentAvailable-for-Sale Debt Securities
The following table presents the scheduledcontractual maturities of available-for-sale investmentAFS debt securities as of September 30, 2017:March 31, 2020:
| | | | ($ in thousands) | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Fair Value |
| Due within one year | | $ | 638,257 |
| | $ | 621,343 |
| | $ | 588,392 |
| | $ | 590,461 |
|
| Due after one year through five years | | 629,892 |
| | 623,058 |
| | 314,312 |
| | 319,938 |
|
| Due after five years through ten years | | 176,117 |
| | 172,902 |
| | 240,566 |
| | 252,057 |
|
| Due after ten years | | 1,548,497 |
| | 1,539,473 |
| | 2,517,143 |
| | 2,533,487 |
|
| Total available-for-sale investment securities | | $ | 2,992,763 |
| | $ | 2,956,776 |
| |
| Total AFS debt securities | | | $ | 3,660,413 |
| | $ | 3,695,943 |
|
|
Actual maturities of mortgage-backed securities can differ from contractual maturities becauseas the borrowers have the right to prepay obligations. In addition, factors such as prepayments and interest rates may affect the yields on the carrying values of mortgage-backed securities.
Available-for-sale investmentAs of March 31, 2020 and December 31, 2019, AFS debt securities with fair valuesvalue of $584.9$742.4 million and $767.4$479.4 million, as of September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, repurchase agreements the Federal Reserve Bank’s discount window and for other purposes required or permitted by law.
Restricted Equity Securities
Restricted equity securities include stock of the Federal Reserve Bank and of the FHLB. Restricted equity securities are carried at cost as these securities do not have a readily determinable fair value. The following table presents the restricted equity securities on the Consolidated Balance Sheet as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| Federal Reserve Bank of San Francisco (“FRB”) stock | | $ | 58,563 |
| | $ | 58,330 |
|
| FHLB stock | | 20,182 |
| | 20,250 |
|
| Total restricted equity securities | | $ | 78,745 |
| | $ | 78,580 |
|
| |
|
| | | | | | | | |
| | | | | |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| Federal Reserve Bank stock | | $ | 56,072 |
| | $ | 55,525 |
|
| FHLB stock | | 17,250 |
| | 17,250 |
|
| Total | | $ | 73,322 |
| | $ | 72,775 |
|
| | | | | |
Note 76 — Derivatives
The Company uses derivatives to manage exposure to market risk, primarily including interest rate risk and foreign currency risk, and 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 are not significant to 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’s investment in its China subsidiary, East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance SheetsSheet 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 — Derivativesto the Consolidated Financial Statements of the Company’s 20162019 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 September 30, 2017March 31, 2020 and December 31, 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 March 31, 2020 and December 31, 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) | | March 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 | | $ | 31,026 |
| | $ | — |
| | $ | 1,144 |
| | $ | 31,026 |
| | $ | — |
| | $ | 3,198 |
|
| Net investment hedges: | | | | | | | | | | | | |
| Foreign exchange contracts | | 155,255 |
| | 73 |
| | 31 |
| | 86,167 |
| | — |
| | 1,586 |
|
| Total derivatives designated as hedging instruments | | $ | 186,281 |
| | $ | 73 |
| | $ | 1,175 |
| | $ | 117,193 |
| | $ | — |
| | $ | 4,784 |
|
| | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Interest rate contracts | | $ | 16,657,306 |
| | $ | 605,122 |
| | $ | 402,207 |
| | $ | 15,489,692 |
| | $ | 192,883 |
| | $ | 124,119 |
|
| Foreign exchange contracts | | 4,958,834 |
| | 64,310 |
| | 55,627 |
| | 4,839,661 |
| | 54,637 |
| | 47,024 |
|
| Credit contracts | | 210,357 |
| | 8 |
| | 218 |
| | 210,678 |
| | 2 |
| | 84 |
|
| Equity contracts | | — |
| (1) | 1,128 |
| | — |
| | — |
| (1) | 1,414 |
| | — |
|
| Commodity contracts | | — |
| (2) | 163,563 |
| | 199,288 |
| | — |
| (2) | 81,380 |
| | 80,517 |
|
| Total derivatives not designated as hedging instruments | | $ | 21,826,497 |
| | $ | 834,131 |
| | $ | 657,340 |
| | $ | 20,540,031 |
| | $ | 330,316 |
| | $ | 251,744 |
|
| Gross derivative assets/liabilities | | | | $ | 834,204 |
| | $ | 658,515 |
| | | | $ | 330,316 |
| | $ | 256,528 |
|
| Less: Master netting agreements | | | | (158,674 | ) | | (158,674 | ) | | | | (121,561 | ) | | (121,561 | ) |
| Less: Cash collateral received/paid | | | | (20,100 | ) | | (84,427 | ) | | | | (3,758 | ) | | (38,238 | ) |
| Net derivative assets/liabilities | | | | $ | 655,430 |
| | $ | 415,414 |
| | | | $ | 204,997 |
| | $ | 96,729 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 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 | | $ | 42,566 |
| | $ | — |
| | $ | 6,648 |
| | $ | 48,365 |
| | $ | — |
| | $ | 5,976 |
|
| Foreign currency forward contracts | | — |
| | — |
| | — |
| | 83,026 |
| | 4,325 |
| | — |
|
| Total derivatives designated as hedging instruments | | $ | 42,566 |
| | $ | — |
| | $ | 6,648 |
| | $ | 131,391 |
| | $ | 4,325 |
| | $ | 5,976 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Interest rate swaps and options | | $ | 8,742,980 |
| | $ | 64,822 |
| | $ | 64,212 |
| | $ | 7,668,482 |
| | $ | 67,578 |
| | $ | 65,131 |
|
| Foreign exchange contracts | | 1,131,414 |
| | 14,187 |
| | 20,054 |
| | 767,764 |
| | 11,874 |
| | 11,213 |
|
| RPAs | | 68,387 |
| | 2 |
| | 1 |
| | 71,414 |
| | 3 |
| | 3 |
|
| Warrants | | — |
| (2) | 1,455 |
| | — |
| | — |
| | — |
| | — |
|
| Total derivatives not designated as hedging instruments | | $ | 9,942,781 |
| | $ | 80,466 |
| | $ | 84,267 |
| | $ | 8,507,660 |
| | $ | 79,455 |
| | $ | 76,347 |
|
| |
| |
| (1) | Derivative assetsThe Company held equity contracts in 2 public companies and derivative liabilities are included18 private companies as of March 31, 2020. In comparison, the Company held equity contracts in Other assets and Accrued expenses3 public companies and other liabilities, respectively,on the Consolidated Balance Sheets.
18 private companies as of December 31, 2019. |
| |
| (2) | The Company held four warrantsnotional amount of the Company’s commodity contracts entered with its customers totaled 6,738 thousand barrels of crude oil and 61,296 thousand units of natural gas, measured in public companies and 32 warrants in private companiesmillion British thermal units (“MMBTUs”) as of September 30, 2017.March 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 natural gas as of December 31, 2019. The Company simultaneously entered into the offsetting commodity contracts with mirrored terms with third-party financial institutions. |
Derivatives Designated as Hedging Instruments
Interest Rate Swaps on Certificates of Deposit Fair Value Hedges — The Company is exposed to changes in the fair value of certain fixed rate certificates of deposit due to changes in the benchmark interest rate, London Interbank Offered Rate. Interestrates. The Company entered into interest rate swaps, which were designated as fair value hedgeshedges. The interest rate swaps involve the receiptexchange of fixed rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.amounts.
As of September 30, 2017 and December 31, 2016, the total notional amounts of the interest rate swaps on certificates of deposit were $42.6 million and $48.4 million, respectively. The fair value liabilities of the interest rate swaps were $6.6 million and $6.0 million as of September 30, 2017 and December 31, 2016, respectively.
The following table presents the net gains (losses) recognized on the Consolidated StatementsStatement of Income related to the derivatives designated as fair value hedges for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Gains (losses) recorded in interest expense: | | | | |
| Recognized on interest rate swaps | | $ | 2,045 |
| | $ | 1,220 |
|
| Recognized on certificates of deposit | | $ | (1,362 | ) | | $ | (1,261 | ) |
| |
The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of the hedged certificates of deposit as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Gains (losses) recorded in interest expense: | | | | | | | | |
| Recognized on interest rate swaps | | $ | 37 |
| | $ | (1,327 | ) | | $ | (1,486 | ) | | $ | 3,044 |
|
| Recognized on certificates of deposit | | $ | (116 | ) | | $ | 674 |
| | $ | 1,236 |
| | $ | (2,688 | ) |
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Carrying Value (1) | | Cumulative Fair Value Adjustment (2) |
| | March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 |
| Certificates of deposit | | $ | (30,441 | ) | | $ | (29,080 | ) | | $ | 243 |
| | $ | 1,604 |
|
| |
| |
| (1) | Represents the full carrying amount of the hedged certificates of deposit. |
| |
| (2) | For liabilities, (increase) decrease to carrying value. |
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 a portion of its 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’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 Chinese Renminbi (“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 dedesignate 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$112.9 million and $73 thousand asset, and $42.3 million and $31 thousand liability, respectively, as partof March 31, 2020. In comparison, the notional and fair value amounts of the Derivatives Not Designatedforeign exchange forward contracts, were $86.2 million and $1.6 million liability, respectively, as Hedging Instruments — “Foreign Exchange Contracts” caption as of September 30, 2017.
As of September 30, 2017, there were no derivative contracts designated as net investment hedges. As of December 31, 2016, the total notional amount and fair value of the foreign currency forward contracts designated as net investment hedges were $83.0 million and a $4.3 million asset, respectively. 2019.
The following table presents the gains (losses) recorded in the Foreign currency translation adjustment account within AOCI related to the effective portion of theon net investment hedges and the ineffective portion recorded on the Consolidated Statements of Income for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Gains recognized in AOCI | | $ | 1,004 |
| | $ | 2,005 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Gains (losses) recognized in AOCI on net investment hedges (effective portion) | | $ | — |
| | $ | 69 |
| | $ | (648 | ) | | $ | 296 |
|
| Losses recognized in foreign exchange income (ineffective portion) | | $ | — |
| | $ | (236 | ) | | $ | (1,953 | ) | | $ | (667 | ) |
| |
Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps and OptionsContracts — 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. Beginning 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 September 30, 2017,derivatives, and not as collateral against derivatives. Included in the total notional amountsamount of $8.34 billion of interest rates contracts entered into with financial counterparties as of March 31, 2020, was a notional amount of $2.68 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 $4.37 billion for derivatives that were in an asset valuation position and $4.37 billion for derivatives that wereresulted in a reduction in derivative liability valuation position. Asfair values of $213.9 million, as of March 31, 2020. In comparison, included in the total notional amount of $7.75 billion of interest rates contracts entered into with financial counterparties as of December 31, 2016, the total2019, was a notional amountsamount 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 $64.8$75.1 million asset and a $64.2 million liability as of September 30, 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 $65.1 million liability as of December 31, 2016.2019.
The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | | Assets | | Liabilities | | | | Assets | | Liabilities |
| Written options | | $ | 897,893 |
| | $ | — |
| | $ | 179 |
| | Purchased options | | $ | 897,893 |
| | $ | 180 |
| | $ | — |
|
| Sold collars and corridors | | 518,307 |
| | 10,125 |
| | 2 |
| | Collars and corridors | | 518,307 |
| | 2 |
| | 10,215 |
|
| Swaps | | 6,900,299 |
| | 593,753 |
| | — |
| | Swaps | | 6,924,607 |
| | 1,062 |
| | 391,811 |
|
| Total | | $ | 8,316,499 |
| | $ | 603,878 |
| | $ | 181 |
| | Total | | $ | 8,340,807 |
| | $ | 1,244 |
| | $ | 402,026 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2019 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | | Assets | | Liabilities | | | | Assets | | Liabilities |
| Written options | | $ | 1,003,558 |
| | $ | — |
| | $ | 66 |
| | Purchased options | | $ | 1,003,558 |
| | $ | 67 |
| | $ | — |
|
| Sold collars and corridors | | 490,852 |
| | 1,971 |
| | 16 |
| | Collars and corridors | | 490,852 |
| | 17 |
| | 1,996 |
|
| Swaps | | 6,247,667 |
| | 187,294 |
| | 6,237 |
| | Swaps | | 6,253,205 |
| | 3,534 |
| | 115,804 |
|
| Total | | $ | 7,742,077 |
| | $ | 189,265 |
| | $ | 6,319 |
| | Total | | $ | 7,747,615 |
| | $ | 3,618 |
| | $ | 117,800 |
|
| |
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.customers. For a majority of the foreign exchange transactionscontracts entered into with its customers, the Company entersmanaged its foreign exchange exposure 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 to manage 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 September 30, 2017March 31, 2020 and December 31, 2016,2019.
The following tables present the total notional amounts ofand the foreign exchange contracts were $1.13 billion and $767.8 million, respectively. Thegross fair values of the foreign exchange derivative contracts recorded were a $14.2 million asset and a $20.1 million liabilityoutstanding as of September 30, 2017. The fair values of the foreign exchange contracts recorded were an $11.9 million assetMarch 31, 2020 and an $11.2 million liability as of December 31, 2016.2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional
Amount | | Fair Value |
| | | Assets | | Liabilities | | | | Assets | | Liabilities |
| Forwards and spot | | $ | 3,658,965 |
| | $ | 50,674 |
| | $ | 38,564 |
| | Forwards and spot | | $ | 176,903 |
| | $ | 4,049 |
| | $ | 7,721 |
|
| Swaps | | 9,007 |
| | 4 |
| | 95 |
| | Swaps | | 773,059 |
| | 7,569 |
| | 7,256 |
|
| Written options | | 86,810 |
| | 217 |
| | — |
| | Purchased options | | 86,810 |
| | — |
| | 217 |
|
| Collars | | 2,205 |
| | 27 |
| | — |
| | Collars | | 165,075 |
| | 1,770 |
| | 1,774 |
|
| Total | | $ | 3,756,987 |
| | $ | 50,922 |
| | $ | 38,659 |
| | Total | | $ | 1,201,847 |
| | $ | 13,388 |
| | $ | 16,968 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2019 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional
Amount | | Fair Value |
| | | Assets | | Liabilities | | | | 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 |
| | — |
| | Purchased options | | 87,036 |
| | — |
| | 127 |
|
| Collars | | 2,244 |
| | — |
| | 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 AgreementsContracts — The Company has enteredmay periodically enter into RPAs under which the Company assumed its pro-rata share ofRPA contracts 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 with institutional counterparties. Under the interest rate derivative contract and enters into such RPAs in instances whereRPA, 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 credit risk on the RPAs by monitoring the credit worthinesscreditworthiness 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 March 31, 2020 and December 31, 2019. The notional amount of the RPAs reflectreflects the Company’s pro-rata share of the derivative instrument. As of September 30, 2017,The following table presents the notional amountamounts and the gross fair valuevalues of the RPAs purchased were $47.8 million and a $1 thousand liability, respectively. As of September 30, 2017, the notional amount and fair value of the RPAs sold were $20.6 million and a $2 thousand asset, respectively. Aspurchased outstanding as of March 31, 2020 and 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) | | March 31, 2020 | | December 31, 2019 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | Assets | | Liabilities | | | Assets | | Liabilities |
| RPAs - protection sold | | $ | 199,643 |
| | $ | — |
| | $ | 218 |
| | $ | 199,964 |
| | $ | — |
| | $ | 84 |
|
| RPAs - protection purchased | | 10,714 |
| | 8 |
| | — |
| | 10,714 |
| | 2 |
| | — |
|
| Total RPAs | | $ | 210,357 |
| | $ | 8 |
| | $ | 218 |
| | $ | 210,678 |
| | $ | 2 |
| | $ | 84 |
|
| |
Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of September 30, 2017March 31, 2020 and December 31, 2016,2019, the exposuresexposure from the RPAs purchasedwith protections sold would be $92$688 thousand and $179$125 thousand, respectively. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the weighted averageweighted-average remaining maturities of the outstanding RPAs were 3.01.9 years and 3.72.2 years, respectively.
Warrants Equity Contracts — TheAs part of the Company’s loan origination process, from time to time, the Company obtainedobtains warrants to purchase preferred andand/or common stock of technology and life sciences companies as partit provides loans to. Warrants grant the Company the right to buy a certain class of the loan origination process. As of September 30, 2017, theunderlying company’s equity at a certain price before expiration. The Company held four warrants in 2 public companies and 3218 private companies as of March 31, 2020, and held warrants in 3 public companies and 18 private companies.companies as of December 31, 2019. The total fair value of the warrants held in both public and private companies was $1.1 million and $1.4 million in assets as of March 31, 2020 and December 31, 2019, respectively.
Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. To economically hedge against the risk of fluctuation in commodity prices in the products offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions to manage the exposure with its customers. 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 March 31, 2020, the notional quantities that cleared through CME totaled 1,582 thousand barrels crude oil and 5,290 thousand MMBTUs natural gas. Applying variation margin payments as settlement to CME-cleared derivative transactions resulted in reductions in gross derivative asset fair value of $39.6 million and liability fair value of $203 thousand, respectively, as of March 31, 2020, for a net asset fair value of $2.4 million. In comparison, the notional quantities that cleared through CME totaled 1,752 thousand barrels crude oil and 6,075 thousand MMBTUs natural gas as of December 31, 2019. Applying variation margin payments as settlement to CME-cleared derivative transactions resulted in a reduction in gross derivative asset fair value of $2.9 million and liability fair value of $1.5 million, respectively, as of December 31, 2019, for a net asset fair value of $986 thousand.
The following tables present the notional amounts and fair values of the warrants for public and private companies were an $856 thousand asset and a $599 thousand asset, respectively, totaling $1.5 millioncommodity derivative positions outstanding as of September 30, 2017.March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
($ and units in thousands) | | March 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: | | | | | | | | |
| Written options | | 24 |
| | Barrels | | $ | — |
| | $ | 681 |
| | Purchased options | | 24 |
| | Barrels | | $ | 681 |
| | $ | — |
|
| Collars | | 2,522 |
| | Barrels | | 13 |
| | 46,210 |
| | Collars | | 2,859 |
| | Barrels | | 49,546 |
| | 3,732 |
|
| Swaps | | 4,192 |
| | Barrels | | 789 |
| | 87,097 |
| | Swaps | | 4,294 |
| | Barrels | | 54,366 |
| | 2,408 |
|
| Total | | 6,738 |
| |
| | $ | 802 |
| | $ | 133,988 |
| | Total | | 7,177 |
| |
| | $ | 104,593 |
| | $ | 6,140 |
|
| | | | | | | | | | | | | | | | | | | |
| Natural gas: | | | | | | | | | | Natural gas: | | | | | | | | |
| Written options | | 420 |
| | MMBTUs | | $ | — |
| | $ | 43 |
| | Purchased Options | | 410 |
| | MMBTUs | | $ | 22 |
| | $ | — |
|
| Collars | | 14,201 |
| | MMBTUs | | 541 |
| | 1,364 |
| | Collars | | 14,291 |
| | MMBTUs | | 996 |
| | 403 |
|
| Swaps | | 46,675 |
| | MMBTUs | | 25,791 |
| | 31,732 |
| | Swaps | | 46,500 |
| | MMBTUs | | 30,818 |
| | 25,618 |
|
| Total | | 61,296 |
| |
| | $ | 26,332 |
| | $ | 33,139 |
| | Total | | 61,201 |
| |
| | $ | 31,836 |
| | $ | 26,021 |
|
| Total | | | |
| | $ | 27,134 |
| | $ | 167,127 |
| | Total | | | |
| | $ | 136,429 |
| | $ | 32,161 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
($ 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 | �� | $ | — |
| | $ | 30 |
| | Purchased options | | 36 |
| | Barrels | | $ | 29 |
| | $ | — |
|
| 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 | | $ | — |
| | $ | 22 |
| | Purchased options | | 530 |
| | MMBTUs | | $ | 21 |
| | $ | — |
|
| 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 |
|
| |
The following table presents the net (losses) gains (losses) recognized on the Company’s Consolidated StatementsStatement of Income related to derivatives not designated as hedging instruments for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | |
| |
| ($ in thousands) | | Classification on Consolidated Statement of Income | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Derivatives not designated as hedging instruments: | | | | | | |
| Interest rate contracts | | Interest rate contracts and other derivative income | | $ | (7,011 | ) | | $ | (1,779 | ) |
| Foreign exchange contracts | | Foreign exchange income | | 2,861 |
| | 6,326 |
|
| Credit contracts | | Interest rate contracts and other derivative income | | (23 | ) | | 83 |
|
| Equity contracts | | Lending fees | | 309 |
| | 250 |
|
| Commodity contracts | | Interest rate contracts and other derivative income | | 24 |
| | 4 |
|
| Net (losses) gains | | | | $ | (3,840 | ) | | $ | 4,884 |
|
| |
|
| | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Location in Consolidated Statements of Income | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Interest rate swaps and options | | Derivative fees and other income | | $ | (94 | ) | | $ | 411 |
| | $ | (1,838 | ) | | $ | (2,220 | ) |
| Foreign exchange contracts | | Foreign exchange income | | 3,720 |
| | 3,787 |
| | 17,936 |
| | 10,982 |
|
| RPAs | | Derivative fees and other income | | — |
| | 4 |
| | 1 |
| | (7 | ) |
| Warrants | | Ancillary loan fees and other income | | 669 |
| | — |
| | 1,455 |
| | — |
|
| Net gains | | | | $ | 4,295 |
| | $ | 4,202 |
| | $ | 17,554 |
| | $ | 8,755 |
|
| |
Credit-Risk-Related
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-relatedcredit 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 March 31, 2020, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that are in a net liability position totaled $139.1 million, in which $138.9 million in cash and securities collateral were posted to cover this position. As of December 31, 2019, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that are in a net liability position totaled $56.4 million, which includes $14.4 million in derivative assets and $70.8 million in derivative liabilities. We posted $56.4 million in cash and securities collateral to cover these positions as of December 31, 2019. In the event that the credit rating of East West Bank’s credit rating isBank had been downgraded to below investment grade, no additional minimal collateral would behave been required to be posted since the liabilities related to such contracts were fully collateralized as of September 30, 2017March 31, 2020, and December 31, 2016.2019.
Offsetting of Derivatives
The Company has entered into agreements with certain counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The following tables present the gross derivativesderivative fair values, the balance sheet netting adjustments and the resulting net fair values recorded on the Consolidated Balance Sheetsconsolidated balance sheet, as well as the cash and non-cash collateral associated with master netting arrangements. The gross amounts of derivative assets and liabilities are presented after the respective collateral received or pledged in the formapplication of other financial instruments, which are generally marketable securities and/or cash.variation margin payments as settlements with centrally cleared organizations, where applicable. The collateral amounts in thesethe following tables are limited to the outstanding balances of the related asset or liability, (after netting is applied); thusafter the application of netting; therefore instances of overcollateralization are not shown:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | As of September 30, 2017 |
| ($ in thousands) | | 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 Sheets | | Net Amounts
Presented
on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | |
| | | | | | | | Derivative Amount | | Collateral
Received | | Net Amount |
| Derivatives Assets | | $ | 80,466 |
| | $ | 57,720 |
| | $ | 22,746 |
| | $ | — |
| | $ | 22,746 |
| | $ | (20,240 | ) | (1) | $ | (2,230 | ) | (2) | $ | 276 |
|
| | | | | | | | | | | | | | | | | |
| | | Gross Amounts Recognized | | Gross Amounts Recognized | | Gross Amounts Recognized | | Gross Amounts
Offset on the
Consolidated
Balance Sheets | | Net Amounts
Presented
on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | |
| | | | | | | | Derivative Amount | | Collateral
Posted | | Net Amount |
| Derivatives Liabilities | | $ | 90,915 |
| | $ | 17,814 |
| | $ | 73,101 |
| | $ | — |
| | $ | 73,101 |
| | $ | (20,240 | ) | (1) | $ | (52,851 | ) | (3) | $ | 10 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | As of March 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 | | $ | 834,204 |
| | $ | (158,674 | ) | | $ | (20,100 | ) | | $ | 655,430 |
| | $ | (29,103 | ) | | $ | 626,327 |
|
| | | 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 | | $ | 658,515 |
| | $ | (158,674 | ) | | $ | (84,427 | ) | | $ | 415,414 |
| | $ | (232,940 | ) | | $ | 182,474 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | As of December 31, 2016 |
| ($ in thousands) | | 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 Sheets | | Net Amounts
Presented
on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | |
| | | | | | | | Derivative
Amounts | | Collateral
Received | | Net Amount |
| Derivatives 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 Sheets | | Net Amounts
Presented
on the
Consolidated
Balance Sheets | | Gross Amounts Not Offset on the
Consolidated Balance Sheets | | |
| | | | | | | | Derivative
Amounts | | Collateral
Posted | | Net Amount |
| Derivatives Liabilities | | $ | 82,323 |
| | $ | 24,097 |
| | $ | 58,226 |
| | $ | — |
| | $ | 58,226 |
| | $ | (20,991 | ) | (1) | $ | (36,349 | ) | (3) | $ | 886 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | As of December 31, 2019 |
| | | 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 | | $ | 330,316 |
| | $ | (121,561 | ) | | $ | (3,758 | ) | | $ | 204,997 |
| | $ | — |
| | $ | 204,997 |
|
| | | 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 | | $ | 256,528 |
| | $ | (121,561 | ) | | $ | (38,238 | ) | | $ | 96,729 |
| | $ | (79,619 | ) | | $ | 17,110 |
|
| |
| |
| (1) | Represents the netting ofGross amounts recognized for derivative receivable and payable balances for the same counterparty underassets include amounts with counterparties subject to enforceable master netting arrangements if the Company has electedor similar agreements of $831.9 million and $328.7 million, respectively, as of March 31, 2020 and December 31, 2019, and amounts with counterparties not subject to net.enforceable master netting arrangements or similar agreements of $2.3 million and $1.6 million, respectively, as of March 31, 2020 and December 31, 2019. |
| |
| (2) | RepresentsGross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $657.6 million and $256.5 million, respectively, as of March 31, 2020 and December 31, 2019, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $931 thousand and $20 thousand, respectively, as of March 31, 2020 and December 31, 2019. |
| |
| (3) | Gross cash collateral received under master netting arrangements or similar agreements were $20.1 million and securities$3.8 million, respectively, as of March 31, 2020 and December 31, 2019. Of the gross cash collateral received, $20.1 million and $3.8 million were used to offset against derivative assets, withrespectively, as of March 31, 2020 and December 31, 2019. |
| |
| (4) | Gross cash collateral pledged under master netting arrangements or similar agreements were $89.8 million and $43.0 million, respectively, as of March 31, 2020 and December 31, 2019. Of the same counterpartygross cash collateral pledged, $84.4 million and $38.2 million were used to offset against derivative liabilities, respectively, as of March 31, 2020 and December 31, 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. No casharrangements or similar agreements. GAAP does not permit the netting of non-cash collateral was received ason the consolidated balance sheet but requires disclosure of September 30, 2017. Includes $8.1 million of cash collateral received as of December 31, 2016. |
| |
(3) | Represents cash and securities pledged against derivative liabilities with the same counterparty that are subject to enforceable master netting arrangements. Includes $18.0 million and $170 thousand of cash collateral posted as of September 30, 2017 and December 31, 2016, respectively.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, referagreements. Refer to Note 54 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements for additional information. Refer toNote 4 3— Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for fair value measurement disclosures on derivatives.
Note 87 — Loans Receivable and Allowance for Credit Losses
On January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective method through a cumulative-effect adjustment to retained earnings. Balance sheet information and results for reporting periods beginning with January 1, 2020 are presented under ASC 326, while prior period comparisons continue to be presented under legacy GAAP. ASU 2016-13 also introduces the concept of PCD financial assets, which replaces PCI assets. The Company’s held-for-investment loan portfolio includescomprises both originated and purchased loans. OriginatedThe Company adopted ASU 2016-13 using the prospective transition approach for PCD assets that were previously classified as PCI. Prior to January 1, 2020, originated loans and purchased loans with no evidence of credit deterioration at their acquisition date arewere referred to collectively as non-PCI loans.loans; while PCI loans arewere loans acquired with evidence of credit deterioration since their originationacquisition date, and for which it iswas probable at the acquisition date that the Company would be unable to collect all contractually required payments. PCI loans are accounted for under ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company has elected to account for PCI loans on a pool level basis under ASC 310-30 at the time of acquisition.
The following table presents the composition of the Company’s non-PCI and PCI loans held-for-investment as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| | Non-PCI Loans (1) | | PCI Loans (2) | | Total (1)(2) | | Non-PCI Loans (1) | | PCI Loans (2) | | Total (1)(2) |
| CRE: | | | | | | | | | | | | |
| Income producing | | $ | 8,530,519 |
| | $ | 313,257 |
| | $ | 8,843,776 |
| | $ | 7,667,661 |
| | $ | 348,448 |
| | $ | 8,016,109 |
|
| Construction | | 572,027 |
| | — |
| | 572,027 |
| | 551,560 |
| | — |
| | 551,560 |
|
| Land | | 111,006 |
| | 371 |
| | 111,377 |
| | 121,276 |
| | 1,918 |
| | 123,194 |
|
| Total CRE | | 9,213,552 |
| | 313,628 |
| | 9,527,180 |
| | 8,340,497 |
| | 350,366 |
| | 8,690,863 |
|
| C&I: | | | | | | | | | | | | |
| Commercial business | | 9,763,688 |
| | 12,566 |
| | 9,776,254 |
| | 8,921,246 |
| | 38,387 |
| | 8,959,633 |
|
| Trade finance | | 868,902 |
| | — |
| | 868,902 |
| | 680,930 |
| | — |
| | 680,930 |
|
| Total C&I | | 10,632,590 |
| | 12,566 |
| | 10,645,156 |
| | 9,602,176 |
| | 38,387 |
| | 9,640,563 |
|
| Residential: | | | | | | | | | | | | |
| Single-family | | 4,234,017 |
| | 121,992 |
| | 4,356,009 |
| | 3,370,669 |
| | 139,110 |
| | 3,509,779 |
|
| Multifamily | | 1,808,311 |
| | 68,645 |
| | 1,876,956 |
| | 1,490,285 |
| | 95,654 |
| | 1,585,939 |
|
| Total residential | | 6,042,328 |
| | 190,637 |
| | 6,232,965 |
| | 4,860,954 |
| | 234,764 |
| | 5,095,718 |
|
| Consumer | | 2,104,614 |
| | 15,442 |
| | 2,120,056 |
| | 2,057,067 |
| | 18,928 |
| | 2,075,995 |
|
| Total loans held-for-investment | | $ | 27,993,084 |
| | $ | 532,273 |
| | $ | 28,525,357 |
| | $ | 24,860,694 |
| | $ | 642,445 |
| | $ | 25,503,139 |
|
| Allowance for loan losses | | (285,858 | ) | | (68 | ) | | (285,926 | ) | | (260,402 | ) | | (118 | ) | | (260,520 | ) |
| Loans held-for-investment, net | | $ | 27,707,226 |
| | $ | 532,205 |
| | $ | 28,239,431 |
| | $ | 24,600,292 |
| | $ | 642,327 |
| | $ | 25,242,619 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Amortized Cost (1) | | Non-PCI Loans (1) | | PCI Loans | | Total (1) |
| Commercial: | | | | | | | | |
| C&I | | $ | 12,590,764 |
| | $ | 12,149,121 |
| | $ | 1,810 |
| | $ | 12,150,931 |
|
| CRE: | | | | | | | | |
| CRE | | 10,682,242 |
| | 10,165,247 |
| | 113,201 |
| | 10,278,448 |
|
| Multifamily residential | | 2,902,601 |
| | 2,834,212 |
| | 22,162 |
| | 2,856,374 |
|
| Construction and land | | 606,209 |
| | 628,459 |
| | 40 |
| | 628,499 |
|
| Total CRE | | 14,191,052 |
| | 13,627,918 |
| | 135,403 |
| | 13,763,321 |
|
| Total commercial | | 26,781,816 |
| | 25,777,039 |
| | 137,213 |
| | 25,914,252 |
|
| Consumer: | | | | | | | | |
| Residential mortgage: | | | | | | | | |
| Single-family residential | | 7,403,723 |
| | 7,028,979 |
| | 79,611 |
| | 7,108,590 |
|
| HELOCs | | 1,452,862 |
| | 1,466,736 |
| | 6,047 |
| | 1,472,783 |
|
| Total residential mortgage | | 8,856,585 |
| | 8,495,715 |
| | 85,658 |
| | 8,581,373 |
|
| Other consumer | | 254,992 |
| | 282,914 |
| | — |
| | 282,914 |
|
| Total consumer | | 9,111,577 |
| | 8,778,629 |
| | 85,658 |
| | 8,864,287 |
|
| Total loans held-for-investment | | $ | 35,893,393 |
| | $ | 34,555,668 |
| | $ | 222,871 |
| | $ | 34,778,539 |
|
| Allowance for loan losses | | (557,003 | ) | | (358,287 | ) | | — |
| | (358,287 | ) |
| Loans held-for-investment, net | | $ | 35,336,390 |
| | $ | 34,197,381 |
| | $ | 222,871 |
| | $ | 34,420,252 |
|
| |
| |
| (1) | Includes $(29.2) million and $1.2 million as of September 30, 2017 and December 31, 2016, respectively, of net deferred loan fees, unearned income,fees, unamortized premiums and unaccreted discounts. |
| |
(2) | Loans netdiscounts of ASC 310-30 discount.$(50.3) million and $(43.2) million as of March 31, 2020 and December 31, 2019, respectively. |
The commercial portfolio includes C&I, CRE, loans include income producing real estate,multifamily residential, and construction and land loans where the interest rates may be fixed, variable or hybrid. Included in CRE loans are owner occupiedloans. The consumer portfolio includes single-family residential, HELOC and non-owner occupied loans where the borrowers rely on income from tenants to service the loan. Commercial business and trade finance in theother consumer loans.
The C&I segment provideloan portfolio includes loans and financing tofor businesses in a wide spectrum of industries.
Residentialindustries and includes asset-based lending, equipment financing and leasing, project-based finance, revolving lines of credit, Small Business Administration lending, structured finance, term loans and trade finance. The CRE loan portfolio consists of income producing real estate loans that are comprisedeither owner occupied or non-owner occupied; non-owner occupied properties are defined as those for which 50% or more of single-family andthe loan debt service is primarily provided by unaffiliated rental income from a third party. The multifamily loans. The Company offers first lien mortgageresidential loan portfolio largely consists of loans secured by one-to-four unit residential properties located in its primary lending areas. with 5 or more units. Construction and land loans mainly provide construction financing for multifamily residential, hotels, offices, industrial and retail projects, and financing for the purchase of land.
The consumer portfolio includes single-family residential loans and HELOCs originated by the Company offersthrough a variety of first lien mortgage loan programs, including fixed rate conformingprograms. A substantial number of these loans and adjustable rate mortgage loans with initial fixed periods of one to seven years, which adjust annually thereafter.
Consumer loans are comprised of home equity lines of credit (“HELOCs”), insurance premium financing loans, credit card and auto loans. As of September 30, 2017 and December 31, 2016, the Company’s HELOCs were the largest component of the consumer loan portfolio, and were secured by one-to-four unit residential properties located in its primary lending areas. The HELOCs loan portfolio is largely comprised of loans originated through a reduced documentation loan program, wherein which a substantiallarge down payment is required, resulting in a low loan-to-value (“LTV”) ratio at origination, typically 60% or less at origination.less. The Company is in a first lien position for manyvirtually all reduced documentation single-family residential loans and for most of these reduced documentationthe HELOCs. These loans have historically experienced low delinquency and defaultloss rates. Other consumer loans are mainly consumer insurance premium financing.
AllLoans held-for-investments’ accrued interest receivable was $117.6 million and $121.8 million as of March 31, 2020 and December 31, 2019, respectively. Approximately $366 thousand of interest income related to nonaccrual loans originated are subject was reversed during the three months ended March 31, 2020 and there was 0 interest income recognized on nonaccrual loans for the three months ended March 31, 2020. For our accounting policy related to held-for-investment loans’ accrued interest receivable, see Note 2 — Summary of Significant Accounting Policies to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks associated with these products. The Company conducts a variety of quality control procedures and periodic audits, including the review of lending and legal requirements to ensure that it isConsolidated Financial Statements in compliance with these requirements.this Form 10-Q.
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, loans totaling $18.18of $23.11 billion and $16.44$22.43 billion, respectively, were pledged to secure borrowings and to provide additional borrowing capacity from the Federal Reserve BankFRB 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 can be classified within the following categories:of 1 through 10. Loans risk rated 1 through 5 are assigned an internal risk rating of “Pass”, with loans risk rated 1 being fully secured by cash or U.S. government securities. Pass Watch, Special Mention, Substandard, Doubtful and Loss. The risk ratings reflect the relative strength of the repayment sources.
Pass and Watch loans are generally considered to have sufficient sources of repayment in order to repay the loan in full, in accordance with all terms and conditions. Special Mention loans are considered toLoans assigned a risk rating of 6 have potential weaknesses that warrant closer attention by management. Special Mention is consideredmanagement; these are assigned an internal risk rating of “Special Mention”. Loans assigned a transitory grade. If potential weaknesses are resolved, the loan is upgraded to a Passrisk rating of 7 or Watch grade. If negative trends in the borrower’s financial status or other information indicate that the repayment sources may become inadequate, the loan is downgraded to a Substandard grade. Substandard loans are considered to8 have well-defined weaknesses that may jeopardize the full and timely repayment of the loan. Substandard loans haveloan; these are assigned an internal risk rating of “Substandard”. Loans assigned a distinct possibilityrisk rating of loss, if the deficiencies are not corrected. Additionally, when management has assessed a potential for loss but a distinct possibility of loss is not recognizable, the loan is still classified as Substandard. Doubtful loans9 have insufficient sources of repayment and a high probability of loss. Loss loansloss; these are considered to be uncollectibleassigned an internal risk rating of “Doubtful”. Loans assigned a risk rating of 10 are uncollectable and of such little value that they are no longer considered bankable assets. Theseassets; these are assigned an internal risk rating of “Loss”. The loans’ internal risk ratings are reviewed routinely and adjusted based on changes in the borrowers’ financial status and the loans’ collectability. These risk ratings were updated as of March 31, 2020.
The following table summarizes the Company’s loans held-for-investment as of March 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) | | March 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 | | $ | 884,043 |
| | $ | 2,320,726 |
| | $ | 830,428 |
| | $ | 381,798 |
| | $ | 94,032 |
| | $ | 411,215 |
| | $ | 6,945,982 |
| | $ | 10,081 |
| | $ | 11,878,305 |
|
| Special mention | | 21,388 |
| | 98,629 |
| | 16,948 |
| | 27,701 |
| | 1,064 |
| | 10,600 |
| | 218,835 |
| | — |
| | 395,165 |
|
| Substandard | | 4,324 |
| | 65,448 |
| | 27,200 |
| | 40,985 |
| | 13,431 |
| | 2,196 |
| | 147,012 |
| | — |
| | 300,596 |
|
| Doubtful | | — |
| | 15,654 |
| | — |
| | — |
| | 1,044 |
| | — |
| | — |
| | — |
| | 16,698 |
|
| Total C&I | | 909,755 |
| | 2,500,457 |
| | 874,576 |
| | 450,484 |
| | 109,571 |
| | 424,011 |
| | 7,311,829 |
| | 10,081 |
| | 12,590,764 |
|
| CRE: | | | | | | | | | | | | | | | | | |
|
|
| Pass | | 1,023,184 |
| | 2,994,402 |
| | 2,319,358 |
| | 1,317,389 |
| | 739,774 |
| | 1,926,748 |
| | 157,889 |
| | 10,775 |
| | 10,489,519 |
|
| Special mention | | 3,636 |
| | 66,004 |
| | 15,438 |
| | 19,896 |
| | 674 |
| | 10,518 |
| | — |
| | — |
| | 116,166 |
|
| Substandard | | 5,540 |
| | 29,695 |
| | 2,415 |
| | 18,900 |
| | 520 |
| | 19,487 |
| | — |
| | — |
| | 76,557 |
|
| Total CRE | | 1,032,360 |
| | 3,090,101 |
| | 2,337,211 |
| | 1,356,185 |
| | 740,968 |
| | 1,956,753 |
| | 157,889 |
| | 10,775 |
| | 10,682,242 |
|
| Multifamily residential: | | | | | | | | | | | | | | | | | |
|
|
| Pass | | 293,032 |
| | 1,091,261 |
| | 489,564 |
| | 408,783 |
| | 212,174 |
| | 372,554 |
| | 5,386 |
| | — |
| | 2,872,754 |
|
| Special mention | | — |
| | 21,164 |
| | 1,893 |
| | — |
| | — |
| | 521 |
| | — |
| | — |
| | 23,578 |
|
| Substandard | | — |
| | — |
| | 285 |
| | — |
| | — |
| | 5,984 |
| | — |
| | — |
| | 6,269 |
|
| Total multifamily residential | | 293,032 |
| | 1,112,425 |
| | 491,742 |
| | 408,783 |
| | 212,174 |
| | 379,059 |
| | 5,386 |
| | — |
| | 2,902,601 |
|
| Construction and land: | | | | | | | | | | | | | | | | | |
|
|
| Pass | | 67,143 |
| | 316,396 |
| | 159,847 |
| | 15,630 |
| | 21,048 |
| | 1,183 |
| | — |
| | — |
| | 581,247 |
|
| Substandard | | 1,608 |
| | 3,662 |
| | — |
| | — |
| | — |
| | 19,692 |
| | — |
| | — |
| | 24,962 |
|
| Total construction and land | | 68,751 |
| | 320,058 |
| | 159,847 |
| | 15,630 |
| | 21,048 |
| | 20,875 |
| | — |
| | — |
| | 606,209 |
|
| Total CRE | | 1,394,143 |
| | 4,522,584 |
| | 2,988,800 |
| | 1,780,598 |
| | 974,190 |
| | 2,356,687 |
| | 163,275 |
| | 10,775 |
| | 14,191,052 |
|
| Total commercial | | 2,303,898 |
| | 7,023,041 |
| | 3,863,376 |
| | 2,231,082 |
| | 1,083,761 |
| | 2,780,698 |
| | 7,475,104 |
| | 20,856 |
|
| 26,781,816 |
|
| Consumer: | | | | | | | | | | | | | | | | | | |
| Single-family residential: | | | | | | | | | | | | | | | | | | |
| Pass | | 612,040 |
| | 2,043,504 |
| | 1,775,928 |
| | 1,218,685 |
| | 624,427 |
| | 1,099,351 |
| | — |
| | — |
| | 7,373,935 |
|
| Special mention | | — |
| | 238 |
| | 1,639 |
| | 1,253 |
| | 2,811 |
| | 6,796 |
| | — |
| | — |
| | 12,737 |
|
| Substandard | | — |
| | 839 |
| | 1,733 |
| | 3,180 |
| | 1,158 |
| | 10,141 |
| | — |
| | — |
| | 17,051 |
|
| Total single-family residential mortgage | | 612,040 |
| | 2,044,581 |
| | 1,779,300 |
| | 1,223,118 |
| | 628,396 |
| | 1,116,288 |
| | — |
| | — |
| | 7,403,723 |
|
| HELOCs: | | | | | | | | | | | | | | | | | | |
| Pass | | — |
| | — |
| | 3,182 |
| | 5,980 |
| | 6,525 |
| | 19,809 |
| | 1,260,844 |
| | 142,090 |
| | 1,438,430 |
|
| Special mention | | — |
| | — |
| | 700 |
| | — |
| | 165 |
| | 1,945 |
| | 571 |
| | 605 |
| | 3,986 |
|
| Substandard | | — |
| | 150 |
| | 289 |
| | 2,611 |
| | 1,145 |
| | 4,789 |
| | — |
| | 1,462 |
| | 10,446 |
|
| Total HELOCs | | — |
| | 150 |
| | 4,171 |
| | 8,591 |
| | 7,835 |
| | 26,543 |
| | 1,261,415 |
| | 144,157 |
| | 1,452,862 |
|
| Total residential mortgage | | 612,040 |
| | 2,044,731 |
| | 1,783,471 |
| | 1,231,709 |
| | 636,231 |
| | 1,142,831 |
| | 1,261,415 |
| | 144,157 |
| | 8,856,585 |
|
| Other consumer: | | | | | | | | | | | | | | | | | | |
| Pass | | 3,951 |
| | 4,440 |
| | 2,637 |
| | 1,885 |
| | 18 |
| | 198,988 |
| | 40,556 |
| | — |
| | 252,475 |
|
| Special mention | | 11 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
|
| Substandard | | — |
| | — |
| | — |
| | 2,491 |
| | — |
| | 3 |
| | 12 |
| | — |
| | 2,506 |
|
| Total other consumer | | 3,962 |
| | 4,440 |
| | 2,637 |
| | 4,376 |
| | 18 |
| | 198,991 |
| | 40,568 |
| | — |
| | 254,992 |
|
| Total consumer | | 616,002 |
| | 2,049,171 |
| | 1,786,108 |
| | 1,236,085 |
| | 636,249 |
| | 1,341,822 |
| | 1,301,983 |
| | 144,157 |
| | 9,111,577 |
|
| Total | | $ | 2,919,900 |
| | $ | 9,072,212 |
| | $ | 5,649,484 |
| | $ | 3,467,167 |
| | $ | 1,720,010 |
| | $ | 4,122,520 |
| | $ | 8,777,087 |
| | $ | 165,013 |
| | $ | 35,893,393 |
|
| |
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 three months ended March 31, 2020, $31.3 million of HELOCs converted to term loans and there were 0 conversions for C&I or CRE loans.
The following tables present the credit risk ratings for non-PCI loans by portfolio segment as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Loss | | Total
Non-PCI
Loans |
| CRE: | | |
| | |
| | |
| | |
| | | | |
|
| Income producing | | $ | 8,341,970 |
| | $ | 74,028 |
| | $ | 114,521 |
| | $ | — |
| | $ | — |
| | $ | 8,530,519 |
|
| Construction | | 540,851 |
| | 22,176 |
| | 9,000 |
| | — |
| | — |
| | 572,027 |
|
| Land | | 96,160 |
| | — |
| | 14,846 |
| | — |
| | — |
| | 111,006 |
|
| C&I: | | | | | | | | |
| | | | |
|
| Commercial business | | 9,447,163 |
| | 142,531 |
| | 152,975 |
| | 21,019 |
| | — |
| | 9,763,688 |
|
| Trade finance | | 830,268 |
| | 18,631 |
| | 20,003 |
| | — |
| | — |
| | 868,902 |
|
| Residential: | | | | | | | | |
| | | | |
|
| Single-family | | 4,199,554 |
| | 11,501 |
| | 22,962 |
| | — |
| | — |
| | 4,234,017 |
|
| Multifamily | | 1,789,351 |
| | — |
| | 18,960 |
| | — |
| | — |
| | 1,808,311 |
|
| Consumer | | 2,080,056 |
| | 9,683 |
| | 14,875 |
| | — |
| | — |
| | 2,104,614 |
|
| Total | | $ | 27,325,373 |
| | $ | 278,550 |
| | $ | 368,142 |
| | $ | 21,019 |
| | $ | — |
| | $ | 27,993,084 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2016 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Loss | | Total Non-PCI Loans |
| CRE: | | |
| | |
| | |
| | |
| | | | |
|
| Income producing | | $ | 7,476,804 |
| | $ | 29,005 |
| | $ | 161,852 |
| | $ | — |
| | $ | — |
| | $ | 7,667,661 |
|
| Construction | | 551,560 |
| | — |
| | — |
| | — |
| | — |
| | 551,560 |
|
| Land | | 107,976 |
| | — |
| | 13,290 |
| | 10 |
| | — |
| | 121,276 |
|
| C&I: | | |
| | |
| | |
| | |
| | | | |
|
| Commercial business | | 8,559,674 |
| | 155,276 |
| | 201,139 |
| | 5,157 |
| | — |
| | 8,921,246 |
|
| Trade finance | | 635,027 |
| | 9,435 |
| | 36,460 |
| | — |
| | 8 |
| | 680,930 |
|
| Residential: | | |
| | |
| | |
| | |
| | | | |
|
| Single-family | | 3,341,015 |
| | 10,179 |
| | 19,475 |
| | — |
| | — |
| | 3,370,669 |
|
| Multifamily | | 1,462,522 |
| | 2,268 |
| | 25,495 |
| | — |
| | — |
| | 1,490,285 |
|
| Consumer | | 2,043,405 |
| | 6,764 |
| | 6,898 |
| | — |
| | — |
| | 2,057,067 |
|
| Total | | $ | 24,177,983 |
| | $ | 212,927 |
| | $ | 464,609 |
| | $ | 5,167 |
| | $ | 8 |
| | $ | 24,860,694 |
|
| |
The following tables present the credit risk ratings for PCI loans by portfolio segmentsegments as of September 30, 2017 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Loss | | Total PCI Loans |
| CRE: | | |
| | |
| | |
| | | | | | |
|
| Income producing | | $ | 261,907 |
| | $ | — |
| | $ | 51,350 |
| | $ | — |
| | $ | — |
| | $ | 313,257 |
|
| Land | | 44 |
| | — |
| | 327 |
| | — |
| | — |
| | 371 |
|
| C&I: | | | | | | | | | | | | |
| Commercial business | | 11,205 |
| | 90 |
| | 1,271 |
| | — |
| | — |
| | 12,566 |
|
| Residential: | | | | | | | | | | | | |
|
| Single-family | | 118,281 |
| | 1,769 |
| | 1,942 |
| | — |
| | — |
| | 121,992 |
|
| Multifamily | | 64,455 |
| | — |
| | 4,190 |
| | — |
| | — |
| | 68,645 |
|
| Consumer | | 13,962 |
| | 364 |
| | 1,116 |
| | — |
| | — |
| | 15,442 |
|
Total (1) | | $ | 469,854 |
| | $ | 2,223 |
| | $ | 60,196 |
| | $ | — |
| | $ | — |
| | $ | 532,273 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2019 |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total Non-PCI Loans |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 11,423,094 |
| | $ | 406,543 |
| | $ | 302,509 |
| | $ | 16,975 |
| | $ | 12,149,121 |
|
| CRE: | | | | | | | | | | |
| CRE | | 10,003,749 |
| | 83,683 |
| | 77,815 |
| | — |
| | 10,165,247 |
|
| Multifamily residential | | 2,806,475 |
| | 20,406 |
| | 7,331 |
| | — |
| | 2,834,212 |
|
| Construction and land | | 603,447 |
| | — |
| | 25,012 |
| | — |
| | 628,459 |
|
| Total CRE | | 13,413,671 |
| | 104,089 |
| | 110,158 |
| | — |
| | 13,627,918 |
|
| Total commercial | | 24,836,765 |
| | 510,632 |
| | 412,667 |
| | 16,975 |
| | 25,777,039 |
|
| Consumer: | | | | | | | | | | |
| Residential mortgage: | | | | | | | | | |
|
|
| Single-family residential | | 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 |
| | $ | 515,702 |
| | $ | 440,105 |
| | $ | 16,975 |
| | $ | 34,555,668 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2016 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Loss | | Total PCI Loans |
| CRE: | | |
| | |
| | |
| | | | | | |
|
| Income producing | | $ | 293,529 |
| | $ | 3,239 |
| | $ | 51,680 |
| | $ | — |
| | $ | — |
| | $ | 348,448 |
|
| Land | | 1,562 |
| | — |
| | 356 |
| | — |
| | — |
| | 1,918 |
|
| C&I: | | |
| | |
| | |
| | |
| | | | |
|
| Commercial business | | 33,885 |
| | 772 |
| | 3,730 |
| | — |
| | — |
| | 38,387 |
|
| Residential: | | |
| | |
| | |
| | | | | | |
|
| Single-family | | 136,245 |
| | 1,239 |
| | 1,626 |
| | — |
| | — |
| | 139,110 |
|
| Multifamily | | 86,190 |
| | — |
| | 9,464 |
| | — |
| | — |
| | 95,654 |
|
| Consumer | | 17,433 |
| | 316 |
| | 1,179 |
| | — |
| | — |
| | 18,928 |
|
Total (1) | | $ | 568,844 |
| | $ | 5,566 |
| | $ | 68,035 |
| | $ | — |
| | $ | — |
| | $ | 642,445 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2019 |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total PCI Loans |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 1,810 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,810 |
|
| CRE: | | | | | | | | | | |
| CRE | | 102,257 |
| | — |
| | 10,944 |
| | — |
| | 113,201 |
|
| Multifamily residential | | 22,162 |
| | — |
| | — |
| | — |
| | 22,162 |
|
| Construction and land | | 40 |
| | — |
| | — |
| | — |
| | 40 |
|
| Total CRE | | 124,459 |
| | — |
| | 10,944 |
| | — |
| | 135,403 |
|
| Total commercial | | 126,269 |
| | — |
| | 10,944 |
| | — |
| | 137,213 |
|
| Consumer: | | | | | | | | | | |
| Residential mortgage: | | | | | | | | | | |
| Single-family residential | | 79,517 |
| | — |
| | 94 |
| | — |
| | 79,611 |
|
| HELOCs | | 5,849 |
| | — |
| | 198 |
| | — |
| | 6,047 |
|
| Total residential mortgage | | 85,366 |
| | — |
| | 292 |
| | — |
| | 85,658 |
|
| Total consumer | | 85,366 |
| | — |
| | 292 |
| | — |
| | 85,658 |
|
Total (1) | | $ | 211,635 |
| | $ | — |
| | $ | 11,236 |
| | $ | — |
| | $ | 222,871 |
|
| |
| |
| (1) | Loans net of ASC 310-30310-10 discount. |
Nonaccrual and Past Due Loans
Non-PCI loansLoans that are 90 or more days past due are generally placed on nonaccrual status. Additionally, non-PCI loansstatus, unless the loan is well-collateralized or guaranteed by government agencies, and in the process of collection. Loans that are less than 90 days past due but have identified deficiencies, such as when the full collection of principal or interest becomes uncertain, are also placed on nonaccrual status. The following tables presenttable presents the aging analysis of total loans held-for-investment as of March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | 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
Loans |
| Commercial: | | | | | | | | | | | | | | | | |
| C&I | | $ | 15,168 |
| | $ | 3,217 |
| | $ | 18,385 |
| | $ | 59,110 |
| | $ | 29,969 |
| | $ | 89,079 |
| | $ | 12,483,300 |
| | $ | 12,590,764 |
|
| CRE: | | | | | | | | | | | | | | | | |
| CRE | | 6,050 |
| | 936 |
| | 6,986 |
| | 474 |
| | 5,824 |
| | 6,298 |
| | 10,668,958 |
| | 10,682,242 |
|
| Multifamily residential | | 510 |
| | 366 |
| | 876 |
| | 518 |
| | 285 |
| | 803 |
| | 2,900,922 |
| | 2,902,601 |
|
| Construction and land | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 606,209 |
| | 606,209 |
|
| Total CRE | | 6,560 |
| | 1,302 |
| | 7,862 |
| | 992 |
| | 6,109 |
| | 7,101 |
| | 14,176,089 |
| | 14,191,052 |
|
| Total commercial | | 21,728 |
| | 4,519 |
| | 26,247 |
| | 60,102 |
| | 36,078 |
| | 96,180 |
| | 26,659,389 |
| | 26,781,816 |
|
| Consumer: | | | | | | | | | | | | | | | | |
| Residential mortgage: | | | | | | | | | | | | | | | | |
| Single-family residential | | 45,926 |
| | 12,737 |
| | 58,663 |
| | 1,312 |
| | 16,224 |
| | 17,536 |
| | 7,327,524 |
| | 7,403,723 |
|
| HELOCs | | 10,654 |
| | 3,980 |
| | 14,634 |
| | 444 |
| | 10,002 |
| | 10,446 |
| | 1,427,782 |
| | 1,452,862 |
|
| Total residential mortgage | | 56,580 |
| | 16,717 |
| | 73,297 |
| | 1,756 |
| | 26,226 |
| | 27,982 |
| | 8,755,306 |
| | 8,856,585 |
|
| Other consumer | | 34 |
| | 29 |
| | 63 |
| | — |
| | 2,506 |
| | 2,506 |
| | 252,423 |
| | 254,992 |
|
| Total consumer | | 56,614 |
| | 16,746 |
| | 73,360 |
| | 1,756 |
| | 28,732 |
| | 30,488 |
| | 9,007,729 |
| | 9,111,577 |
|
| Total | | $ | 78,342 |
| | $ | 21,265 |
| | $ | 99,607 |
| | $ | 61,858 |
| | $ | 64,810 |
| | $ | 126,668 |
| | $ | 35,667,118 |
| | $ | 35,893,393 |
|
| |
The following table presents amortized cost of loans on nonaccrual status for which there was no related allowance for loan losses as of March 31, 2020:
|
| | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| Commercial: | | |
| C&I | | $ | 64,431 |
|
| CRE: | | |
| CRE | | 5,253 |
|
| Total CRE | | 5,253 |
|
| Total commercial | | 69,684 |
|
| Consumer: | | |
| Residential mortgage: | | |
| Single-family residential | | 8,718 |
|
| HELOCs | | 6,511 |
|
| Total residential mortgage | | 15,229 |
|
| Other consumer | | 2,491 |
|
| Total consumer | | 17,720 |
|
| Total nonaccrual loans with no related allowance for loan losses | | $ | 87,404 |
|
| | | |
The following table presents the aging analysis of non-PCI loans as of September 30, 2017 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2019 |
| | 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: | | | | | | | | | | | | | | | | |
| C&I | | $ | 31,121 |
| | $ | 17,034 |
| | $ | 48,155 |
| | $ | 31,084 |
| | $ | 43,751 |
| | $ | 74,835 |
| | $ | 12,026,131 |
| | $ | 12,149,121 |
|
| CRE: | | | | | | | | | | | | | | | | |
| CRE | | 22,830 |
| | 1,977 |
| | 24,807 |
| | 540 |
| | 15,901 |
| | 16,441 |
| | 10,123,999 |
| | 10,165,247 |
|
| Multifamily residential | | 198 |
| | 531 |
| | 729 |
| | 534 |
| | 285 |
| | 819 |
| | 2,832,664 |
| | 2,834,212 |
|
| Construction and land | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 628,459 |
| | 628,459 |
|
| Total CRE | | 23,028 |
| | 2,508 |
| | 25,536 |
| | 1,074 |
| | 16,186 |
| | 17,260 |
| | 13,585,122 |
| | 13,627,918 |
|
| Total commercial | | 54,149 |
| | 19,542 |
| | 73,691 |
| | 32,158 |
| | 59,937 |
| | 92,095 |
| | 25,611,253 |
| | 25,777,039 |
|
| Consumer: | | | | | | | | | | | | | | | | |
| Residential mortgage: | | | | | | | | | | | | | | | | |
| Single-family residential | | 15,443 |
| | 5,074 |
| | 20,517 |
| | 1,964 |
| | 12,901 |
| | 14,865 |
| | 6,993,597 |
| | 7,028,979 |
|
| HELOCs | | 4,273 |
| | 2,791 |
| | 7,064 |
| | 1,448 |
| | 9,294 |
| | 10,742 |
| | 1,448,930 |
| | 1,466,736 |
|
| Total residential mortgage | | 19,716 |
| | 7,865 |
| | 27,581 |
| | 3,412 |
| | 22,195 |
| | 25,607 |
| | 8,442,527 |
| | 8,495,715 |
|
| Other consumer | | 6 |
| | 5 |
| | 11 |
| | — |
| | 2,517 |
| | 2,517 |
| | 280,386 |
| | 282,914 |
|
| Total consumer | | 19,722 |
| | 7,870 |
| | 27,592 |
| | 3,412 |
| | 24,712 |
| | 28,124 |
| | 8,722,913 |
| | 8,778,629 |
|
| Total | | $ | 73,871 |
| | $ | 27,412 |
| | $ | 101,283 |
| | $ | 35,570 |
| | $ | 84,649 |
| | $ | 120,219 |
| | $ | 34,334,166 |
| | $ | 34,555,668 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 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 |
| CRE: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Income producing | | $ | 5,211 |
| | $ | 1,924 |
| | $ | 7,135 |
| | $ | 4,853 |
| | $ | 19,949 |
| | $ | 24,802 |
| | $ | 8,498,582 |
| | $ | 8,530,519 |
|
| Construction | | 9,000 |
| | — |
| | 9,000 |
| | — |
| | — |
| | — |
| | 563,027 |
| | 572,027 |
|
| Land | | — |
| | — |
| | — |
| | 10 |
| | 4,173 |
| | 4,183 |
| | 106,823 |
| | 111,006 |
|
| C&I: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Commercial business | | 16,315 |
| | 108 |
| | 16,423 |
| | 34,844 |
| | 38,540 |
| | 73,384 |
| | 9,673,881 |
| | 9,763,688 |
|
| Trade finance | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 868,902 |
| | 868,902 |
|
| Residential: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Single-family | | 16,765 |
| | 1,560 |
| | 18,325 |
| | — |
| | 6,639 |
| | 6,639 |
| | 4,209,053 |
| | 4,234,017 |
|
| Multifamily | | 7,476 |
| | 664 |
| | 8,140 |
| | 1,456 |
| | 1,164 |
| | 2,620 |
| | 1,797,551 |
| | 1,808,311 |
|
| Consumer | | 8,837 |
| | 5,346 |
| | 14,183 |
| | 93 |
| | 3,004 |
| | 3,097 |
| | 2,087,334 |
| | 2,104,614 |
|
| Total | | $ | 63,604 |
| | $ | 9,602 |
| | $ | 73,206 |
| | $ | 41,256 |
| | $ | 73,469 |
| | $ | 114,725 |
| | $ | 27,805,153 |
| | $ | 27,993,084 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 |
| CRE: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Income producing | | $ | 6,233 |
| | $ | 14,080 |
| | $ | 20,313 |
| | $ | 14,872 |
| | $ | 12,035 |
| | $ | 26,907 |
| | $ | 7,620,441 |
| | $ | 7,667,661 |
|
| Construction | | 4,994 |
| | — |
| | 4,994 |
| | — |
| | — |
| | — |
| | 546,566 |
| | 551,560 |
|
| Land | | — |
| | — |
| | — |
| | 433 |
| | 4,893 |
| | 5,326 |
| | 115,950 |
| | 121,276 |
|
| C&I: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Commercial business | | 45,052 |
| | 2,279 |
| | 47,331 |
| | 60,511 |
| | 20,737 |
| | 81,248 |
| | 8,792,667 |
| | 8,921,246 |
|
| Trade finance | | — |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
| | 680,922 |
| | 680,930 |
|
| Residential: | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
|
| Single-family | | 9,595 |
| | 8,076 |
| | 17,671 |
| | — |
| | 4,214 |
| | 4,214 |
| | 3,348,784 |
| | 3,370,669 |
|
| Multifamily | | 3,951 |
| | 374 |
| | 4,325 |
| | 2,790 |
| | 194 |
| | 2,984 |
| | 1,482,976 |
| | 1,490,285 |
|
| Consumer | | 3,327 |
| | 3,228 |
| | 6,555 |
| | 165 |
| | 1,965 |
| | 2,130 |
| | 2,048,382 |
| | 2,057,067 |
|
| Total | | $ | 73,152 |
| | $ | 28,037 |
| | $ | 101,189 |
| | $ | 78,779 |
| | $ | 44,038 |
| | $ | 122,817 |
| | $ | 24,636,688 |
| | $ | 24,860,694 |
|
| | | | | | | | | | | | | | | | | |
For information on the policy for recording payments received and resuming accrual of interest on non-PCI loans that are placed on nonaccrual status, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2016 Form 10-K.
PCI loans are 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 September 30, 2017 and December 31, 2016,2019, PCI loans on nonaccrual status totaled $5.7$297 thousand.
Foreclosed Assets
The Company had $24.3 million and $11.7in foreclosed assets as of March 31, 2020 compared to $1.3 million respectively.
Loans in Processas of Foreclosure
As of September 30, 2017 and December 31, 2016,2019. The Company commences the Company had $6.3 million and $3.1 million, respectively, of recorded investments in residential andforeclosure process on consumer mortgage loans secured by residentialwhen a borrower becomes 120 days delinquent in accordance with the Consumer Finance Protection Bureau guidelines. The carrying value of consumer real estate properties,loans for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions, which were not included in OREO. A foreclosed residential real estate property with a carrying amount of $391 thousand was included in total net OREO of $2.3$8.1 million and $7.2 million as of September 30, 2017. In comparison, foreclosed residentialMarch 31, 2020 and December 31, 2019, respectively. The foreclosure proceedings for these consumer real estate propertiesloans were initiated prior to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress in March 2020. In connection with a carrying amount of $401 thousand were included in total net OREO of $6.7 million as of December 31, 2016.our actions to support our customers during the COVID-19 pandemic, we have suspended certain mortgage foreclosure activities.
Troubled Debt Restructurings
Potential troubledTroubled debt restructurings (“TDRs”) are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty in order to maximize the Company’s recovery.difficulty. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered. The Company has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act, the Company has elected to not apply TDR classification to any COVID-19 related loan modifications. On April 7, 2020, the federal banking regulators issued the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” (the Interagency Statement). The Interagency Statement provides additional TDR relief as it clarifies that it is not necessary to consider the impact of the COVID-19 pandemic on the financial condition of a borrower in connection with a short-term (e.g., six months) COVID-19 related loan modification provided that the borrower is current at the date the modification program is implemented. For COVID-19 related loan modifications in the form of payment deferrals, the delinquency status will not advance and loans that were accruing at the time that the relief is provided will generally not be placed on nonaccrual status during the deferral period. Interest income will continue to be recognized over the contractual life of the loan.
The following tables presenttable presents the additions to non-PCI TDRs for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Loans Modified as TDRs During the Three Months Ended September 30, |
| ($ in thousands) | | 2017 | | 2016 |
| | 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) |
| CRE: | | | | �� |
| | |
| | |
| | | | | | | | |
| Income producing | | 1 | | $ | 172 |
| | $ | 172 |
| | $ | 8 |
| | — | | $ | — |
| | $ | — |
| | $ | — |
|
| C&I: | | | | | | | | | | | | | | | | |
| Commercial business | | 10 | | $ | 15,143 |
| | $ | 14,927 |
| | $ | 65 |
| | 3 | | $ | 493 |
| | $ | 475 |
| | $ | 93 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Loans Modified as TDRs During the Nine Months Ended September 30, |
| ($ in thousands) | | 2017 | | 2016 |
| | 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) |
| CRE: | | | | |
| | |
| | |
| | | | | | | | |
| Income producing | | 2 | | $ | 1,699 |
| | $ | 1,648 |
| | $ | 8 |
| | 3 | | $ | 15,899 |
| | $ | 15,730 |
| | $ | 43 |
|
| Land | | — | | $ | — |
| | $ | — |
| | $ | — |
| | 1 | | $ | 5,522 |
| | $ | 5,233 |
| | $ | — |
|
| C&I: | | | | | | | | | | | | | | | | |
| Commercial business | | 15 | | $ | 29,541 |
| | $ | 28,796 |
| | $ | 10,365 |
| | 8 | | $ | 22,182 |
| | $ | 9,113 |
| | $ | 2,711 |
|
| Trade finance | | — | | $ | — |
| | $ | — |
| | $ | — |
| | 2 | | $ | 7,901 |
| | $ | 3,025 |
| | $ | — |
|
| Residential: | | | | | | | | | | | | | | | | |
| Single-family | | — | | $ | — |
| | $ | — |
| | $ | — |
| | 2 | | $ | 1,071 |
| | $ | 1,065 |
| | $ | — |
|
| Multifamily | | 1 | | $ | 3,655 |
| | $ | 3,620 |
| | $ | 112 |
| | — | | $ | — |
| | $ | — |
| | $ | — |
|
| Consumer | | — | | $ | — |
| | $ | — |
| | $ | — |
| | 1 | | $ | 344 |
| | $ | 337 |
| | $ | 1 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Loans Modified as TDRs During the Three Months Ended March 31, |
| | 2020 | | 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: | | | | | | | | | | | | | | | | |
| C&I | | 3 | | $ | 16,604 |
| | $ | 15,735 |
| | $ | 98 |
| | 3 | | $ | 29,152 |
| | $ | 29,176 |
| | $ | 60 |
|
| Total | | 3 | | $ | 16,604 |
| | $ | 15,735 |
| | $ | 98 |
| | 3 | | $ | 29,152 |
| | $ | 29,176 |
| | $ | 60 |
|
| |
| |
| (1) | Includes subsequent payments after modification and reflects the balance as of September 30, 2017March 31, 2020 and 2016.2019. |
| |
| (2) | The financial impact includes charge-offs and specific reserves recorded atsince the modification date. |
The following tables presenttable presents the non-PCI TDR modificationspost-modification outstanding balances for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 by modification type:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Modification Type During the Three Months Ended September 30, 2017 |
| | Principal (1) | | Principal and Interest (2) | | Interest Rate Reduction | | Interest Deferments | | Other | | Total |
| CRE | | $ | 172 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 172 |
|
| C&I | | 14,903 |
| | 24 |
| | — |
| | — |
| | — |
| | 14,927 |
|
| Total | | $ | 15,075 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15,099 |
|
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Modification Type During the Three Months Ended September 30, 2016 |
| | Principal (1) | | Principal
and
Interest (2) | | Interest
Rate
Reduction | | Interest
Deferments | | Other | | Total |
| C&I | | $ | 444 |
| | $ | — |
| | $ | — |
| | $ | 31 |
| | $ | — |
| | $ | 475 |
|
| Total | | $ | 444 |
| | $ | — |
| | $ | — |
| | $ | 31 |
| | $ | — |
| | $ | 475 |
|
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Modification Type During the Nine Months Ended September 30, 2017 |
| | Principal (1) | | Principal
and
Interest (2) | | Interest
Rate
Reduction | | Interest
Deferments | | Other | | Total |
| CRE | | $ | 1,648 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,648 |
|
| C&I | | 18,289 |
| | 10,507 |
| | — |
| | — |
| | — |
| | 28,796 |
|
| Residential | | 3,620 |
| | — |
| | — |
| | — |
| | — |
| | 3,620 |
|
| Total | | $ | 23,557 |
| | $ | 10,507 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 34,064 |
|
| | |
| | | | ($ in thousands) | | Modification Type During the Nine Months Ended September 30, 2016 | | Modification Type During the Three Months Ended March 31, |
| | Principal (1) | | Principal
and
Interest (2) | | Interest
Rate
Reduction | | Interest
Deferments | | Other | | Total | | 2020 | | 2019 |
| CRE | | $ | 19,812 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,151 |
| | $ | 20,963 |
| |
| ($ in thousands) | | | Principal (1) | | Principal and Interest (2) | | Total | | Principal (1) | | Principal and Interest (2) | | Total |
| | | | | | | | | | | | |
| | 10,218 |
| | — |
| | 1,288 |
| | 32 |
| | 600 |
| | 12,138 |
| | $ | 4,564 |
| | $ | 11,171 |
| | $ | 15,735 |
| | $ | 29,176 |
| | $ | — |
| | $ | 29,176 |
|
| Residential | | 266 |
| | — |
| | 799 |
| | — |
| | — |
| | 1,065 |
| |
| Consumer | | 337 |
| | — |
| | — |
| | — |
| | — |
| | 337 |
| |
| Total | | $ | 30,633 |
| | $ | — |
| | $ | 2,087 |
| | $ | 32 |
| | $ | 1,751 |
| | $ | 34,503 |
| | $ | 4,564 |
| | $ | 11,171 |
| | $ | 15,735 |
| | $ | 29,176 |
| | $ | — |
| | $ | 29,176 |
|
| | | | | | | | | | | | | | |
| |
| (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. |
Subsequent to restructuring, if a TDR that becomes delinquent, generally beyond 90 days past due, it is considered to have defaulted. Asbe in default. TDRs are individually evaluated for impairment under the specific reserve methodology, subsequentimpairment. Subsequent defaults do not generally have a significant additional impact on the allowance for loan losses. During the three months ended March 31, 2020, there were 0 TDRs that experienced payment defaults after modifications within the previous 12 months. The following tables presenttable presents information on loans for loanswhich a subsequent payment default occurred during the three months ended March 31, 2019, which had been modified as TDRsTDR within the previous 12 months that have subsequently defaulted during the three and nine months ended September 30, 2017 and 2016,of its default, and were still in default at the respective period end:as of March 31, 2019:
|
| | | | | | | |
| |
| ($ in thousands) | | Loans Modified as TDRs that Subsequently Defaulted During the Three Months Ended March 31, 2019 |
| | Number of
Loans | | Recorded
Investment |
| Commercial: | | | | |
| C&I | | 3 |
| | $ | 4,618 |
|
| Total | | 3 |
| | $ | 4,618 |
|
| |
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Loans Modified as TDRs that Subsequently Defaulted During the Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of
Loans | | Recorded
Investment | | Number of
Loans | | Recorded
Investment |
| CRE: | | |
| | |
| | |
| | |
|
| Income producing | | — |
| | $ | — |
| | 1 |
| | $ | 1,000 |
|
| C&I: | | | | | | | | |
| Commercial business | | 1 |
| | $ | 9,386 |
| | — |
| | $ | — |
|
| |
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Loans Modified as TDRs that Subsequently Defaulted During the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Number of
Loans | | Recorded
Investment | | Number of
Loans | | Recorded
Investment |
| CRE: | | |
| | |
| | |
| | |
|
| Income producing | | — |
| | $ | — |
| | 1 |
| | $ | 1,000 |
|
| C&I: | | |
| | |
| | |
| | |
|
| Commercial business | | 1 |
| | $ | 9,386 |
| | 2 |
| | $ | 119 |
|
| Consumer | | 1 |
| | $ | 48 |
| | — |
| | $ | — |
|
| |
The amount of additional funds committed to lend to borrowers whose terms have been modified as TDRs was $612 thousand$2.3 million and $9.9$2.2 million as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.
Impaired Loans
The Company’s loans are grouped into heterogeneous and homogeneous (mostly consumer loans) categories. Classified loans in the heterogeneous category are identified and evaluated for impairment on an individual basis. A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all scheduled payments of principal or interest due in accordance with the original contractual terms. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent, less costs to sell. When the value of an impaired loan is less than the recorded investment and the loan is classified as nonperforming and uncollectible, the deficiency is charged-off against the allowance for loan losses. Impaired loans exclude the homogeneous consumer loan portfolio, which is evaluated collectively for impairment. The Company’s impaired loans include predominantly non-PCI loans held-for-investment on nonaccrual status and any non-PCI loans modified in a TDR, which may be on accrual or nonaccrual status.
The following tables presenttable presents information on theabout non-PCI impaired loans as of September 30, 2017 and December 31, 2016:2019: |
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 |
| | — |
| | 19,691 |
| | — |
|
| 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 |
| | — |
| | 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) | | September 30, 2017 |
| | Unpaid Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance |
| CRE: | | |
| | |
| | |
| | |
| | |
|
| Income producing | | $ | 35,133 |
| | $ | 28,908 |
| | $ | 6,241 |
| | $ | 35,149 |
| | $ | 1,011 |
|
| Land | | 4,183 |
| | 4,173 |
| | 10 |
| | 4,183 |
| | 1 |
|
| C&I: | | |
| | |
| | |
| | |
| | |
|
| Commercial business | | 89,233 |
| | 50,700 |
| | 38,392 |
| | 89,092 |
| | 18,183 |
|
| Trade finance | | 4,786 |
| | — |
| | 4,708 |
| | 4,708 |
| | 786 |
|
| Residential: | | |
| | |
| | |
| | |
| | |
|
| Single-family | | 15,868 |
| | 1,867 |
| | 14,032 |
| | 15,899 |
| | 572 |
|
| Multifamily | | 12,224 |
| | 6,062 |
| | 6,170 |
| | 12,232 |
| | 194 |
|
| Consumer | | 4,298 |
| | 1,303 |
| | 2,998 |
| | 4,301 |
| | 4 |
|
| Total | | $ | 165,725 |
| | $ | 93,013 |
| | $ | 72,551 |
| | $ | 165,564 |
| | $ | 20,751 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2016 |
| | Unpaid Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance |
| CRE: | | |
| | |
| | |
| | |
| | |
|
| Income producing | | $ | 50,718 |
| | $ | 32,507 |
| | $ | 14,001 |
| | $ | 46,508 |
| | $ | 1,263 |
|
| Land | | 6,457 |
| | 5,427 |
| | 443 |
| | 5,870 |
| | 63 |
|
| C&I: | | |
| | |
| | |
| | | | |
|
| Commercial business | | 162,239 |
| | 78,316 |
| | 42,137 |
| | 120,453 |
| | 10,443 |
|
| Trade finance | | 5,227 |
| | — |
| | 5,166 |
| | 5,166 |
| | 34 |
|
| Residential: | | |
| | |
| | |
| | | | |
|
| Single-family | | 15,435 |
| | — |
| | 14,335 |
| | 14,335 |
| | 687 |
|
| Multifamily | | 11,181 |
| | 5,684 |
| | 4,357 |
| | 10,041 |
| | 180 |
|
| Consumer | | 4,016 |
| | — |
| | 3,682 |
| | 3,682 |
| | 31 |
|
| Total | | $ | 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 three and nine months ended September 30, 2017 and 2016:March 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Average
Recorded
Investment | | Recognized Interest Income (1) | | Average
Recorded
Investment | | Recognized Interest Income (1) | | Average Recorded Investment | | Recognized Interest Income (1) | | Average
Recorded
Investment | | Recognized Interest Income (1) |
| CRE: | | | | | | | | | | | | | | | | |
| Income producing | | $ | 37,489 |
| | $ | 179 |
| | $ | 52,116 |
| | $ | 464 |
| | $ | 37,238 |
| | $ | 535 |
| | $ | 52,221 |
| | $ | 1,368 |
|
| Land | | 4,337 |
| | — |
| | 6,622 |
| | 9 |
| | 4,484 |
| | — |
| | 6,777 |
| | 26 |
|
| C&I: | | | | | | | | | | | | | | | | |
| Commercial business | | 93,278 |
| | 242 |
| | 91,290 |
| | 258 |
| | 94,709 |
| | 799 |
| | 92,805 |
| | 648 |
|
| Trade finance | | 4,216 |
| | 53 |
| | 9,005 |
| | 33 |
| | 4,444 |
| | 122 |
| | 10,028 |
| | 166 |
|
| Residential: | | | | | | | | | | | | | | | | |
| Single-family | | 16,124 |
| | 111 |
| | 13,438 |
| | 72 |
| | 16,141 |
| | 325 |
| | 13,517 |
| | 220 |
|
| Multifamily | | 12,532 |
| | 108 |
| | 20,585 |
| | 77 |
| | 12,540 |
| | 324 |
| | 20,646 |
| | 231 |
|
| Consumer | | 4,492 |
| | 14 |
| | 1,571 |
| | 16 |
| | 4,455 |
| | 41 |
| | 1,575 |
| | 48 |
|
| Total non-PCI impaired loans | | $ | 172,468 |
| | $ | 707 |
| | $ | 194,627 |
| | $ | 929 |
| | $ | 174,011 |
| | $ | 2,146 |
| | $ | 197,569 |
| | $ | 2,707 |
|
| |
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, 2019 |
| | Average
Recorded
Investment | | Recognized Interest Income (1) |
| Commercial: | | | | |
| C&I | | $ | 93,391 |
| | $ | 735 |
|
| CRE: | | | | |
| CRE | | 30,827 |
| | 114 |
|
| Multifamily residential | | 5,721 |
| | 61 |
|
| Total CRE | | 36,548 |
| | 175 |
|
| Total commercial | | 129,939 |
| | 910 |
|
| Consumer: | | | | |
| Residential mortgage: | | | | |
| Single-family residential | | 15,898 |
| | 128 |
|
| HELOCs | | 10,811 |
| | 18 |
|
| Total residential mortgage | | 26,709 |
| | 146 |
|
| Other consumer | | 2,504 |
| | — |
|
| Total consumer | | 29,213 |
| | 146 |
|
| Total non-PCI impaired loans | | $ | 159,152 |
| | $ | 1,056 |
|
| |
| |
| (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, and not as interest income. |
Allowance for Credit Losses
The allowance for credit losses includes the allowance for loan losses and the allowance for unfunded credit commitments. The Company’s Allowance for Credit Losses Committee reviews and approves the allowance for credit losses on a quarterly basis.
Allowance for Collectively Evaluated Loans
For loans collectively assessed, the Company’s methodology to determine the appropriate allowance for loan losses is based on quantitative credit models, supplemented by qualitative adjustments. The Company utilize a lifetime loss rate model for the C&I portfolio; probability of default (“PD”) and loss given default (“LGD”) models for all commercial and consumer real estate loan portfolios, and a loss rate approach for other consumer loans.
Factors incorporated into the qualitative adjustments are designed to capture economic, portfolio, operational and segmentation risks not captured by the quantitative credit models. These factors include, but are not limited to, current and forecast economic or market conditions; risks stemming from borrowers’ exposure to or dependence on the U.S. consumer market; industry specific risks inherent in the Company’s loan portfolio, such as oil price fluctuations or falling oil consumption; profiles of various loan segments; portfolio concentrations by loan type, industry, and geography; loan growth trends; internal credit risk ratings; historical loss experience; current delinquency and problem loan trends, and collateral values. The evaluation is inherently subjective, as it requires numerous estimates and judgments that are susceptible to revision as more information becomes available. To the extent actual results differ from estimates or management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.
For the three months ended March 31, 2020, there were no changes to the reasonable and supportable forecast period, and reversion to historical loss experience method. The forecasts of macroeconomic variables were updated to include the impact of the COVID-19 pandemic, oil price declines and other assumptions. The Company uses a third-party economic forecast to estimate the expected credit losses in its quantitative credit models. The forecast uses three economic scenarios including a base forecast representing management's view of the most likely outcome and equally-probable downside and upside scenarios reflecting possible worsening and improving economic conditions, respectively. The economic outlook deteriorated towards the end of the quarter ended March 31, 2020, reflecting the effects of the ongoing COVID-19 pandemic. To reflect the sudden sharp recession caused by the COVID-19 global pandemic, U.S. monetary and fiscal responses to the outbreak, oil price declines and other assumptions, the forecast utilized to estimate expected credit losses was updated in late March 2020. Unemployment rate, which is a key macroeconomic variable for the quantitative models, is projected to significantly spike in the second quarter of 2020 and begin a slower recovery but remain at an elevated level during the second half of 2020. The allowance for credit losses at March 31, 2020 also included qualitative adjustments for certain industry sectors, such as the oil and gas loan portfolio that the Company views as higher risk, where quantitative models may not have captured the additional exposure related to such industry sectors.
Allowance for Loan Losses for the Commercial Loan Portfolio— The Company’s C&I lifetime loss rate model estimates credit losses by estimating a loss rate expected over the life of a loan. This loss rate is applied to the amortized cost basis, excluding accrued interest receivables, to determine expected credit losses. This model incorporates portfolio prepayment rate and utilization rates assumptions; loan-specific risk characteristics such as internal credit risk rating, industry segment, time-to-maturity, size and credit spread at origination, and the economic and market conditions. Each of these components, along with economic forecast information through the reasonable and supportable period, are embedded in the forecasted lifetime loss rate. The lifetime loss rate model’s reasonable and supportable period spans eight quarters, thereafter immediately reverting to the historical average loss rate, expressed implicitly through the loan-level lifetime loss rate.
The Company’s CRE PD/LGD models estimate the probability that a loan will default and, in the event of default, estimate the expected credit losses upon default. The product of the PD and LGD determines the Company’s current expected credit losses. In addition to the Company’s macroeconomic outlook, these models also incorporate prepayment estimates, historical loss rates, loan duration and amortization terms, interest rates, property type, and the geographic locations of the properties collateralizing the loans. The PD/LGD model assumptions and variable inputs span the entire contractual life of the loans, adjusted for expected prepayments. After a reasonable and supportable period, the forecast of future economic conditions reverts to long-run historical economic trends. The loan-specific variables apply over the lifetime of a loan.
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.
The Company’s macroeconomic outlook is a key driver in the commercial loan portfolio. The Company uses numerous key macroeconomic variables within its forecasts, including unemployment, real GDP and U.S. Treasury rates. The macroeconomic outlook also considers national and regional personal income, sales, employment and financial indicators that impact discrete commercial loan industry segments. The Company utilizes a probability-weighted three-scenario forecast approach to estimate the allowance for credit losses.
To the extent that information relevant to the collectability of a loan is available and not already captured by the quantitative models, the Company utilizes qualitative factors to adjust the estimate. These factors include, but are not limited to, operational risks resulting from the quality of the Company’s internal loan ratings; portfolio risks such as higher than normal growth trends, delinquencies and levels of classified loans; industry-specific risks inherent in the Company’s portfolio, and other risks borne out of geopolitical, environmental, or natural disaster events specific to the Company’s portfolio, which are not otherwise captured by the quantitative models.
Allowance for Loan Losses for the Consumer Loan Portfolio — For single-family residential and HELOC loans, PG/LGD model assumptions and variable inputs span the entire contractual life of the loans, adjusted for expected prepayments. After a reasonable and supportable period, the forecast of future economic conditions reverts to long- run historical economic trends. The loan-specific variables apply over the lifetime of a loan. In addition to the consideration of the Company’s macroeconomic outlook, the PD/LGD model also incorporates prepayment estimates, historical loss rates, and loan-specific risk characteristics such as the borrower’s FICO score, loan term, interest rates, property purpose and value, and the geographic locations of the properties collateralizing the loans.
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.
The Company’s macroeconomic outlook is a key driver in the residential mortgage portfolio. The Company uses several macroeconomic variables, including unemployment rate and home price index, for its residential mortgage portfolio at the national, state and Metropolitan Statistical Area level. The macroeconomic outlook takes into account national and regional personal income, employment and financial indicators impacting the residential loans industry. For other consumer loans, the Company qualitatively adjusts the expected credit loss using real GDP, unemployment, U.S. Treasury Spread and the S&P 500 index. The Company utilizes a probability-weighted three-scenario forecast approach to estimate the allowance for credit losses.
Individually Assessed 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 present value of expected future cash flows; (2) the fair value of collateral less costs to sell; (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 to not 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 March 31, 2020, collateral dependent commercial and consumer loans totaled $34.6 million and $17.8 million, respectively. The Company's commercial collateral-dependent loans were secured by real estate or business properties. The Company's consumer collateral dependent loans were all residential mortgage loans, secured by the underlying real estate. As of March 31, 2020, the collateral value of the properties securing each of these collateral dependent loans, net of selling costs, exceeded the amortized cost of the individual loans, except for one C&I loan, against which there was a recorded allowance of $416 thousand. For the three months ended March 31, 2020, there was no significant deterioration or changes in the collaterals securing these loans.
The following tables presenttable presents a summary of activities in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017 and 2016:March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 2017 |
| | Non-PCI Loans | | PCI Loans | | Total |
| | CRE | | C&I | | Residential | | Consumer | | Total | | |
| Beginning balance | | $ | 73,985 |
| | $ | 150,136 |
| | $ | 43,679 |
| | $ | 8,438 |
| | $ | 276,238 |
| | $ | 78 |
| | $ | 276,316 |
|
| (Reversal of) provision for loan losses | | (346 | ) | | 15,656 |
| | (583 | ) | | (1,269 | ) | | 13,458 |
| | (10 | ) | | 13,448 |
|
| Charge-offs | | — |
| | (7,359 | ) | | — |
| | (65 | ) | | (7,424 | ) | | — |
| | (7,424 | ) |
| Recoveries | | 610 |
| | 2,165 |
| | 809 |
| | 2 |
| | 3,586 |
| | — |
| | 3,586 |
|
| Net recoveries (charge-offs) | | 610 |
| | (5,194 | ) | | 809 |
| | (63 | ) | | (3,838 | ) | | — |
| | (3,838 | ) |
| Ending balance | | $ | 74,249 |
| | $ | 160,598 |
| | $ | 43,905 |
| | $ | 7,106 |
| | $ | 285,858 |
| | $ | 68 |
| | $ | 285,926 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Residential Mortgage | | Other Consumer | |
| | | CRE | | Multi-Family Residential | | Construction and Land | | Single- Family Residential | | HELOCs | | |
| Allowance for loan losses, December 31, 2019 | | $ | 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 |
|
| Allowance for loan losses, January 1, 2020 | | 312,613 |
| | 112,678 |
| | 14,714 |
| | 9,515 |
| | 24,857 |
| | 3,467 |
| | 5,601 |
| | 483,445 |
|
| Provision for (reversal of ) credit losses | | 60,618 |
| | 11,435 |
| | 1,281 |
| | 1,482 |
| | 1,700 |
| | 412 |
| | (2,272 | ) | | 74,656 |
|
| Gross charge-offs | | (11,977 | ) | | (954 | ) | | — |
| | — |
| | — |
| | — |
| | (26 | ) | | (12,957 | ) |
| Gross recoveries | | 1,575 |
| | 9,660 |
| | 535 |
| | 21 |
| | 265 |
| | 2 |
| | 1 |
| | 12,059 |
|
| Total net charge-offs | | (10,402 | ) | | 8,706 |
| | 535 |
| | 21 |
| | 265 |
| | 2 |
| | (25 | ) | | (898 | ) |
| Foreign currency translation adjustments | | (200 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (200 | ) |
| Allowance for loan losses, March 31, 2020 | | $ | 362,629 |
| | $ | 132,819 |
| | $ | 16,530 |
| | $ | 11,018 |
| | $ | 26,822 |
| | $ | 3,881 |
| | $ | 3,304 |
| | $ | 557,003 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 2016 |
| | Non-PCI Loans | | PCI Loans | | Total |
| | CRE | | C&I | | Residential | | Consumer | | Total | | |
| Beginning balance | | $ | 78,102 |
| | $ | 148,427 |
| | $ | 31,561 |
| | $ | 8,421 |
| | $ | 266,511 |
| | $ | 257 |
| | $ | 266,768 |
|
| (Reversal of) provision for loan losses | | (6,598 | ) | | 18,548 |
| | 309 |
| | (644 | ) | | 11,615 |
| | (101 | ) | | 11,514 |
|
| Charge-offs | | (309 | ) | | (23,696 | ) | | (29 | ) | | (13 | ) | | (24,047 | ) | | — |
| | (24,047 | ) |
| Recoveries | | 634 |
| | 165 |
| | 654 |
| | 124 |
| | 1,577 |
| | — |
| | 1,577 |
|
| Net recoveries (charge-offs) | | 325 |
| | (23,531 | ) | | 625 |
| | 111 |
| | (22,470 | ) | | — |
| | (22,470 | ) |
| Ending balance | | $ | 71,829 |
| | $ | 143,444 |
| | $ | 32,495 |
| | $ | 7,888 |
| | $ | 255,656 |
| | $ | 156 |
| | $ | 255,812 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2017 |
| | Non-PCI Loans | | PCI Loans | | Total |
| | CRE | | C&I | | Residential | | Consumer | | Total | | |
| Beginning balance | | $ | 72,804 |
| | $ | 142,166 |
| | $ | 37,333 |
| | $ | 8,099 |
| | $ | 260,402 |
| | $ | 118 |
| | $ | 260,520 |
|
| (Reversal of) provision for loan losses | | (120 | ) | | 28,576 |
| | 4,815 |
| | (1,087 | ) | | 32,184 |
| | (50 | ) | | 32,134 |
|
| Charge-offs | | (149 | ) | | (19,802 | ) | | (1 | ) | | (72 | ) | | (20,024 | ) | | — |
| | (20,024 | ) |
| Recoveries | | 1,714 |
| | 9,658 |
| | 1,758 |
| | 166 |
| | 13,296 |
| | — |
| | 13,296 |
|
| Net recoveries (charge-offs) | | 1,565 |
| | (10,144 | ) | | 1,757 |
| | 94 |
| | (6,728 | ) | | — |
| | (6,728 | ) |
| Ending balance | | $ | 74,249 |
| | $ | 160,598 |
| | $ | 43,905 |
| | $ | 7,106 |
| | $ | 285,858 |
| | $ | 68 |
| | $ | 285,926 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2016 |
| | Non-PCI Loans | | PCI Loans | | Total |
| | CRE | | C&I | | Residential | | Consumer | | Total | | |
| Beginning balance | | $ | 81,191 |
| | $ | 134,597 |
| | $ | 39,292 |
| | $ | 9,520 |
| | $ | 264,600 |
| | $ | 359 |
| | $ | 264,959 |
|
| (Reversal of) provision for loan losses | | (9,731 | ) | | 38,549 |
| | (7,679 | ) | | (1,887 | ) | | 19,252 |
| | (203 | ) | | 19,049 |
|
| Charge-offs | | (504 | ) | | (31,770 | ) | | (166 | ) | | (17 | ) | | (32,457 | ) | | — |
| | (32,457 | ) |
| Recoveries | | 873 |
| | 2,068 |
| | 1,048 |
| | 272 |
| | 4,261 |
| | — |
| | 4,261 |
|
| Net recoveries (charge-offs) | | 369 |
| | (29,702 | ) | | 882 |
| | 255 |
| | (28,196 | ) | | — |
| | (28,196 | ) |
| Ending balance | | $ | 71,829 |
| | $ | 143,444 |
| | $ | 32,495 |
| | $ | 7,888 |
| | $ | 255,656 |
| | $ | 156 |
| | $ | 255,812 |
|
| |
For further information on accounting policies and the methodologies used to estimate the allowance for credit losses and loan charge-offs, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2016 Form 10-K.
The following table presents a summary of activities in the allowance for unfunded credit reservescommitments for the three and nine months ended September 30, 2017March 31, 2020:
|
| | | | |
| |
| ($ in thousands) | | Three Months Ended
March 31, 2020 |
| Unfunded credit facilities | | |
| Allowance for unfunded credit commitments, December 31, 2019 | | $ | 11,158 |
|
| Impact of ASU 2016-13 adoption | | 10,457 |
|
| Allowance for unfunded credit commitments, January 1, 2020 | | 21,615 |
|
| Reversal of credit losses | | (786 | ) |
| Allowance for unfunded credit commitments, March 31, 2020 | | $ | 20,829 |
|
| Total provision for credit losses | | $ | 73,870 |
|
| |
The following table presents a summary of activities in the allowance for loan losses by portfolio segments and 2016:the allowance for unfunded credit commitments for the three months ended March 31, 2019:
|
| | | | |
| |
| ($ in thousands) | | Three Months Ended
March 31, 2019 |
| Allowance for non-PCI loans, beginning of period | | $ | 311,300 |
|
| Provision for loan losses on non-PCI loans | (a) | 20,648 |
|
| Gross charge-offs: | | |
| Commercial: | | |
| C&I | | (17,244 | ) |
| Consumer: | | |
| Other consumer | | (14 | ) |
| Total gross charge-offs | | (17,258 | ) |
| Gross recoveries: | | |
| Commercial: | | |
| C&I | | 2,251 |
|
| CRE: | | |
| CRE | | 222 |
|
| Multifamily residential | | 281 |
|
| Construction and land | | 63 |
|
| Total CRE | | 566 |
|
| Consumer: | | |
| Residential mortgage: | | |
| Single-family residential | | 2 |
|
| HELOCs | | 2 |
|
| Total residential mortgage | | 4 |
|
| Total gross recoveries | | 2,821 |
|
| Net charge-offs | | (14,437 | ) |
| Foreign currency translation adjustments | | 369 |
|
| Allowance for non-PCI loans, end of period | | 317,880 |
|
| PCI Loans | | |
| Allowance for PCI loans, beginning of period | | 22 |
|
| Reversal of loan losses on PCI loans | (b) | (8 | ) |
| Allowance for PCI loans, end of period | | 14 |
|
| Allowance for loan losses | | $ | 317,894 |
|
| Unfunded credit facilities | | |
| Allowance for unfunded credit commitments, beginning of period | | $ | 12,566 |
|
| Provision for unfunded credit commitments | (c) | 1,939 |
|
| Allowance for unfunded credit commitments, ending of period | | $ | 14,505 |
|
| Total provision for credit losses | (a)+(b)+(c) | $ | 22,579 |
|
| |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| ($ in thousands) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | | $ | 15,188 |
| | $ | 20,318 |
| | $ | 16,121 |
| | $ | 20,360 |
|
| Reversal of unfunded credit reserves | | (452 | ) | | (1,989 | ) | | (1,385 | ) | | (2,031 | ) |
| Ending balance | | $ | 14,736 |
| | $ | 18,329 |
| | $ | 14,736 |
| | $ | 18,329 |
|
| | | | | | | | | |
As of March 31, 2020, the allowance for loan losses amounted to $557.0 million or 1.55% of loans held-for-investment, compared with $358.3 million or 1.03% of loans held-for-investment as of December 31, 2019, and $317.9 million or 0.97% of loans held-for-investment as of March 31, 2019. The quarter-over-quarter and year-over-year increase in allowance for loan losses was largely due to the adoption of ASU 2016-13, which increased the allowance for loan losses by $125.2 million; deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, which drove a $73.9 million provision for credit losses for the three months ended March 31, 2020 and loan growth. First quarter 2020 gross charge-offs of $13.0 million were primarily from C&I loans, and were almost entirely offset by recoveries, primarily from CRE loans, resulting in net charge-offs of $898 thousand or annualized 0.01% of average loans held-for-investment. The C&I gross charge-offs for the three months ended March 31, 2020 totaled $12.0 million and were primarily from the oil and gas loan portfolio.
The allowance for unfunded credit reservescommitments is maintained at a level, that management believes to be sufficient to absorb estimated probableexpected credit losses related to unfunded credit facilities. The allowance for unfunded credit reserves is included in Accrued expense and other liabilities on the Consolidated Balance Sheets. SeeNote 1110 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q for additional information related to unfunded credit reserves.commitments.
The following tables presenttable presents the Company’s allowance for loan losses and recorded investments by portfolio segmentloan type and impairment methodology as of September 30, 2017 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 |
| | CRE | | C&I | | Residential | | Consumer | | Total |
| Allowance for loan losses | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 1,012 |
| | $ | 18,969 |
| | $ | 766 |
| | $ | 4 |
| | $ | 20,751 |
|
| Collectively evaluated for impairment | | 73,237 |
| | 141,629 |
| | 43,139 |
| | 7,102 |
| | 265,107 |
|
Acquired with deteriorated credit quality | | 68 |
| | — |
| | — |
| | — |
| | 68 |
|
| Ending balance | | $ | 74,317 |
| | $ | 160,598 |
| | $ | 43,905 |
| | $ | 7,106 |
| | $ | 285,926 |
|
| | | | | | | | | | | |
| Recorded investment in loans | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 39,332 |
| | $ | 93,800 |
| | $ | 28,131 |
| | $ | 4,301 |
| | $ | 165,564 |
|
| Collectively evaluated for impairment | | 9,174,220 |
| | 10,538,790 |
| | 6,014,197 |
| | 2,100,313 |
| | 27,827,520 |
|
Acquired with deteriorated credit quality (1) | | 313,628 |
| | 12,566 |
| | 190,637 |
| | 15,442 |
| | 532,273 |
|
Ending balance (1) | | $ | 9,527,180 |
| | $ | 10,645,156 |
| | $ | 6,232,965 |
| | $ | 2,120,056 |
| | $ | 28,525,357 |
|
| |
| | | | ($ in thousands) | | | December 31, 2019 |
| | Commercial | | Consumer | | Total |
| | December 31, 2016 | | C&I | | CRE | | Residential Mortgage | | Other Consumer | |
| | CRE | | C&I | | Residential | | Consumer | | Total | | | CRE | | Multifamily Residential | | Construction and Land | | Single- Family Residential | | HELOCs | |
| Allowance for loan losses | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 1,326 |
| | $ | 10,477 |
| | $ | 867 |
| | $ | 31 |
| | $ | 12,701 |
| | $ | 2,881 |
| | $ | 97 |
| | $ | 55 |
| | $ | — |
| | $ | 35 |
| | $ | 8 |
| | $ | 2,517 |
| | $ | 5,593 |
|
| Collectively evaluated for impairment | | 71,478 |
| | 131,689 |
| | 36,466 |
| | 8,068 |
| | 247,701 |
| | 235,495 |
| | 40,412 |
| | 22,771 |
| | 19,404 |
| | 28,492 |
| | 5,257 |
| | 863 |
| | 352,694 |
|
| Acquired with deteriorated credit quality | | 112 |
| | 1 |
| | 5 |
| | — |
| | 118 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ending balance | | $ | 72,916 |
| | $ | 142,167 |
| | $ | 37,338 |
| | $ | 8,099 |
| | $ | 260,520 |
| |
| | | | | | | | | | | | |
| 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 | | $ | 52,378 |
| | $ | 125,619 |
| | $ | 24,376 |
| | $ | 3,682 |
| | $ | 206,055 |
| | $ | 114,042 |
| | $ | 21,618 |
| | $ | 4,464 |
| | $ | 19,691 |
| | $ | 22,211 |
| | $ | 13,574 |
| | $ | 2,517 |
| | $ | 198,117 |
|
| Collectively evaluated for impairment | | 8,288,119 |
| | 9,476,557 |
| | 4,836,578 |
| | 2,053,385 |
| | 24,654,639 |
| | 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) | | 350,366 |
| | 38,387 |
| | 234,764 |
| | 18,928 |
| | 642,445 |
| | 1,810 |
| | 113,201 |
| | 22,162 |
| | 40 |
| | 79,611 |
| | 6,047 |
| | — |
| | 222,871 |
|
Ending balance (1) | | $ | 8,690,863 |
| | $ | 9,640,563 |
| | $ | 5,095,718 |
| | $ | 2,075,995 |
| | $ | 25,503,139 |
| |
Total (1) | | | $ | 12,150,931 |
| | $ | 10,278,448 |
| | $ | 2,856,374 |
| | $ | 628,499 |
| | $ | 7,108,590 |
| | $ | 1,472,783 |
| | $ | 282,914 |
| | $ | 34,778,539 |
|
|
| |
| (1) | Loans net of ASC 310-30310-10 discount. |
Purchased Credit-Deteriorated Loans
Purchased Credit Impaired Loans
AtOn January 1, 2020, the date of acquisition, PCI loans are pooled and accounted for at fair value, which represents the discounted valueamortized cost basis of the expected cash flowsPCD loans was adjusted to reflect the $1.2 million of allowance for loan losses. For the loan portfolio. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The cash flows expected overthree months ended March 31, 2020, the lifeCompany did not acquire any PCD loans. For information on PCD loans, see Note 2 — Summary of Significant Accounting Policies to the pools are estimated by an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions as to cumulative loss rates, loss curves and prepayment speeds are utilized to calculate the expected cash flows. The amount of expected cash flows over the initial investmentConsolidated Financial Statements in the loan represents the “accretable yield,” which is recognized as interest income on a level yield basis over the life of the loan. Prepayments affect the estimated life of PCI loans, which may change the amount of interest income, and possibly principal, expected to be collected. The excess of total contractual cash flows over the cash flows expected to be received at origination is deemed to be the “nonaccretable difference.”this Form 10-Q.
The following table presents the changes in accretable yield foron PCI loans for the three and nine months ended September 30, 2017 and 2016:March 31, 2019:
|
| | | | |
| |
| ($ in thousands) | | Three Months Ended
March 31, 2019 |
| Accretable yield for PCI loans, beginning of period | | $ | 74,870 |
|
| Accretion | | (6,201 | ) |
| Changes in expected cash flows | | 192 |
|
| Accretable yield for PCI loans, end of period | | $ | 68,861 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | | $ | 118,625 |
| | $ | 166,777 |
| | $ | 136,247 |
| | $ | 214,907 |
|
| Accretion | | (10,747 | ) | | (14,827 | ) | | (32,108 | ) | | (53,510 | ) |
| Changes in expected cash flows | | 2,078 |
| | 311 |
| | 5,817 |
| | (9,136 | ) |
| Ending balance | | $ | 109,956 |
| | $ | 152,261 |
| | $ | 109,956 |
| | $ | 152,261 |
|
| |
Loans Held-for-Sale
Loans held-for-sale are carried at the 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,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liability 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.
As of September 30, 2017,March 31, 2020 and December 31, 2019, loans held-for-sale amounted to $178of $1.6 million and $434 thousand, which were comprisedrespectively, consisted of single-family residential loans. In comparison, asRefer to Note 1 — Summary of December 31, 2016, loans held-for-sale amounted to $23.1 million, which were primarily comprised of consumer loans.Significant Accounting Policies— Significant Accounting Policies — Loans transferred from held-for-investment to held-for-sale were $74.5 million and $418.5 million during the three and nine months ended September 30, 2017, respectively. These loan transfers were primarily comprised of C&I loans for both periods. In comparison, $144.9 million and $720.7 million of loans were transferred from held-for-investment to held-for-sale during the three and nine months ended September 30, 2016, respectively. These loan transfers were primarily comprised of C&I, multifamily residential and CRE loans for both periods. The Company recorded $232 thousand and $441 thousand in write-downsHeld-for-Sale to the allowanceConsolidated Financial Statements of the Company’s 2019 Form 10-K for loan lossesadditional details related to the Company’s loans transferred from held-for-investment to held-for-sale for the three and nine months ended September 30, 2017, respectively. In comparison, there were no write-downs and $1.9 million of write-downs recorded to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the three and nine months ended September 30, 2016, respectively.held-for-sale.
During the three
Loan Purchases, Transfers and nine months ended September 30, 2017, the Company sold $33.8 million and $101.4 million, respectively, in originated loans, resulting in net gains of $2.3 million and $5.5 million, respectively. Originated loans sold during these periods were primarily comprised of C&I and CRE loans. In comparison, the Company sold $107.3 million in originated loans during the three months ended September 30, 2016, resulting in net gains of $2.2 million. Originated loans sold during this period were primarily comprised of C&I and CRE loans. During the nine months ended September 30, 2016, the Company sold or securitized $529.5 million in originated loans, resulting in net gains of $9.3 million. Included in these amounts were $201.7 million of multifamily residential loans securitized during the first quarter of 2016, which resulted in net gains of $1.1 million, $641 thousand in mortgage servicing rights and $160.1 million of held-to-maturity investment security that were recorded. The remaining $327.8 million of originated loans sold during the nine months ended September 30, 2016, primarily comprising of CRE and C&I loans, resulted in net gains of $8.2 million.Sales
During the three and nine months ended September 30, 2017, the Company purchased $72.4 million and $441.1 million loans, respectively, compared to $256.2 million and $1.04 billion during the three and nine months ended September 30, 2016, respectively. Purchased loans for each of the three and nine months ended September 30, 2017 were primarily comprised of C&I syndication loans. Purchased loans for each of the three and nine months ended September 30, 2016 were primarily comprised of C&I syndication loans and single-family residential loans. The higher loans purchased for the three and nine months ended September 30, 2016, primarily included $165.8 million and $488.3 million, respectively, of single-family residential loans purchased for Community Reinvestment Act (“CRA”) purposes.
From time to time, the Company purchases and sells loans in the secondary market. Certainmarket in the ordinary course of business. From time to time, purchased loans aremay be transferred from held-for-investment to held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate. DuringThe following tables provide information about the three and nine months ended September 30, 2017, the Company soldcarrying value of loans of $57.4 million and $354.5 million, respectively, in the secondary market at net gains of $19 thousand and $1.2 million, respectively. In comparison, the Company sold loans of $45.8 million and $179.4 millionpurchased for the threeheld-for-investment portfolio, loans sold and nine months ended September 30, 2016, respectively, in the secondary market. Loan sales in the secondary market resulted in no gains or losses and $69 thousand in net gains recorded for the three and nine months ended September 30, 2016, respectively.
The Company records valuation adjustments in Net gains on sales of loans on the Consolidated Statements of Income transferred from held-for-investment to carry the loans held-for-sale portfolio at the lower of cost or fair value. For each ofvalue during the three months ended September 30, 2017March 31, 2020 and 2016, no valuation adjustments were recorded. For the nine months ended September 30, 2017 and 2016, the Company recorded $61 thousand and $2.4 million, respectively, in valuation adjustments.2019:
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, 2020 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Residential Mortgage | |
| | | CRE | | Multifamily
Residential | | Single-Family
Residential | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 102,973 |
| | $ | 7,250 |
| | $ | — |
| | $ | — |
| | $ | 110,223 |
|
Sales (2)(3)(4) | | $ | 102,973 |
| | $ | 7,250 |
| | $ | — |
| | $ | 4,642 |
| | $ | 114,865 |
|
Purchases (5) | | $ | 130,583 |
| | $ | — |
| | $ | 1,513 |
| | $ | 1,084 |
| | $ | 133,180 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, 2019 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Residential Mortgage | |
| | | CRE | | Multifamily
Residential | | Single-Family
Residential | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 75,573 |
| | $ | 16,655 |
| | $ | — |
| | $ | — |
| | $ | 92,228 |
|
Sales (2)(3)(4) | | $ | 75,646 |
| | $ | 16,655 |
| | $ | — |
| | $ | 2,442 |
| | $ | 94,743 |
|
Purchases (5) | | $ | 107,194 |
| | $ | — |
| | $ | 4,218 |
| | $ | 36,402 |
| | $ | 147,814 |
|
| |
| |
| (1) | The Company recorded 0 write-downs to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the three months ended March 31, 2020 and $73 thousand for the same period in 2019. |
| |
| (2) | Includes originated loans sold of $114.9 million and $76.5 million for the three months ended March 31, 2020 and 2019, respectively. Originated loans sold during each of the three months ended March 31, 2020 and 2019 were primarily C&I loans. |
| |
| (3) | Includes NaN and $18.2 million of purchased loans sold in the secondary market for the three months ended March 31, 2020 and 2019, respectively. |
| |
| (4) | Net gains on sales of loans were $950 thousand and $915 thousand for the three months ended March 31, 2020 and 2019, respectively. |
| |
| (5) | C&I loan purchases for each of the three months ended March 31, 2020 and 2019 were comprised primarily of syndicated C&I term loans. |
Note 98 — 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 housing and other purposes, particularly in neighborhoods with low or moderate income.low-or moderate-income 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 StatementsStatement 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:March 31, 2020 and December 31, 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| Investments in qualified affordable housing partnerships, net | | $ | 198,653 |
| | $ | 207,037 |
|
| Accrued expenses and other liabilities — Unfunded commitments | | $ | 77,487 |
| | $ | 80,294 |
|
| |
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| Investments in qualified affordable housing partnerships, net | | $ | 178,344 |
| | $ | 183,917 |
|
| Accrued expenses and other liabilities — Unfunded commitments | | $ | 63,607 |
| | $ | 57,243 |
|
| |
The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the periods indicated:three months ended March 31, 2020 and 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Tax credits and other tax benefits recognized | | $ | 11,031 |
| | $ | 11,826 |
|
| Amortization expense included in income tax expense | | $ | 8,384 |
| | $ | 8,897 |
|
| |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| ($ in thousands) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Tax credits and other tax benefits recognized | | $ | 15,840 |
| | $ | 8,591 |
| | $ | 35,027 |
| | $ | 26,561 |
|
| Amortization expense included in income tax expense | | $ | 8,944 |
| | $ | 6,612 |
| | $ | 22,945 |
| | $ | 20,923 |
|
| | | | | | | | | |
Investments in Tax Credit and Other Investments, Net
Investments in tax credit and other investments, net, were $203.8 million and $173.3 million as of September 30, 2017 and December 31, 2016, respectively. The Company is not the primary beneficiary in these partnerships and, therefore, is not required to consolidate its investments in tax credit and other investments on the Consolidated Financial Statements. Depending on the ownership percentage and the influence the Company has on the limited partnership,investments in tax credit and other investments, net, the Company applies either the equity or cost method of accounting.accounting, or the measurement alternative as elected under ASU 2016-01 for equity investments without readily determinable fair value.
TotalThe following table presents the Company’s investments in tax credit and other investments, net, and related unfunded commitments for these investments were $103.0 million and $117.0 million as of September 30, 2017March 31, 2020 and December 31, 2016, respectively, and are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| Investments in tax credit and other investments, net | | $ | 268,330 |
| | $ | 254,140 |
|
| Accrued expenses and other liabilities — Unfunded commitments | | $ | 121,604 |
| | $ | 113,515 |
|
| |
Amortization of tax credit and other investments was $23.8$17.3 million and $32.6$24.9 million for the three months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.
Included in Investments in tax credit and other investments, net, on the Consolidated Balance Sheet were equity securities with readily determinable fair values of $30.3 million and $31.7 million, as of March 31, 2020 and December 31, 2019, respectively. These equity securities are CRA investments and were measured at fair value with changes in fair value recorded in net income. The Company recorded unrealized gains on these equity securities of $38 thousand and $392 thousand during the three months ended March 31, 2020 and 2019, respectively.
The Company has equity securities without readily determinable fair values at carrying value totaling $19.1 million as of both March 31, 2020 and December 31, 2019, which are measured under the measurement alternative and the related adjustments from observable price changes. For the three months ended March 31, 2020 and 2019, there were 0 adjustments to these securities.
For the three months ended March 31, 2020, the Company recorded an impairment recovery of $150 thousand related to 1 historic tax credit and recorded 0 OTTI charge within Amortization of tax credit and other investments was $66.1on the Consolidated Statement of Income. In comparison, the Company recorded an OTTI charge of $7.0 million related to DC Solar and 0 impairment recovery for the three months ended March 31, 2019.
Variable Interest Entities
The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation projects, wind and solar projects, of which the majority of such investments are Variable Interest Entities (“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. The Company is the servicer of the multifamily residential loans it has securitized in 2016. The Company does not consolidate the multifamily securitization entity because it does not have power and does not have a variable interest that could potentially be significant to the VIE. 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 serves as the collateral manager of a CLO that closed in the fourth quarter of 2019 and retained substantially all of the investment grade rated securities issued by the CLO. In accordance with GAAP, the Company does not consolidate the CLO as it does not hold interests that could potentially be significant to the CLO. The Company’s maximum exposure to loss from the CLO is equal to the carrying amount of the retained securities of $259.9 million and $60.8$284.7 million for the nine months ended September 30, 2017as of March 31, 2020 and 2016,December 31, 2019, respectively.
Note 109—Goodwill and Other Intangible Assets
Goodwill
Total goodwill of $469.4was $465.7 million remained unchanged as of September 30, 2017 compared toboth March 31, 2020 and December 31, 2016.2019. Goodwill is testedrepresents the excess of the purchase price over the fair value of net assets acquired in an acquisition. The Company assesses goodwill for impairment at the reporting unit level, equivalent to the same level as the Company’s business segments. This assessment is performed on an annual basis as of December 31st,each year, or more frequently asif events occur or circumstances, change that would more likely than not reducesuch as adverse changes in the fair value of aeconomic or business environment, indicate there may be impairment. The Company organizes its operation into 3 reporting unit below its carrying amount. The Company’s three operating segments, Retail Banking,segments: (1) Consumer and Business Banking; (2) Commercial BankingBanking; and Other,(3) Other. For information on how the reporting units are equivalent toidentified and the Company’s reporting units. For complete discussion and disclosure,components are aggregated, see Note 15 — Business Segmentsto the Consolidated Financial Statements.Statements in this Form 10-Q.
There was 0 change in the carrying amount of goodwill during the three months ended March 31, 2020. The following table presents changes in the carrying amount of goodwill by reporting unit during the three months ended March 31, 2019:
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Consumer
and
Business Banking | | Commercial
Banking | | Total |
| Beginning balance, January 1, 2019 | | $ | 353,321 |
| | $ | 112,226 |
| | $ | 465,547 |
|
| Acquisition of Enstream Capital Markets, LLC | | — |
| | 150 |
| | 150 |
|
| Ending balance, March 31, 2019 | | $ | 353,321 |
| | $ | 112,376 |
| | $ | 465,697 |
|
| |
Impairment Analysis
The Company performed its annual impairment analysis as of December 31, 20162019, and concluded that there was no0 goodwill impairment as the fair valuesvalue of all reporting units exceeded the carrying amountsamount of goodwill. There were no triggering events duringtheir respective reporting unit. The COVID-19 outbreak and public health response to contain it have resulted in economic and market deteriorations. Given this economic and market deterioration, as of March 31, 2020, we further evaluated our goodwill to assess if the ninefair value of all reporting units exceed the carrying amount of the respective reporting units. The Company performed its goodwill impairment test as of March 31, 2020 and concluded that there was 0 goodwill impairment for the three months ended September 30, 2017, and therefore, no additional goodwill impairment analysis was performed. No assurance can be given that goodwill will not be written down in future periods.March 31, 2020. Refer to Note 9 — Goodwill and Other Intangible Assets to the Consolidated Financial Statements of the Company’s 20162019 Form 10-K for additional details related to the Company’s annual goodwill impairment analysis.
Core Deposit Intangibles
Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions and wereare included in Other assets on the Consolidated Balance Sheets.Sheet. These intangibles are tested for impairment on an annual basis, or more frequently as events occur or as current circumstances and conditions warrant. There were no0 impairment write-downs on the core deposit intangibles for each of the ninethree months ended September 30, 2017March 31, 2020 and 2016.2019.
The following table presents the gross carrying valueamount of core deposit intangible assets and accumulated amortization as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
Gross balance (1) | | $ | 86,099 |
| | $ | 86,099 |
|
Accumulated amortization (1) | | (77,041 | ) | | (76,088 | ) |
Net carrying balance (1) | | $ | 9,058 |
| | $ | 10,011 |
|
| |
| |
| (1) | Excludes fully amortized core deposit intangible assets. |
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| Gross balance | | $ | 108,814 |
| | $ | 108,814 |
|
| Accumulated amortization | | (86,140 | ) | | (80,825 | ) |
| Net carrying balance | | $ | 22,674 |
| | $ | 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 $1.7 million$953 thousand and $2.0$1.2 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $5.3 million and $6.2 million for the nine months ended September 30, 2017 and 2016,2019, respectively.
The following table presents the estimated future amortization expense of core deposit intangibles:intangibles as of March 31, 2020:
|
| | | | |
| |
| ($ in thousands) | | Amount |
| Remainder of 2020 | | $ | 2,681 |
|
| 2021 | | 2,749 |
|
| 2022 | | 1,865 |
|
| 2023 | | 1,199 |
|
| 2024 | | 553 |
|
| Thereafter | | 11 |
|
| Total | | $ | 9,058 |
|
| |
|
| | | | |
| |
| Year Ended December 31, | | Amount ($ in thousands) |
| Remainder of 2017 | | $ | 1,620 |
|
| 2018 | | 5,883 |
|
| 2019 | | 4,864 |
|
| 2020 | | 3,846 |
|
| 2021 | | 2,833 |
|
| Thereafter | | 3,628 |
|
| Total | | $ | 22,674 |
|
| |
Note 1110—Commitments and Contingencies
Commitments to Extend Credit Extensions — In the normal 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:March 31, 2020 and December 31, 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| Loan commitments | | $ | 4,914,602 |
| | $ | 5,330,211 |
|
| Commercial letters of credit and SBLCs | | $ | 1,863,072 |
| | $ | 1,860,414 |
|
| |
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| Loan commitments | | $ | 4,956,515 |
| | $ | 5,077,869 |
|
| Commercial letters of credit and SBLCs | | $ | 1,757,648 |
| | $ | 1,525,613 |
|
| |
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 September 30, 2017,March 31, 2020, total letters of credit which amounted to $1.76of $1.86 billion were comprisedconsisted of SBLCs of $1.70$1.81 billion and commercial letters of credit of $59.1$56.0 million.
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 $14.0$20.8 million as of September 30, 2017March 31, 2020 and $15.7$11.1 million as of December 31, 2016. These amounts are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.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 make payments whenrepurchase up to the recourse component of the loans if the loans default. AsThe following table presents the types of September 30, 2017guarantees the Company had outstanding as of March 31, 2020 and December 31, 2016, the unpaid principal balance of total single-family and multifamily residential loans sold or securitized with recourse amounted to $121.2 million and $150.5 million, respectively. 2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Maximum Potential
Future Payments | | Carrying Value |
| | March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 |
| Single-family residential loans sold or securitized with recourse | | $ | 11,857 |
| | $ | 12,578 |
| | $ | 11,857 |
| | $ | 12,578 |
|
| Multifamily residential loans sold or securitized with recourse | | 15,885 |
| | 15,892 |
| | 34,771 |
| | 40,708 |
|
| Total | | $ | 27,742 |
| | $ | 28,470 |
| | $ | 46,628 |
| | $ | 53,286 |
|
| |
The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit reserves,commitments and totaled $256$65 thousand and $373$76 thousand as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The allowance for unfunded credit reservescommitments is included inAccrued expenses and other liabilities on the Consolidated Balance Sheets.Sheet. The Company continues to experience minimal losses from the single-family and multifamily residential loan portfolios sold or securitized with recourse.
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 9 8 — 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-Q. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, these commitments were $166.6$199.1 million and $174.3$193.8 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.Sheet.
Note 11 — Revenue from Contracts with Customers
The following tables present revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, and other noninterest income, segregated by operating segments for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, 2020 |
| | Consumer
and
Business
Banking | | Commercial
Banking | | Other | | Total |
| Noninterest income: | | | | | | | | |
| Revenue from contracts with customers: | | | | | | | | |
| Deposit account fees: | | | | | | | | |
| Deposit service charges and related fee income | | $ | 5,544 |
| | $ | 3,799 |
| | $ | 6 |
| | $ | 9,349 |
|
| Card income | | 898 |
| | 200 |
| | — |
| | 1,098 |
|
| Wealth management fees | | 5,017 |
| | 340 |
| | — |
| | 5,357 |
|
| Total revenue from contracts with customers | | $ | 11,459 |
| | $ | 4,339 |
| | $ | 6 |
| | $ | 15,804 |
|
Other sources of noninterest income (1) | | 4,943 |
| | 28,117 |
| | 5,185 |
| | 38,245 |
|
| Total noninterest income | | $ | 16,402 |
| | $ | 32,456 |
| | $ | 5,191 |
| | $ | 54,049 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, 2019 |
| | Consumer
and
Business
Banking | | Commercial
Banking | | Other | | Total |
| Noninterest income: | | | | | | | | |
| Revenue from contracts with customers: | | | | | | | | |
| Deposit account fees: | | | | | | | | |
| Deposit service charges and related fee income | | $ | 5,233 |
| | $ | 3,274 |
| | $ | 16 |
| | $ | 8,523 |
|
| Card income | | 760 |
| | 185 |
| | — |
| | 945 |
|
| Wealth management fees | | 3,706 |
| | 106 |
| | — |
| | 3,812 |
|
| Total revenue from contracts with customers | | $ | 9,699 |
| | $ | 3,565 |
| | $ | 16 |
| | $ | 13,280 |
|
Other sources of noninterest income (1) | | 4,073 |
| | 20,979 |
| | 3,799 |
| | 28,851 |
|
| Total noninterest income | | $ | 13,772 |
| | $ | 24,544 |
| | $ | 3,815 |
| | $ | 42,131 |
|
| |
| |
| (1) | Primarily represents revenue from contracts with customers that are out of the scope of ASC 606, Revenue from Contracts with Customers. |
Generally, the Company recognizes revenue from contracts with customers when it satisfies its performance obligations. The Company’s performance obligations are typically satisfied as services are rendered. The Company generally records contract liabilities, or deferred revenue, when payments from customers are received or due in advance of providing services. The Company records contract assets when services are provided to customers before payment is received or before payment is due. Since the Company receives payments for its services during the period or at the time services are provided, there were 0 contract assets or contract liabilities as of both March 31, 2020 and December 31, 2019.
The major revenue streams by fee type that are within the scope of ASC 606 presented in the above tables are described in additional detail below:
Deposit Account Fees — 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 automated teller machine 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 transactional 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 Account Fees — Card Income
Card income is comprised 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.
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.
Practical Expedients and Exemptions
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose the value of unsatisfied performance obligations as the Company’s contracts with customers generally have a term that is less than one year, are open-ended with a cancellation period that is less than one year, or allow the Company to recognize revenue in the amount to which the Company has the right to invoice.
In addition, given the short-term nature of the contracts, the Company also applies the practical expedient in ASC 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component, if at contract inception, the period between when the entity transfers the goods or services and when the customer pays for that good or service is one year or less.
Note 12—Stock Compensation Plans
Pursuant to the Company’s 2016 Stock Incentive Plan, as amended, the Company may issue stocks, stock options, restricted stock, awardsrestricted stock units (“RSAs”RSUs”), 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 no0 outstanding stock options or unvested RSAsawards other than RSUs as of September 30, 2017both March 31, 2020 and 2016.December 31, 2019.
The following table presents a summary of the total share-based compensation expense and the related net tax (deficiencies) benefits associated with the Company’s various employee share-based compensation plans for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Stock compensation costs | | $ | 7,209 |
| | $ | 7,444 |
|
| Related net tax (deficiencies) benefits for stock compensation plans | | $ | (1,566 | ) | | $ | 4,707 |
|
| |
Restricted Stock Units —RSUs are granted under the Company’s long-term incentive plan at no cost to the recipient. RSUs vest ratably over three years or cliff vest after three or five years of continued employment from the date of the grant.grant and are authorized to settle predominantly in shares of the Company’s common stock. Certain RSUs will be settled in cash. RSUs entitle the recipient to receive cash dividends equivalentdividend equivalents to any dividends paid on the underlying common stock during the period the RSUs are outstanding. RSUThe dividends are accrued during the vesting period and are paid at the time of vesting. While a portion of RSUs are time-vesting awards, others vest subject to the attainment of specified performance goals referred to as “Performance-based“performance-based RSUs.” AllSubstantially all RSUs are subject to forfeiture until vested.vested unless otherwise specified in the employment terms.
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 to a minimum of zero0 and 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 total share-based compensation expense and the related net tax benefit associated withactivities for the Company’s various employee share-based compensation planstime-based and performance-based RSUs that will be settled in shares for the three and nine months ended September 30, 2017 and 2016:March 31, 2020. The number of outstanding performance-based RSUs stated below assumes the associated performance targets will be met at the target level:
|
| | | | | | | | | | | | | | |
| |
| | | 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 | | 606,327 |
| | 41.76 |
| | 165,084 |
| | 39.79 |
|
| Vested | | (250,160 | ) | | 54.47 |
| | (131,597 | ) | | 56.59 |
|
| Forfeited | | (22,182 | ) | | 52.82 |
| | — |
| | — |
|
| Outstanding, March 31, 2020 | | 1,473,853 |
| | $ | 51.83 |
| | 419,970 |
| | $ | 53.24 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Stock compensation costs | | $ | 5,665 |
| | $ | 4,763 |
| | $ | 15,780 |
| | $ | 13,973 |
|
| Related net tax benefits for stock compensation plans | | $ | 151 |
| | $ | 14 |
| | $ | 4,614 |
| | $ | 1,019 |
|
| |
Effective January 1, 2017, the Company adopted ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result of the adoption of this new guidance, all excess tax benefits and deficiencies on share-based payment awards were recognized within Income tax expense on the Consolidated Statements of Income for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, these tax benefits were recorded as increases to Additional paid-in capital on the Consolidated Statements of Changes in Stockholders’ Equity.
The following table presents a summary of the activityactivities for the Company’s time-based and performance-based RSUs that will be settled in cash for the ninethree months ended September 30, 2017 based on the target amount of awards:March 31, 2020:
|
| | | |
|
| | Shares |
| Outstanding, January 1, 2020 | | 11,638 |
|
| Granted | | 5,639 |
|
| Vested | | (600 | ) |
| Forfeited | | — |
|
| Outstanding, March 31, 2020 | | 16,677 |
|
|
|
| | | | | | | | | | | | | | |
| |
| | | Nine Months Ended September 30, 2017 |
| | Time-Based RSUs | | Performance-Based RSUs |
| | Shares | | Weighted Average Grant-Date Fair Value | | Shares | | Weighted Average Grant-Date Fair Value |
| Outstanding, beginning of period | | 1,218,714 |
| | $ | 35.92 |
| | 410,746 |
| | $ | 35.27 |
|
| Granted | | 370,514 |
| | 54.71 |
| | 131,597 |
| | 56.59 |
|
| Vested | | (299,164 | ) | | 36.68 |
| | (118,044 | ) | | 36.85 |
|
| Forfeited | | (131,472 | ) | | 40.05 |
| | — |
| | — |
|
| Outstanding, end of period | | 1,158,592 |
| | $ | 41.26 |
| | 424,299 |
| | $ | 41.44 |
|
| |
As of September 30, 2017,March 31, 2020, there were $35.3 million and $19.7 million of total unrecognized compensation costs related to unvested time-based and performance-based RSUs, amounted to $28.2 million and $15.3 million, respectively. These costs are expected to be recognized over a weighted averageweighted-average period of 2.002.18 years and 2.022.23 years, respectively.
Note 13 — Stockholders’ Equity and Earnings Per Share
Warrant — The Company acquired MetroCorp Bancshares, Inc., (“MetroCorp”)following table presents the basic and diluted EPS calculations for the three months ended March 31, 2020 and 2019. For more information on January 17, 2014. Prior to the acquisition, MetroCorp had an outstanding warrant to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holder were converted into the right to acquire 230,282 shares of East West’s common stock until January 16, 2019. The warrant has not been exercised as of September 30, 2017.
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 common share equivalents calculated for warrants and RSUs outstanding using the treasury stock method. With the adoption of ASU 2016-09 during the first quarter of 2017, the impact of excess tax benefits and deficiencies is no longer included in the calculation of diluted EPS. As a resultEPS, see Note 1 — Summary of applying ASU 2016-09, the Company recorded income tax benefits of $151 thousand or $0 per common share, and $4.6 million or $0.03 per common share for the three and nine months ended September 30, 2017, respectively, related to the vesting of the RSUs. See Note 2 — CurrentSignificant Accounting Developments Policies— Significant Accounting Policies —Earnings Per Shareto the Consolidated Financial Statements for additional information.
The following table presentsof the EPS calculations for the three and nine months ended September 30, 2017 and 2016:Company’s 2019 Form 10-K.
|
| | | | | | | | |
| |
| ($ and shares in thousands, except per share data) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Basic: | | | | |
| Net income | | $ | 144,824 |
| | $ | 164,024 |
|
| Basic weighted-average number of shares outstanding | | 144,814 |
| | 145,256 |
|
| Basic EPS | | $ | 1.00 |
| | $ | 1.13 |
|
| Diluted: | | | | |
| Net income | | $ | 144,824 |
| | $ | 164,024 |
|
Basic weighted-average number of shares outstanding (1) | | 144,814 |
| | 145,256 |
|
Diluted potential common shares (2) | | 471 |
| | 665 |
|
Diluted weighted-average number of shares outstanding (1)(2) | | 145,285 |
| | 145,921 |
|
| Diluted EPS | | $ | 1.00 |
| | $ | 1.12 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| ($ and shares in thousands, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 |
| Basic | | | | | | | | |
| Net income | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
|
| | | | | | | | | |
| Basic weighted average number of shares outstanding | | 144,498 |
| | 144,122 |
| | 144,412 |
| | 144,061 |
|
| Basic EPS | | $ | 0.92 |
| | $ | 0.76 |
| | $ | 2.91 |
| | $ | 2.23 |
|
| | | | | | | | | |
| Diluted | | | | | | | | |
| Net income | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
|
| | | | | | | | | |
| Basic weighted average number of shares outstanding | | 144,498 |
| | 144,122 |
| | 144,412 |
| | 144,061 |
|
Diluted potential common shares (1) | | 1,384 |
| | 1,116 |
| | 1,437 |
| | 1,025 |
|
| Diluted weighted average number of shares outstanding | | 145,882 |
| | 145,238 |
| | 145,849 |
| | 145,086 |
|
| Diluted EPS | | $ | 0.91 |
| | $ | 0.76 |
| | $ | 2.88 |
| | $ | 2.21 |
|
| |
| |
| (1) | The Company acquired MetroCorp Bancshares, Inc. (“MetroCorp”) on January 17, 2014. Prior to the acquisition, MetroCorp had outstanding warrants to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holders were converted into the rights to acquire 230,282 shares of East West’s common stock until January 16, 2019. All warrants were exercised on January 7, 2019. |
| |
| (2) | Includes dilutive shares from RSUs and warrants for the three and nine months ended September 30, 2017March 31, 2020 and 2016.2019. |
For the three and nine months ended September 30, 2017, 4March 31, 2020 and 2019, 328 thousand and 6263 thousand weighted averageweighted-average shares of anti-dilutive shares from RSUs, respectively, were excluded from the diluted EPS computation. For the three and nine months ended September 30, 2016, 2 thousand and 7 thousand weighted average anti-dilutive shares from 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. During the three months ended March 31, 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the three months ended March 31, 2019.
Note 14 — Accumulated Other Comprehensive Income (Loss)
The following tables presenttable presents the changes in the components of AOCI balances for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Available-
for-Sale
Investment
Securities | | Foreign
Currency
Translation
Adjustments (1) | | Total | | Available-
for-Sale
Investment
Securities | | Foreign
Currency
Translation
Adjustments (1) | | Total |
| Beginning balance | | $ | (18,950 | ) | | $ | (15,231 | ) | | $ | (34,181 | ) | | $ | 11,756 |
| | $ | (13,468 | ) | | $ | (1,712 | ) |
| Net unrealized (losses) gains arising during the period | | (1,014 | ) | | 3,870 |
| | 2,856 |
| | (3,869 | ) | | (555 | ) | | (4,424 | ) |
| Amounts reclassified from AOCI | | (892 | ) | | — |
| | (892 | ) | | (1,038 | ) | | — |
| | (1,038 | ) |
| Changes, net of taxes | | (1,906 | ) | | 3,870 |
| | 1,964 |
| | (4,907 | ) | | (555 | ) | | (5,462 | ) |
| Ending balance | | $ | (20,856 | ) | | $ | (11,361 | ) | | $ | (32,217 | ) | | $ | 6,849 |
| | $ | (14,023 | ) | | $ | (7,174 | ) |
| |
| | | | ($ in thousands) | | Nine Months Ended September 30, | | Available-
for-Sale
Debt
Securities | | Foreign
Currency
Translation
Adjustments (1) | | Total |
| | 2017 | | 2016 | |
| | 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 | ) | |
| Balance, January 1, 2019 | | | $ | (45,821 | ) | | $ | (12,353 | ) | | $ | (58,174 | ) |
| Net unrealized gains arising during the period | | | 23,111 |
| | 3,180 |
| | 26,291 |
|
| Amounts reclassified from AOCI | | | (1,100 | ) | | — |
| | (1,100 | ) |
| Changes, net of tax | | | 22,011 |
| | 3,180 |
| | 25,191 |
|
| Balance, March 31, 2019 | | | $ | (23,810 | ) | | $ | (9,173 | ) | | $ | (32,983 | ) |
| Balance, January 1, 2020 | | | $ | (2,419 | ) | | $ | (15,989 | ) | | $ | (18,408 | ) |
| Net unrealized gains (losses) arising during the period | | 11,818 |
| | 8,013 |
| | 19,831 |
| | 17,901 |
| | (5,226 | ) | | 12,675 |
| | 28,530 |
| | (2,164 | ) | | 26,366 |
|
| Amounts reclassified from AOCI | | (3,902 | ) | | — |
| | (3,902 | ) | | (4,908 | ) | | — |
| | (4,908 | ) | | (1,077 | ) | | — |
| | (1,077 | ) |
| Changes, net of taxes | | 7,916 |
| | 8,013 |
| | 15,929 |
| | 12,993 |
| | (5,226 | ) | | 7,767 |
| |
| Ending balance | | $ | (20,856 | ) | | $ | (11,361 | ) | | $ | (32,217 | ) | | $ | 6,849 |
| | $ | (14,023 | ) | | $ | (7,174 | ) | |
| Changes, net of tax | | | 27,453 |
| | (2,164 | ) | | 25,289 |
|
| Balance, March 31, 2020 | | | $ | 25,034 |
| | $ | (18,153 | ) | | $ | 6,881 |
|
| | | | | | | | | | | | | | |
| |
| (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 Chinese RenminbiRMB and USD, respectively. |
The following tables presenttable presents the components of other comprehensive income (loss), reclassifications to net income and the related tax effects for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Before-Tax | | Tax Effect | | Net-of-Tax | | Before-Tax | | Tax Effect | | Net-of-Tax |
| Available-for-sale investment securities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Net unrealized losses arising during the period | | $ | (1,749 | ) | | $ | 735 |
| | $ | (1,014 | ) | | $ | (6,677 | ) | | $ | 2,808 |
| | $ | (3,869 | ) |
Net realized gains reclassified into net income (1) | | (1,539 | ) | | 647 |
| | (892 | ) | | (1,790 | ) | | 752 |
| | (1,038 | ) |
| Net change | | (3,288 | ) | | 1,382 |
| | (1,906 | ) | | (8,467 | ) | | 3,560 |
| | (4,907 | ) |
| | | | | | | | | | | | | |
| Foreign currency translation adjustments: | | | | | | | | | | | | |
| Net unrealized gains (losses) arising during period | | 3,870 |
| | — |
| | 3,870 |
| | (555 | ) | | — |
| | (555 | ) |
| Net change | | 3,870 |
| | — |
| | 3,870 |
| | (555 | ) | | — |
| | (555 | ) |
| Other comprehensive income (loss) | | $ | 582 |
| | $ | 1,382 |
| | $ | 1,964 |
| | $ | (9,022 | ) | | $ | 3,560 |
| | $ | (5,462 | ) |
| |
| | | | ($ in thousands) | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2020 | | 2019 |
| | Before-Tax | | Tax Effect | | Net-of-Tax | | 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: | | |
| | |
| | |
| | |
| | |
| | |
| |
| AFS debt securities: | | | | | | | | | | | | | |
| Net unrealized gains arising during the period | | $ | 20,392 |
| | $ | (8,574 | ) | | $ | 11,818 |
| | $ | 30,888 |
| | $ | (12,987 | ) | | $ | 17,901 |
| | $ | 40,493 |
| | $ | (11,963 | ) | | $ | 28,530 |
| | $ | 30,938 |
| | $ | (7,827 | ) | | $ | 23,111 |
|
Net realized gains reclassified into net income (1) | | (6,733 | ) | | 2,831 |
| | (3,902 | ) | | (8,468 | ) | | 3,560 |
| | (4,908 | ) | | (1,529 | ) | | 452 |
| | (1,077 | ) | | (1,561 | ) | | 461 |
| | (1,100 | ) |
| Net change | | 13,659 |
| | (5,743 | ) | | 7,916 |
| | 22,420 |
| | (9,427 | ) | | 12,993 |
| | 38,964 |
| | (11,511 | ) | | 27,453 |
| | 29,377 |
| | (7,366 | ) | | 22,011 |
|
| Foreign currency translation adjustments, net of hedges: | | | | | | | | | | | | | |
| Net unrealized (losses) gains arising during the period | | | (1,766 | ) | | (398 | ) | | (2,164 | ) | | 3,180 |
| | — |
| | 3,180 |
|
| Net change | | | (1,766 | ) | | (398 | ) | | (2,164 | ) | | 3,180 |
| | — |
| | 3,180 |
|
| Other comprehensive income (loss) | | | $ | 37,198 |
| | $ | (11,909 | ) | | $ | 25,289 |
| | $ | 32,557 |
| | $ | (7,366 | ) | | $ | 25,191 |
|
| | | | | | | | | | | | | | |
| Foreign currency translation adjustments: | | | | | | | | | | | | | |
| Net unrealized gains (losses) arising during period | | 8,013 |
| | — |
| | 8,013 |
| | (5,226 | ) | | — |
| | (5,226 | ) | |
| Net change | | 8,013 |
| | — |
| | 8,013 |
| | (5,226 | ) | | — |
| | (5,226 | ) | |
| Other comprehensive income | | $ | 21,672 |
| | $ | (5,743 | ) | | $ | 15,929 |
| | $ | 17,194 |
| | $ | (9,427 | ) | | $ | 7,767 |
| |
| | |
| |
| (1) | For the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, pre-tax amounts were reported in Net gains on sales of available-for-sale investmentAFS debt securitieson the Consolidated StatementsStatement of Income. |
Note 15—Business Segments
The Company utilizes an internal reporting system to measure the performance of variousorganizes its operations into 3 reportable operating segments within the Banksegments: (1) Consumer and the Company. The Company has identified three operating segments for purposes of management reporting: (1) RetailBusiness Banking; (2) Commercial Banking; and (3) Other. These three business segments meet the criteria of an operating segment: the segment engages in business activities from which it earns revenues and incurs expenses; its operating results are regularly revieweddefined by the Company’s chief operating decision-maker to render decisions about resources to be allocated totype of customers served, and the related products and services provided. The segments and assess its performance; and discretereflect how financial information is available.
The Retail Banking segment focuses primarily on retail operations through the Bank’s branch network. The Commercial Banking segment, which includes C&I and CRE operations, primarily generates commercial loans and deposits through the bank’s commercial lending offices. Furthermore, the Company’s Commercial Banking segment offers a wide variety of international finance, trade finance, and cash management services and products. The remaining centralized functions, including treasury activities 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.
currently evaluated by management. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of certain operatingbalance sheet and income statement items. The information presented is not indicative of how the segments would perform if they operated as independent entities due to the interrelationships among the segments.
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 through the Company’s branch network. Other products and services provided by this segment include wealth management, treasury management and foreign exchange services.
The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction and land 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 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 costssupport to the 2 core segments, namely the Consumer and Business Banking and the provisionCommercial Banking segments.
The Company utilizes an internal reporting process to measure the performance of the 3 operating segments within the Company. The internal reporting process derives operating segment results by utilizing allocation methodologies for credit losses.revenue and expenses. Net interest income is allocated basedof each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for funding charges or credits through the Company’s internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics.(“FTP”) process. Noninterest income and noninterest expense including depreciation and amortization, directly attributable to a business segment are assigned to the related businessthat segment. Indirect costs, including technology-related costs and corporate overhead, expense, are allocated to the segments based on severala segment’s estimated usage using factors including but not limited to, full-time equivalent employees, net interest income, and loan volume and deposit volume. TheCharge-offs are allocated to the segment directly associated with the loans charged off, and the remaining provision for credit losses is allocated to each segment based on actual charge-offs for the period as well as average loan balances for each segment during the period. The Company evaluates overall performance based on profit or loss from operations before income taxes excluding nonrecurring gains and losses.
volume. The Company’s internal funds transfer pricing assumptionsreporting process utilizes a full-allocation methodology. Under this methodology, corporate expenses and indirect expenses incurred by the Other segment are intendedallocated to promote core deposit growththe Consumer and to reflectBusiness Banking and the current risk profiles of various loan categoriesCommercial Banking segments, except certain corporate treasury-related expenses and insignificant unallocated expenses.
The corporate treasury function within the credit portfolio. Internal funds transfer pricing assumptionsOther segment is responsible for liquidity and methodologies are reviewed at least annually to ensure thatinterest rate management of the Company. The Company’s internal FTP process is reflective of current market conditions.also managed by the corporate treasury function within the Other segment. The internal funds transfer pricing 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 provide a reasonable and consistent basis for the measurement of the Company’sits business segments and productsegments’ net interest margins.
Changesmargins 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 characteristic 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 management structure or reportinginternal FTP assumptions and methodologies may resultare reviewed at least annually to ensure that the process is reflective of current market conditions. During the third quarter of 2019, the Company enhanced its FTP methodology related to deposits by setting a minimum floor rate for the FTP credits paid for deposits in changes inconsideration of the measurement of operatingflattened and inverted yield curve. This methodology has been retrospectively applied to segment results. Resultsfinancial results for prior year periods are generally restated for comparability for changes in management structure or reporting methodologies unless it is deemed not practicable to do so.the three months ended March 31, 2019.
The following tables present the operating results and other key financial measures for the individual operating segments as of and for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 2017 |
| | Retail Banking | | Commercial Banking | | Other | | Total |
| Interest income | | $ | 93,714 |
| | $ | 218,397 |
| | $ | 27,799 |
| | $ | 339,910 |
|
| Charge for funds used | | (37,979 | ) | | (87,071 | ) | | (7,589 | ) | | (132,639 | ) |
| Interest spread on funds used | | 55,735 |
| | 131,326 |
| | 20,210 |
| | 207,271 |
|
| Interest expense | | (20,090 | ) | | (5,943 | ) | | (10,722 | ) | | (36,755 | ) |
| Credit on funds provided | | 111,812 |
| | 12,770 |
| | 8,057 |
| | 132,639 |
|
| Interest spread on funds provided (used) | | 91,722 |
| | 6,827 |
| | (2,665 | ) | | 95,884 |
|
| Net interest income before provision for credit losses | | $ | 147,457 |
| | $ | 138,153 |
| | $ | 17,545 |
| | $ | 303,155 |
|
| Provision for credit losses | | $ | 2,058 |
| | $ | 10,938 |
| | $ | — |
| | $ | 12,996 |
|
| Depreciation, amortization and (accretion), net | | $ | 3,401 |
| | $ | (5,449 | ) | | $ | 40,001 |
| | $ | 37,953 |
|
| Segment income before income taxes | | $ | 68,554 |
| | $ | 99,025 |
| | $ | 7,705 |
| | $ | 175,284 |
|
| As of September 30, 2017: | | | | | | | |
|
|
| Goodwill | | $ | 357,207 |
| | $ | 112,226 |
| | $ | — |
| | $ | 469,433 |
|
| Segment assets | | $ | 8,877,186 |
| | $ | 21,216,848 |
| | $ | 6,213,932 |
| | $ | 36,307,966 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 2016 |
| | Retail
Banking | | Commercial
Banking | | Other | | Total |
| Interest income | | $ | 77,186 |
| | $ | 180,095 |
| | $ | 23,036 |
| | $ | 280,317 |
|
| Charge for funds used | | (24,320 | ) | | (53,262 | ) | | (3,858 | ) | | (81,440 | ) |
| Interest spread on funds used | | 52,866 |
| | 126,833 |
| | 19,178 |
| | 198,877 |
|
| Interest expense | | (14,855 | ) | | (3,699 | ) | | (7,615 | ) | | (26,169 | ) |
| Credit on funds provided | | 68,622 |
| | 8,206 |
| | 4,612 |
| | 81,440 |
|
| Interest spread on funds provided (used) | | 53,767 |
| | 4,507 |
| | (3,003 | ) | | 55,271 |
|
| Net interest income before (reversal of) provision for credit losses | | $ | 106,633 |
| | $ | 131,340 |
| | $ | 16,175 |
| | $ | 254,148 |
|
| (Reversal of) provision for credit losses | | $ | (3,709 | ) | | $ | 13,234 |
| | $ | — |
| | $ | 9,525 |
|
| Depreciation, amortization, and (accretion), net | | $ | 782 |
| | $ | (5,875 | ) | | $ | 40,541 |
| | $ | 35,448 |
|
| Segment income before income taxes | | $ | 32,304 |
| | $ | 80,393 |
| | $ | 10,767 |
| | $ | 123,464 |
|
| As of September 30, 2016: | | | | | | | |
|
|
| Goodwill | | $ | 357,207 |
| | $ | 112,226 |
| | $ | — |
| | $ | 469,433 |
|
| Segment assets | | $ | 7,606,611 |
| | $ | 18,549,562 |
| | $ | 7,099,102 |
| | $ | 33,255,275 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Consumer
and
Business
Banking | | Commercial
Banking | | Other | | Total |
| Three months ended March 31, 2020 | | | | | | | | |
| Net interest income before provision for credit losses | | $ | 152,591 |
| | $ | 183,501 |
| | $ | 26,615 |
| | $ | 362,707 |
|
| Provision for credit losses | | 7,788 |
| | 66,082 |
| | — |
| | 73,870 |
|
| Noninterest income | | 16,402 |
| | 32,456 |
| | 5,191 |
| | 54,049 |
|
| Noninterest expense | | 86,964 |
| | 70,126 |
| | 21,786 |
| | 178,876 |
|
| Segment income before income taxes | | 74,241 |
| | 79,749 |
| | 10,020 |
| | 164,010 |
|
| Segment net income | | $ | 53,195 |
| | $ | 57,131 |
| | $ | 34,498 |
| | $ | 144,824 |
|
| As of March 31, 2020 | | | | | | | | |
| Segment assets | | $ | 11,894,691 |
| | $ | 26,412,726 |
| | $ | 7,641,128 |
| | $ | 45,948,545 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Consumer
and
Business
Banking | | Commercial
Banking | | Other | | Total |
| Three months ended March 31, 2019 | | | | | | | | |
| Net interest income before provision for credit losses | | $ | 185,059 |
| | $ | 152,708 |
| | $ | 24,694 |
| | $ | 362,461 |
|
| Provision for credit losses | | 3,013 |
| | 19,566 |
| | — |
| | 22,579 |
|
| Noninterest income | | 13,772 |
| | 24,544 |
| | 3,815 |
| | 42,131 |
|
| Noninterest expense | | 87,906 |
| | 70,544 |
| | 28,472 |
| | 186,922 |
|
| Segment income before income taxes | | 107,912 |
| | 87,142 |
| | 37 |
| | 195,091 |
|
| Segment net income | | $ | 77,146 |
| | $ | 62,334 |
| | $ | 24,544 |
| | $ | 164,024 |
|
| As of March 31, 2019 | | | | | | | | |
| Segment assets | | $ | 10,902,961 |
| | $ | 23,964,592 |
| | $ | 7,223,880 |
| | $ | 42,091,433 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2017 |
| | Retail Banking | | Commercial Banking | | Other | | Total |
| Interest income | | $ | 263,491 |
| | $ | 616,689 |
| | $ | 85,174 |
| | $ | 965,354 |
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| Charge for funds used | | (98,856 | ) | | (229,330 | ) | | (50,273 | ) | | (378,459 | ) |
| Interest spread on funds used | | 164,635 |
| | 387,359 |
| | 34,901 |
| | 586,895 |
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| Interest expense | | (54,650 | ) | | (16,225 | ) | | (29,111 | ) | | (99,986 | ) |
| Credit on funds provided | | 320,452 |
| | 37,436 |
| | 20,571 |
| | 378,459 |
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| Interest spread on funds provided (used) | | 265,802 |
| | 21,211 |
| | (8,540 | ) | | 278,473 |
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| Net interest income before provision for credit losses | | $ | 430,437 |
| | $ | 408,570 |
| | $ | 26,361 |
| | $ | 865,368 |
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| Provision for credit losses | | $ | 1,772 |
| | $ | 28,977 |
| | $ | — |
| | $ | 30,749 |
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| Depreciation, amortization and (accretion), net | | $ | 6,741 |
| | $ | (14,609 | ) | | $ | 111,639 |
| | $ | 103,771 |
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| Segment income before income taxes | | $ | 204,601 |
| | $ | 284,195 |
| | $ | 72,177 |
| | $ | 560,973 |
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| As of September 30, 2017: | | | | | | | | |
| Goodwill | | $ | 357,207 |
| | $ | 112,226 |
| | $ | — |
| | $ | 469,433 |
|
| Segment assets | | $ | 8,877,186 |
| | $ | 21,216,848 |
| | $ | 6,213,932 |
| | $ | 36,307,966 |
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| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2016 |
| | Retail
Banking | | Commercial
Banking | | Other | | Total |
| Interest income | | $ | 233,192 |
| | $ | 534,603 |
| | $ | 67,559 |
| | $ | 835,354 |
|
| Charge for funds used | | (70,770 | ) | | (159,734 | ) | | (22,465 | ) | | (252,969 | ) |
| Interest spread on funds used | | 162,422 |
| | 374,869 |
| | 45,094 |
| | 582,385 |
|
| Interest expense | | (44,133 | ) | | (11,965 | ) | | (19,320 | ) | | (75,418 | ) |
| Credit on funds provided | | 210,831 |
| | 26,655 |
| | 15,483 |
| | 252,969 |
|
| Interest spread on funds provided (used) | | 166,698 |
| | 14,690 |
| | (3,837 | ) | | 177,551 |
|
| Net interest income before (reversal of) provision for credit losses | | $ | 329,120 |
| | $ | 389,559 |
| | $ | 41,257 |
| | $ | 759,936 |
|
| (Reversal of) provision for credit losses | | $ | (2,846 | ) | | $ | 19,864 |
| | $ | — |
| | $ | 17,018 |
|
| Depreciation, amortization and (accretion), net | | $ | 279 |
| | $ | (25,915 | ) | | $ | 86,316 |
| | $ | 60,680 |
|
| Segment income before income taxes | | $ | 114,513 |
| | $ | 268,401 |
| | $ | 28,137 |
| | $ | 411,051 |
|
| As of September 30, 2016: | | | | | | | | |
| Goodwill | | $ | 357,207 |
| | $ | 112,226 |
| | $ | — |
| | $ | 469,433 |
|
| Segment assets | | $ | 7,606,611 |
| | $ | 18,549,562 |
| | $ | 7,099,102 |
| | $ | 33,255,275 |
|
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Note 16 — Subsequent Events
On October 19, 2017,April 16, 2020, the Company’s Board of Directors declared fourthsecond quarter 20172020 cash dividends for the Company’s common stock. The common stock cash dividend of $0.20$0.275 per share is payable on NovemberMay 15, 20172020 to stockholders of record as of November 1, 2017.May 4, 2020.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | Page |
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Overview
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”, “EWBC” or “we”), and its various subsidiaries, including theits 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, and the Company’s annual report on Form 10-K for the year ended December 31, 20162019, filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on February 27, 20172020 (the “Company’s 20162019 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. 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 and is the largest bank in the United States (“U.S.”) that has a strong focus on the financial service needs of the Chinese AmericanChinese-American community. The Bank operates both in the U.S. and Greater China.
The Company’s vision is to serve as the financial bridge between the U.S. and Greater China. The Company’s primary strategy to achieve this vision is to expand the Company’s global network of contacts and resources to better meet its customers’ diverse financial needs in and between the world’s two largest markets. WithThrough over 130125 locations in the U.S. and Greater China, andthe Company provides a full range of cross-borderconsumer and commercial products and services through three business segments: Consumer and Business Banking, Commercial Banking, with the remaining operations included in Other. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primary source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and debt securities and interest paid on deposits and other funding sources. As of March 31, 2020, the Company continueshad $45.95 billion in assets and approximately 3,300 full-time equivalent employees. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services of the Company’s 2019 Form 10-K.
Corporate Strategy
We are committed to seek attractive opportunities for growth in pursuing its cross-border business banking strategy.
Inenhancing long-term shareholder value by executing our strategic vision, we remain focused on the fundamentals of growing loans, deposits and revenue, and improving profitability, whileand investing for the future andwhile managing risk, expenses and capital. Our business model is built on customer loyalty and engagement, understanding of our customers’ financial goals, and meeting theirour customers’ financial needs through our offering of diverse products and services. The Company’s approach is concentrated on organically growingseeking 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. We expect our relationship-focused business model to continue to generate organic growth and to expand our targeted customer bases. On an ongoing basis, we invest in technology related to critical business infrastructure and streamlining core processes, in the context of maintaining appropriate expense management. Our risk management activities are focused on ensuring that the Company identifies and manages risks to maintain safety and soundness while maximizing profitability.
Impact of COVID-19
In December 2019, COVID-19 was reported in China, and rapidly spread to other countries, including the U.S. In March 2020, the World Health Organization (“WHO”) characterized COVID-19 as a global pandemic and recommended containment and mitigation measures. On January 31, 2020, the U.S. declared a national public health emergency, and the President announced a National Emergency on March 13, 2020. Many states and municipalities have declared emergencies as well. The COVID-19 outbreak and public health response to contain it have resulted in economic and financial market deterioration as of March 31, 2020, which did not exist at the beginning of the quarter. The recession resulting from government-mandated closures of certain businesses, and “stay-at-home” orders has significantly impacted business investment and consumer spending, and heightened volatility in the global financial markets. These conditions caused by the COVID-19 pandemic have created financial difficulties for many of the Company’s customers and as a result, some borrowers may not be able to satisfy their obligations. Because many of the Company’s loans are secured by real estate, a potential decline in real estate markets could negatively impact the Company’s business, financial condition and the credit quality of the Company’s loan portfolio, potentially increasing the level of loan charge-offs and the provision for credit losses. In the first quarter of 2020, the impact of COVID-19 pandemic was not yet evident in the Company’s balance sheet growth trends or in most of our asset quality metrics. However, the broad-based response to combat COVID-19 pandemic and resulting economic impact had a material impact on the Company’s first quarter 2020 provision for credit losses.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. As part of the CARES Act passed by Congress, various initiatives to protect individuals, businesses and local economies, such as the SBA Paycheck Protection Program (“PPP”) were established. The Company participates in the SBA PPP, and intends to participate in additional new government-sponsored programs, as they are enacted. Through May 6, 2020, we funded over $1.84 billion of SBA-approved PPP loans to over 6,700 customers. In addition, to provide relief to customers during these turbulent times, we are providing payment accommodations for certain small-to medium-sized business, nonprofit organization and consumer customers impacted by COVID-19, and pausing action on collections and foreclosures on certain residential mortgage loans. Although we are uncertain of the full magnitude and duration of the business and economic impact from the unprecedented public health efforts to contain and combat the spread of COVID-19, we could experience material declines in revenues, profitability and/or cash flows in one or more periods in 2020, compared to the corresponding prior-year periods and compared to our expectations at the beginning of the 2020 fiscal year. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided below under Part II, Item 1A - Risk Factors.
Accounting Standards Update 2016-13 Adoption
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses, often referred to as the current expected credit loss ("CECL") model, which establishes a single allowance framework for all financial assets carried at amortized cost, and for certain off-balance sheet exposures. Replacing the prior incurred loss model, this framework requires that management estimate credit losses over the full remaining expected life of a loan, and consider expected future changes in macroeconomic conditions. The adoption of CECL increased the allowance for loan losses by $125.2 million, and the allowance for unfunded credit commitments by $10.5 million. As a result, the Company recorded an after-tax decrease to retained earnings of $98.0 million on January 1, 2020.
Selected Financial Data
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| ($ and shares in thousands, except per share, ratio and headcount data) | | Three Months Ended |
| | March 31,
2020 | | December 31,
2019 | | March 31,
2019 |
| Summary of operations: | | | | | | |
| Interest and dividend income | | $ | 449,190 |
| | $ | 467,233 |
| | $ | 463,311 |
|
| Interest expense | | 86,483 |
| | 99,014 |
| | 100,850 |
|
| Net interest income before provision for credit losses | | 362,707 |
| | 368,219 |
| | 362,461 |
|
| Provision for credit losses | | 73,870 |
| | 18,577 |
| | 22,579 |
|
| Net interest income after provision for credit losses | | 288,837 |
| | 349,642 |
| | 339,882 |
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| Noninterest income | | 54,049 |
| | 63,013 |
| | 42,131 |
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| Noninterest expense | | 178,876 |
| | 193,373 |
| | 186,922 |
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| Income before income taxes | | 164,010 |
| | 219,282 |
| | 195,091 |
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| Income tax expense | | 19,186 |
| | 31,067 |
| | 31,067 |
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| Net income | | $ | 144,824 |
| | $ | 188,215 |
| | $ | 164,024 |
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| Per common share: | | | | | | |
| Basic earnings | | $ | 1.00 |
| | $ | 1.29 |
| | $ | 1.13 |
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| Diluted earnings | | $ | 1.00 |
| | $ | 1.29 |
| | $ | 1.12 |
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| Dividends declared | | $ | 0.28 |
| | $ | 0.28 |
| | $ | 0.23 |
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| Book value | | $ | 34.67 |
| | $ | 34.46 |
| | $ | 31.56 |
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Non-U.S. generally accepted accounting principles (“GAAP”) tangible common equity per share (1) | | $ | 31.27 |
| | $ | 31.15 |
| | $ | 28.21 |
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| Weighted-average number of shares outstanding: | | | | | | |
| Basic | | 144,814 |
| | 145,624 |
| | 145,256 |
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| Diluted | | 145,285 |
| | 146,318 |
| | 145,921 |
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| Common shares outstanding at period-end | | 141,435 |
| | 145,625 |
| | 145,501 |
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| At period end: | | | | | | |
| Total assets | | $ | 45,948,545 |
| | $ | 44,196,096 |
| | $ | 42,091,433 |
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| Total loans | | $ | 35,894,987 |
| | $ | 34,778,973 |
| | $ | 32,863,286 |
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| Available-for-sale (“AFS”) debt securities | | $ | 3,695,943 |
| | $ | 3,317,214 |
| | $ | 2,640,158 |
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| Total deposits | | $ | 38,686,958 |
| | $ | 37,324,259 |
| | $ | 36,273,972 |
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| Long-term debt and finance lease liabilities | | $ | 152,162 |
| | $ | 152,270 |
| | $ | 152,433 |
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| Federal Home Loan Bank (“FHLB”) advances | | $ | 646,336 |
| | $ | 745,915 |
| | $ | 344,657 |
|
Stockholders’ equity (2) | | $ | 4,902,985 |
| | $ | 5,017,617 |
| | $ | 4,591,930 |
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Non-GAAP tangible common equity (1) | | $ | 4,422,519 |
| | $ | 4,535,841 |
| | $ | 4,105,124 |
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| Head count (full-time equivalent) | | 3,285 |
| | 3,294 |
| | 3,241 |
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| Performance metrics: | | | | | | |
| Return on average assets (“ROA”) | | 1.30 | % | | 1.68 | % | | 1.63 | % |
| Return on average equity (“ROE”) | | 11.60 | % | | 15.00 | % | | 14.66 | % |
| Net interest margin | | 3.44 | % | | 3.47 | % | | 3.79 | % |
Efficiency ratio (3) | | 42.92 | % | | 44.84 | % | | 46.20 | % |
Non-GAAP efficiency ratio (1) | | 38.54 | % | | 38.33 | % | | 39.75 | % |
| Credit quality metrics: | | | | | | |
| Allowance for loan losses | | $ | 557,003 |
| | $ | 358,287 |
| | $ | 317,894 |
|
| Allowance for loan losses to loans held-for-investment | | 1.55 | % | | 1.03 | % | | 0.97 | % |
| Nonperforming assets to total assets | | 0.33 | % | | 0.27 | % | | 0.33 | % |
| Annualized net charge-offs to average loans held-for-investment | | 0.01 | % | | 0.10 | % | | 0.18 | % |
| Selected metrics: | | | | | | |
| Total average equity to total average assets | | 11.22 | % | | 11.19 | % | | 11.14 | % |
| Common dividend payout ratio | | 27.95 | % | | 21.52 | % | | 20.59 | % |
| Loan-to-deposit ratio | | 92.78 | % | | 93.18 | % | | 90.60 | % |
| EWBC Capital ratios: | | | | | | |
| Common Equity Tier 1 (“CET1”) capital | | 12.4 | % | | 12.9 | % | | 12.4 | % |
| Tier 1 capital | | 12.4 | % | | 12.9 | % | | 12.4 | % |
| Total capital | | 13.9 | % | | 14.4 | % | | 13.9 | % |
| Tier 1 leverage capital | | 10.2 | % | | 10.3 | % | | 10.2 | % |
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| (1) | Tangible common equity, tangible common equity per share and adjusted efficiency ratio are non-GAAP financial measures. For a discussion of these measures, refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q. |
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| (2) | 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 an after-tax decrease to opening retained earnings of $98.0 million as of January 1, 2020. |
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| (3) | The efficiency ratio is noninterest expense divided by total revenue (net interest income before provision for credit losses and noninterest income). |
Financial Highlights
The Company delivered strong financial performance in the third quarter of 2017 across key measures of loan growth, revenue and net income growth, and credit quality. It is the Company’s priority to focus on strengthening its risk management infrastructure and compliance in order to meet increasing regulatory expectations, while still providing strong returns to stockholders.
Financial Performance
Noteworthy items onabout the Company’s performance included:
Net income totaled $132.7 million for the three months ended September 30, 2017, an increase of $22.5 million or 20%, from $110.1 million for the same period in 2016. This increase was primarily due to higher net interest income, partially offset by higher income tax expense, reflecting a higher effective tax rate. Net income totaled $420.7 million for the nine months ended September 30, 2017, an increase of $99.8 million or 31%, from $320.9 million for the same period in 2016. This increase was primarily due to higher net interest income and noninterest income, partially offset by higher income tax expense due to a higher effective tax rate. The higher net interest income during the three and nine months ended September 30, 2017 was primarily due to growth in the loan portfolio and higher yields. The higher noninterest income during the nine months ended September 30, 2017 was primarily due to a $41.5 million after-tax net gain recognized from the sale of a commercial property in San Francisco, California during the first quarter of 20172020 included:
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| • | Earnings: First quarterof2020 net income was $144.8 million or $1.00 in diluted earnings per share (“EPS”), compared with first quarter of 2019 net income of $164.0 million or diluted EPS of $1.12. The $19.2 million or 12% decrease in net income was primarily due to higher provision for credit losses resulting from the newly adopted CECL methodology and the deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic. |
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| • | Adjusted Earnings: There were no adjustments for non-recurring items during the first quarter of 2020 that affected non-GAAP net income and diluted EPS. During the first quarter of 2019, the Company recorded a $7.0 million pre-tax or $4.9 million after-tax, impairment charge related to DC Solar and affiliates (“DC Solar”). (Refer to Item 2. MD&A — Results of Operations — Income Taxes in this Form 10-Q for a discussion related to the Company’s investment in DC Solar and see reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q.) First quarter 2019 non-GAAP net income was $168.9 million and non-GAAP diluted EPS was $1.16. |
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| • | Revenue: Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $416.8 million for the first quarter of 2020, compared with $404.6 million for the first quarter of 2019, an increase of $12.2 million or 3%. This increase was primarily due to increased noninterest income. |
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| • | Net Interest Income and Net Interest Margin: Firstquarter of 2020 net interest income was $362.7 million, compared with first quarter of 2019 net interest income of $362.5 million. First quarter of 2020 net interest margin was 3.44%, a 35 basis point decrease from 3.79% for the first quarter of 2019. The decrease in the net interest margin reflected materially lower interest rates year-over-year, including a cumulative 225 basis points of cuts to the fed funds target rate in the second half of 2019 and in the first quarter of 2020. |
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| • | Operating Efficiency: Efficiency ratio, calculated as noninterest expense divided by revenue, was 42.92% and 46.20% for the first quarters of 2020 and 2019, respectively. Adjusting for amortization of tax credit and other investments, and core deposit intangibles, non-GAAP efficiency ratio for the first quarter of 2020 was 38.54%, a 121 basis point improvement from 39.75% for the first quarter of 2019. (See reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q.) |
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| • | Tax: Income tax expense was $19.2 million and the effective tax rate was 11.7% for the first quarter of 2020, compared with an income tax expense of $31.1 million and an effective tax rate of 15.9% for the first quarter of 2019. |
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| • | Profitability: First quarter of 2020 ROA was 1.30% and first quarter of 2019 ROA was 1.63%. First quarter of 2020 ROE was 11.60% and first quarter of 2019 ROE was 14.66%. Adjusting for non-recurring items, which occurred only in the first quarter of 2019, non-GAAP ROA and non-GAAP ROE for the first quarter of 2019 were 1.68% and 15.10%, respectively. (See reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q.) |
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| • | Loans: Total loans were $35.89 billion as of March 31, 2020, an increase of $1.12 billion or 3% from $34.78 billion as of December 31, 2019. Growth was well-diversified across commercial and industrial (“C&I”), total commercial real estate (“CRE”) and residential mortgage loans. |
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| • | Deposits: Total deposits were $38.69 billion as of March 31, 2020, an increase of $1.36 billion or 4% from $37.32 billion as of December 31, 2019. This increase was primarily driven by growth in noninterest-bearing demand deposits and money market accounts. |
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| • | Asset Quality Metrics: The allowance for loan losses was $557.0 million or 1.55% of loans held-for-investment, as of March 31, 2020, compared with $358.3 million or 1.03% of loans held-for-investment, as of December 31, 2019. The increase in the allowance for loan losses was due to the adoption of ASU 2016-13, which increased the allowance for loan losses by $125.2 million; deteriorating macroeconomic conditions and outlook as a result of the |
COVID-19 pandemic, and a $2.2loan growth. Nonperforming assets were $150.9 million after-tax net gain recognized from the saleor 0.33% of East West Insurance Services, Inc.’s (“EWIS”) business during the third quartertotal assets, as of 2017.
Diluted earnings per share (“EPS”) was $0.91 and $0.76 for the three months ended September 30, 2017 and 2016, respectively, which reflectedMarch 31, 2020, an increase from $121.5 million, or 0.27% of $0.15total assets, as of December 31, 2019. First quarter 2020 net charge-offs were $898 thousand, or 20%. Diluted EPS was $2.88 and $2.21annualized 0.01% of average loans held-for-investment, compared with $14.4 million, or annualized 0.18% of average loans held-for-investment, for the nine months ended September 30, 2017 and 2016, respectively, an increase of $0.67 or 30%. The diluted EPS impact from the sale of EWIS’s business in the third quarter of 2017 was $0.02, and the diluted EPS impact from the commercial property sale in the first quarter of 2017 was $0.28.2019.
Revenue, or the sum of net interest income before provision for credit losses and noninterest income, increased $49.3 million or 16% to $352.8 million for the three months ended September 30, 2017, compared to the same period in 2016, and increased $184.4 million or 21% to $1.08 billion for the nine months ended September 30, 2017, compared to the same period in 2016.
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| • | Capital Levels: Our capital levels are strong. As of March 31, 2020, all of the Company’s and the Bank’s regulatory capital ratios were well above the regulatory requirements to be considered well-capitalized. See Item 2. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-Q for more information regarding capital. During the three months ended March 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 three months ended March 31, 2019. |
Noninterest expense decreased $6.0 million or 4% to $164.5 million for the three months ended September 30, 2017, compared to the same period in 2016. For the nine months ended September 30, 2017, noninterest expense increased $20.7 million or 4% to $486.7 million, compared to the same period in 2016.
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| • | Cash Dividend: The quarterly cash common stock dividend for the first quarter of 2020 was $0.275 per share, an increase of $0.045 or 20% from $0.23 per share for the first quarter of 2019. The Company returned $40.5 million in cash dividends to stockholders during the first quarter of 2020, compared with $33.8 million during the same period in 2019. |
The Company’s effective tax rate for the three and nine months ended September 30, 2017 was 24.3% and 25.0%, respectively, compared to 10.8% and 21.9%, respectively, for the same periods in 2016.
Return on average assets increased 13 and 28 basis points to 1.46% and 1.59% for the three and nine months ended September 30, 2017, respectively, compared to 1.33% and 1.31%, respectively, for the same periods in 2016. Return on average equity increased 93 and 238 basis points to 14.01% and 15.50% for the three and nine months ended September 30, 2017, respectively, compared to 13.08% and 13.12%, respectively, for the same periods in 2016.
Balance Sheet and Liquidity
The Company experienced growth of $1.52 billion or 4% in total assets as of September 30, 2017 compared to December 31, 2016. This growth was largely attributable to loan growth, partially offset by decreases in securities purchased under resale agreements (“resale agreements”) and available-for-sale investment securities.
Gross loans held-for-investment increased $3.02 billion or 12% to $28.53 billion as of September 30, 2017, compared to $25.50 billion as of December 31, 2016, while the allowance for loan losses to loans held-for-investment ratio slightly declined by two basis points to 1.00% as of September 30, 2017, compared to 1.02% as of December 31, 2016. Deposits increased $1.42 billion or 5% to $31.31 billion as of September 30, 2017, compared to $29.89 billion as of December 31, 2016, consisting of a $1.24 billion or 5% increase in core deposits and a $179.3 million or 3% increase in time deposits. Core deposits comprised 81% of total deposits as of each of September 30, 2017 and December 31, 2016.
Capital
Our financial performance in the nine months ended September 30, 2017 resulted in strong capital generation, which increased total stockholders’ equity by $354.2 million or 10% to $3.78 billion as of September 30, 2017, compared to December 31, 2016. We returned $29.2 million and $87.6 million in cash dividends to our stockholders during the three and nine months ended September 30, 2017, respectively. Book value per common share increased 10% to $26.17 as of September 30, 2017, compared to $23.78 as of December 31, 2016.
From a capital management perspective, the Company continued to maintain a strong capital position with its Common Equity Tier 1 (“CET1”) capital ratio at 11.4% as of September 30, 2017, compared to 10.9% as of December 31, 2016. The total risk-based capital ratio was 12.9% and 12.4% as of September 30, 2017 and December 31, 2016, respectively. The Tier 1 leverage capital ratio was 9.4% as of September 30, 2017, compared to 8.7% as of December 31, 2016.
Results of Operations
Components of Net Income
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| ($ in thousands, except per share data and ratios) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | % Change / Basis Point (“BP”) Change | | 2017 | | 2016 | | % Change / BP Change |
| Interest and dividend income | | $ | 339,910 |
| | $ | 280,317 |
| | 21 | % | | $ | 965,354 |
| | $ | 835,354 |
| | 16 | % |
| Interest expense | | 36,755 |
| | 26,169 |
| | 40 | % | | 99,986 |
| | 75,418 |
| | 33 | % |
| Net interest income before provision for credit losses | | 303,155 |
| | 254,148 |
| | 19 | % | | 865,368 |
| | 759,936 |
| | 14 | % |
| Provision for credit losses | | 12,996 |
| | 9,525 |
| | 36 | % | | 30,749 |
| | 17,018 |
| | 81 | % |
| Noninterest income | | 49,624 |
| | 49,341 |
| | 1 | % | | 213,047 |
| | 134,118 |
| | 59 | % |
| Noninterest expense | | 164,499 |
| | 170,500 |
| | (4 | )% | | 486,693 |
| | 465,985 |
| | 4 | % |
| Income tax expense | | 42,624 |
| | 13,321 |
| | 220 | % | | 140,247 |
| | 90,108 |
| | 56 | % |
| Net income | | $ | 132,660 |
| | $ | 110,143 |
| | 20 | % | | $ | 420,726 |
| | $ | 320,943 |
| | 31 | % |
| Diluted EPS | | $ | 0.91 |
| | $ | 0.76 |
| | 20 | % | | $ | 2.88 |
| | $ | 2.21 |
| | 30 | % |
| Annualized return on average assets | | 1.46 | % | | 1.33 | % | | 13 | bps | | 1.59 | % | | 1.31 | % | | 28 | bps |
| Annualized return on average equity | | 14.01 | % | | 13.08 | % | | 93 | bps | | 15.50 | % | | 13.12 | % | | 238 | bps |
| |
Net income increased $22.5 million or 20% to $132.7 million for the three months ended September 30, 2017, from $110.1 million for the same period in 2016. Diluted EPS was $0.91 for the three months ended September 30, 2017, an increase of $0.15 or 20% from the prior year period. Net income increased $99.8 million or 31% to $420.7 million for the nine months ended September 30, 2017, from $320.9 million for the same period in 2016. Diluted EPS was $2.88 for the nine months ended September 30, 2017, an increase of $0.67 or 30% from the prior year period. As discussed in Note 3 — Dispositions to the Consolidated Financial Statements, the Company completed the sale and leaseback of a commercial property, which resulted in an after-tax net gain of $41.5 million recorded during the first quarter of 2017. Additionally, the Company sold its insurance brokerage business, EWIS, and recorded an after-tax net gain of $2.2 million during the third quarter of 2017. Excluding the net gains on the sales of the commercial property and EWIS’s business during the nine months ended September 30, 2017, non-Generally Accepted Accounting Principles (“non-GAAP”) net income of $377.0 million and non-GAAP diluted EPS of $2.58 increased $56.1 million and $0.37 per share, respectively, from the same prior year period (see reconciliations of non-GAAP measures used below under “Use of Non-GAAP Financial Measures”).
Revenue, or the sum of net interest income before provision for credit losses and noninterest income, increased $49.3 million or 16% to $352.8 million during the three months ended September 30, 2017, from $303.5 million during the same period in 2016. This increase was primarily due to a $49.0 million increase in net interest income, reflecting the growth in the loan portfolio and the positive impact of short-term interest rate increases in 2017. Revenue increased $184.4 million or 21% to $1.08 billion during the nine months ended September 30, 2017, from $894.1 million during the same period in 2016. This increase was due to a $105.4 million increase in net interest income, reflecting the growth in the loan portfolio and the positive impact of short-term interest rate increases in 2017; and a $78.9 million increase in noninterest income, primarily due to the $71.7 million pre-tax gain recognized from the sale of the commercial property during the first quarter of 2017 and the $3.8 million pre-tax gain recognized from the sale of EWIS’s business.
Noninterest expense was $164.5 million for the three months ended September 30, 2017, a decrease of $6.0 million or 4% from $170.5 million for the same period in 2016. This decrease was largely driven by lower amortization expense of tax credits and other investments and lower legal expense, partially offset by an increase in compensation and employee benefits. Noninterest expense was $486.7 million for the nine months ended September 30, 2017, an increase of $20.7 million or 4% from $466.0 million for the same period in 2016. This increase was largely driven by higher compensation and employee benefits and amortization expense of tax credit and other investments, partially offset by lower consulting and legal expenses.
Strong returns on average assets and average equity during the three and nine months ended September 30, 2017 reflected the Company’s ability to achieve higher profitability while expanding the loan and deposit base. The return on average assets increased 13 basis points to 1.46% while the return on average equity increased 93 basis points to 14.01% for the three months ended September 30, 2017, compared to the same period in 2016. The return on average assets increased 28 basis points to 1.59% while the return on average equity increased 238 basis points to 15.50% for the nine months ended September 30, 2017, compared to the same period in 2016. Excluding the impact of the after-tax gains on the sales of the commercial property and EWIS’s business that were recognized in the first and third quarters of 2017, respectively, non-GAAP return on average assets was 1.43% for the nine months ended September 30, 2017, a 12 basis point increase from the same prior year period, while non-GAAP return on average equity was 13.89% for the nine months ended September 30, 2017, a 77 basis point increase from the same prior year period. (See reconciliations of non-GAAP measures used below under “Use of Non-GAAP Financial Measures”.)
Use of Non-GAAP Financial Measures
To supplement the Company’s unaudited interim Consolidated Financial Statements presented in accordance with Generally Accepted Accounting Principles (“GAAP”), the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.
The Company believes these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding its performance. Management believes that excluding the non-recurring after-tax effect of the gains on sales of the commercial property and EWIS’s business from net income, diluted EPS, and returns on average assets and average equity, will make it easier to analyze the results by presenting them on a more comparable basis. However, note that these non-GAAP financial measures should be considered in addition to, not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.
The following table presents a reconciliation of GAAP to non-GAAP financial measures for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | |
| |
| | | | | Nine Months Ended September 30, |
| ($ and shares in thousands, except per share data) | | | | 2017 | | 2016 |
| Net income | | (a) | | $ | 420,726 |
| | $ | 320,943 |
|
Less: Gain on sale of the commercial property, net of tax (1) | | (b) | | (41,526 | ) | | — |
|
Gain on sale of business, net of tax (1) | | | | (2,206 | ) | | — |
|
| Non-GAAP net income | | (c) | | $ | 376,994 |
|
| $ | 320,943 |
|
| | | | | | | |
| Diluted weighted average number of shares outstanding | | (d) | | 145,849 |
| | 145,086 |
|
| | | | | | | |
| Diluted EPS | | (a)/(d) | | $ | 2.88 |
| | $ | 2.21 |
|
| Diluted EPS impact of the gain on sale of the commercial property, net of tax | | (b)/(d) | | (0.28 | ) | | — |
|
| Diluted EPS impact of the gain on sale of business, net of tax | | | | (0.02 | ) | | — |
|
| Non-GAAP diluted EPS | | (c)/(d) | | $ | 2.58 |
|
| $ | 2.21 |
|
| | | | | | | |
| Average total assets | | (e) | | $ | 35,290,542 |
| | $ | 32,662,445 |
|
| Average stockholders’ equity | | (f) | | $ | 3,630,062 |
| | $ | 3,266,485 |
|
Return on average assets (2) | | (a)/(e) | | 1.59 | % | | 1.31 | % |
Non-GAAP return on average assets (2) | | (c)/(e) | | 1.43 | % | | 1.31 | % |
Return on average equity (2) | | (a)/(f) | | 15.50 | % | | 13.12 | % |
Non-GAAP return on average equity (2) | | (c)/(f) | | 13.89 | % | | 13.12 | % |
| | | | | | | |
| |
(1) | Applied statutory tax rate of 42.05%. |
A discussion of net interest income, noninterest income, noninterest expense, income taxes and operating segment results are presented below.
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 customer deposits, securities sold under repurchase agreements (“repurchase agreements”), borrowings and other interest-bearing liabilities. Net interest margin is calculated by dividing the annualizedratio 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 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.
Net
First quarter of 2020 net interest income for the three months ended September 30, 2017 was $303.2$362.7 million, an increase of $49.0 million$246 thousand or 19%0.07%, compared to $254.1with $362.5 million for the same period in 2016. Net interest income for the nine months ended September 30, 2017 was $865.4 million, anfirst quarter of 2019. This slight increase of $105.4 million or 14% compared to $759.9 million for the same period in 2016. The notable increases in net interest income for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were primarily due to increased interest income resulting fromreflected loan growth and higher yields on interest-earning assets, partiallya decrease in the average cost of funds, which was nearly offset by a 16 and 12 basis point increasethe year-over-year decline in the costinterest-earning asset yields. First quarter of interest-bearing deposits during the three and nine months ended September 30, 2017, respectively. The cost of interest-bearing deposits was 0.60% and 0.55% for the three and nine months ended September 30, 2017, respectively, compared to 0.44% and 0.43% for the three and nine months ended September 30, 2016.
For the three months ended September 30, 2017,2020 net interest margin increased to 3.52%was 3.44%, a 35 basis point decrease from 3.79% for the first quarter of 2019.
The average loan yield for the first quarter of 2020 was 4.71%, a 59 basis point decrease from 5.30% for the first quarter of 2019. This decrease, compared to 3.26% forwith the same period a year ago, reflected the downward repricing of the Company’s loan portfolio in 2016. For the nine months ended September 30, 2017, netresponse to materially lower interest margin increased to 3.45%, compared to 3.29%rates. As of March 31, 2020, approximately 69% of total loans were variable-rate or hybrid in their adjustable rate period. First quarter of 2020 average loans were $35.15 billion, an increase of $2.74 billion or 8% from $32.41 billion for the same period in 2016. The increases in net interest margin for the threefirst quarter of 2019. Average loan growth was broad-based across all commercial loan categories and nine months ended September 30, 2017 were due to higher yields from interest-earning assets (primarily due to an increase in loan yields for the three months ended September 30, 2017 compared to the same prior year period, and primarily due to increases in yieldssingle-family residential loans.
First quarter of loans, interest-bearing cash and deposits with banks and investment securities during the nine months ended September 30, 2017), as a result of the short-term interest rate increases in 2017. The higher loan yields for the three and nine months ended September 30, 2017 were partially offset by lower accretion income from the purchased credit impaired (“PCI”) loans accounted for under Accounting Standard Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. During the three and nine months ended September 30, 2017, total accretion income from loans accounted for under ASC 310-30 was $4.5 million and $14.0 million, respectively, compared to $7.1 million and $33.8 million, respectively, for the same periods in 2016.
For the three months ended September 30, 2017,2020 average interest-earning assets increased $3.15were $42.36 billion, an increase of $3.62 billion or 10% to $34.21 billion9% from $31.06$38.75 billion for the same period in 2016.first quarter of 2019. This increase was primarily due to increases of $3.22$2.74 billion or 13% in average loans and $751.0$632.4 million or 47% in average interest-bearing cash and deposits with banks, partially offset by decreases of $508.2 million or 28% in average resale agreements and $310.7 million or 9% in average investment securities. For the nine months ended September 30, 2017, average interest-earning assets increased $2.73 billion or 9% to $33.54 billion from $30.81 billion for the same period in 2016. This increase was primarily due to increases of $2.78 billion or 12% in average loans, and $305.1 million or 17% in average interest-bearing cash and deposits with banks, partially offset by a $228.3 million or 7% decrease in average investmentAFS debt securities.
Customer depositsDeposits are an important source of fundingfunds and affectimpact both net interest income and net interest margin. Deposits are comprised ofAverage noninterest-bearing demand interest-bearing checking, money market, savings and time deposits. Average deposits increased $2.79 billion or 10% to $31.07totaled $11.12 billion for the three months ended September 30, 2017,first quarter of 2020, compared to $28.28with $10.07 billion for the same period in 2016. The ratiofirst quarter of average2019, an increase of $1.05 billion or 10%. Average noninterest-bearing demand deposits tocomprised 30% and 29% of average total deposits increased to 34% for the three months ended September 30, 2017, from 33% for the three months ended September 30, 2016.first quarters of 2020 and 2019, respectively. Average interest-bearing deposits increased $2.27 billion or 8% to $30.33of $26.36 billion for the nine months ended September 30, 2017, compared to $28.06first quarter of 2020 increased by $1.50 billion or 6% from $24.85 billion for the same period in 2016. The ratiofirst quarter of average noninterest-bearing demand deposits to total deposits increased to 34% for the nine months ended September 30, 2017, from 32% for the nine months ended September 30, 2016. 2019.
The average loans to average deposits ratio increased to 89% for the three months ended September 30, 2017, from 86% for the three months ended September 30, 2016. The average loans to average deposits ratio increased to 88% for the nine months ended September 30, 2017, from 86% for the nine months ended September 30, 2016. In addition, cost of funds increased 10was 0.90% for the first quarter of 2020, a decrease of 25 basis points from 1.15% for the first quarter of 2019. The decrease in the average cost of funds reflects the cumulative 225 basis points of cuts to the target fed funds rate in the second half of 2019 and in the first quarter of 2020. The average cost of deposits was 0.82% for the first quarter of 2020, a decrease of 25 basis points from 1.07% for the first quarter of 2019. The average cost of interest-bearing deposits decreased 33 basis points to 0.46%1.17% for the three months ended September 30, 2017first quarter of 2020, from 0.36%1.50% for the same periodfirst quarter of 2019. Other sources of funding included in 2016. Costthe calculation of the average cost of funds increased eight basis points to 0.43% for the nine months ended September 30, 2017 from 0.35% for the same period in 2016.consist of FHLB advances, securities sold under repurchase agreements (“repurchase agreements”) and long-term debt.
The Company utilizes various tools to manage interest rate risk. Refer to the “Interest RateItem 2. MD&A — Risk Management” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Management — Asset Liability and Market Risk Management for details.in this Form 10-Q.
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 for the three months ended September 30, 2017first quarters of 2020 and 2016:2019:
| | | | ($ in thousands) | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2020 | | 2019 |
| | Average Balance | | Interest | | Average Yield/ Rate(1) | | Average
Balance | | Interest | | Average Yield/ Rate(1) | | Average Balance | | Interest | | Average Yield/ Rate (1) | | Average
Balance | | Interest | | Average Yield/ Rate (1) |
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing cash and deposits with banks | | $ | 2,344,561 |
| | $ | 9,630 |
| | 1.63 | % | | $ | 1,593,577 |
| | $ | 3,168 |
| | 0.79 | % | | $ | 2,973,006 |
| | $ | 11,168 |
| | 1.51 | % | | $ | 2,578,686 |
| | $ | 15,470 |
| | 2.43 | % |
Resale agreements (2) | | 1,297,826 |
| | 7,901 |
| | 2.42 | % | | 1,805,978 |
| | 7,834 |
| | 1.73 | % | |
Investment securities (3) | | 2,963,122 |
| | 14,828 |
| (4) | 1.99 | % | | 3,273,861 |
| | 13,388 |
| (4) | 1.63 | % | |
Securities purchased under resale agreements (“Resale agreements”) (2) | | | 882,142 |
| | 5,565 |
| | 2.54 | % | | 1,035,000 |
| | 7,846 |
| | 3.07 | % |
AFS debt securities (3)(4) | | | 3,274,740 |
| | 20,142 |
| | 2.47 | % | | 2,642,299 |
| | 15,748 |
| | 2.42 | % |
Loans (5)(6) | | 27,529,779 |
| | 306,939 |
| (6) | 4.42 | % | | 24,309,313 |
| | 255,316 |
| (6) | 4.18 | % | | 35,153,968 |
| | 411,869 |
| | 4.71 | % | | 32,414,785 |
| | 423,534 |
| | 5.30 | % |
| Restricted equity securities | | 73,245 |
| | 612 |
| | 3.31 | % | | 72,625 |
| | 611 |
| | 3.35 | % | | 78,675 |
| | 446 |
| | 2.28 | % | | 74,234 |
| | 713 |
| | 3.90 | % |
| Total interest-earning assets | | 34,208,533 |
| | 339,910 |
| | 3.94 | % | | 31,055,354 |
| | 280,317 |
| | 3.59 | % | | $ | 42,362,531 |
| | $ | 449,190 |
| | 4.26 | % | | $ | 38,745,004 |
| | $ | 463,311 |
| | 4.85 | % |
| Noninterest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | 387,705 |
| | | | | | 354,053 |
| | | | | | 510,512 |
| | | | | | 468,159 |
| | | | |
| Allowance for loan losses | | (276,467 | ) | | | | | | (266,763 | ) | | | | | | (492,297 | ) | | | | | | (314,446 | ) | | | | |
| Other assets | | 1,617,796 |
| | | | | | 1,763,889 |
| | | | | | 2,374,763 |
| | | | | | 1,839,687 |
| | | | |
| Total assets | | $ | 35,937,567 |
| | | | | | $ | 32,906,533 |
| | | | | | $ | 44,755,509 |
| | | | | | $ | 40,738,404 |
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | |
| Checking deposits | | $ | 4,014,290 |
| | $ | 4,768 |
| | 0.47 | % | | $ | 3,553,477 |
| | $ | 3,253 |
| | 0.36 | % | | $ | 5,001,672 |
| | $ | 10,246 |
| | 0.82 | % | | $ | 5,270,855 |
| | $ | 14,255 |
| | 1.10 | % |
| Money market deposits | | 7,997,648 |
| | 11,828 |
| | 0.59 | % | | 7,548,835 |
| | 6,663 |
| | 0.35 | % | | 9,013,381 |
| | 22,248 |
| | 0.99 | % | | 8,080,848 |
| | 30,234 |
| | 1.52 | % |
| Savings deposits | | 2,423,312 |
| | 1,810 |
| | 0.30 | % | | 2,133,036 |
| | 1,160 |
| | 0.22 | % | | 2,076,270 |
| | 1,817 |
| | 0.35 | % | | 2,091,406 |
| | 2,227 |
| | 0.43 | % |
| Time deposits | | 5,974,793 |
| | 12,680 |
| | 0.84 | % | | 5,627,084 |
| | 9,973 |
| | 0.71 | % | | 10,264,007 |
| | 42,092 |
| | 1.65 | % | | 9,408,897 |
| | 45,289 |
| | 1.95 | % |
| Federal funds purchased and other short-term borrowings | | 29,661 |
| | 212 |
| | 2.84 | % | | 32,137 |
| | 212 |
| | 2.62 | % | | 59,978 |
| | 556 |
| | 3.73 | % | | 60,442 |
| | 616 |
| | 4.13 | % |
| Federal Home Loan Bank (“FHLB”) advances | | 322,973 |
| | 1,947 |
| | 2.39 | % | | 320,743 |
| | 1,361 |
| | 1.69 | % | |
| FHLB advances | | | 693,357 |
| | 4,166 |
| | 2.42 | % | | 338,027 |
| | 2,979 |
| | 3.57 | % |
Repurchase agreements (2) | | 50,000 |
| | 2,122 |
| | 16.84 | % | | 200,000 |
| | 2,319 |
| | 4.61 | % | | 332,417 |
| | 3,991 |
| | 4.83 | % | | 50,000 |
| | 3,492 |
| | 28.32 | % |
| Long-term debt | | 176,472 |
| | 1,388 |
| | 3.12 | % | | 196,170 |
| | 1,228 |
| | 2.49 | % | |
| Long-term debt and finance lease liabilities | | | 152,259 |
| | 1,367 |
| | 3.61 | % | | 152,360 |
| | 1,758 |
| | 4.68 | % |
| Total interest-bearing liabilities | | 20,989,149 |
| | 36,755 |
| | 0.69 | % | | 19,611,482 |
| | 26,169 |
| | 0.53 | % | | $ | 27,593,341 |
| | $ | 86,483 |
| | 1.26 | % | | $ | 25,452,835 |
| | $ | 100,850 |
| | 1.61 | % |
| Noninterest-bearing liabilities and stockholders’ equity: | Noninterest-bearing liabilities and stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | 10,655,860 |
| | | | | | 9,413,031 |
| | | | | | 11,117,710 |
| | | | | | 10,071,370 |
| | | | |
| Accrued expenses and other liabilities | | 536,351 |
| | | | | | 532,779 |
| | | | | | 1,022,453 |
| | | | | | 676,898 |
| | | | |
| Stockholders’ equity | | 3,756,207 |
| | | | | | 3,349,241 |
| | | | | | 5,022,005 |
| | | | | | 4,537,301 |
| | | | |
| Total liabilities and stockholders’ equity | | $ | 35,937,567 |
| | | | | | $ | 32,906,533 |
| | | | | | $ | 44,755,509 |
| | | | | | $ | 40,738,404 |
| | | | |
| Interest rate spread | | |
| | | | 3.25 | % | | | | | | 3.06 | % | | | | | | 3.00 | % | | | | | | 3.24 | % |
| Net interest income and net interest margin | | |
| | $ | 303,155 |
| | 3.52 | % | | | | $ | 254,148 |
| | 3.26 | % | | | | $ | 362,707 |
| | 3.44 | % | | | | $ | 362,461 |
| | 3.79 | % |
|
| |
| (2) | Average balances of resale and repurchase agreements arehave been reported net, pursuant to ASC 210-20-45, Accounting Standards Codification (“ASC”) 210-20-45-11, Balance Sheet OffsettingOffsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 2.54% and 2.80% for the first quarters of 2020 and 2019, respectively. The weighted-average interest rates of gross repurchase agreements were 4.10% and 5.01% for the first quarters of 2020 and 2019, respectively. |
| |
| (3) | Yields on tax-exempt securities are not presented on a tax-equivalent basis. |
| |
| (4) | Includes the amortization of net premiums on investmentdebt securities of $5.2$3.3 million and $5.4$3.0 million for the three months ended September 30, 2017first quarters of 2020 and 2016,2019, respectively. |
| |
| (5) | Average balance includesbalances include nonperforming loans.loans and loans held-for-sale. |
| |
| (6) | Interest income on loans includesLoans include the accretion of net deferred loan fees, accretion of ASC 310-30 discountsunearned fees and amortization of premiums, which totaled $6.5 million and $8.5$8.0 million for both the three months ended September 30, 2017first quarters of 2020 and 2016, respectively.2019. |
The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rates by asset and liability component for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| ($ in thousands) | | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Average Balance | | Interest | | Average Yield/ Rate(1) | | Average
Balance | | Interest | | Average Yield/ Rate(1) |
| ASSETS | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | |
| Interest-bearing cash and deposits with banks | | $ | 2,073,322 |
| | $ | 22,298 |
| | 1.44 | % | | $ | 1,768,252 |
| | $ | 10,245 |
| | 0.77 | % |
Resale agreements (2) | | 1,552,198 |
| | 25,222 |
| | 2.17 | % | | 1,672,993 |
| | 22,479 |
| | 1.79 | % |
Investment securities (3) | | 3,060,688 |
| | 43,936 |
| (4) | 1.92 | % | | 3,289,014 |
| | 37,433 |
| (4) | 1.52 | % |
Loans (5) | | 26,783,082 |
| | 872,039 |
| (6) | 4.35 | % | | 24,006,926 |
| | 763,189 |
| (6) | 4.25 | % |
| Restricted equity securities | | 73,651 |
| | 1,859 |
| | 3.37 | % | | 76,122 |
| | 2,008 |
| | 3.52 | % |
| Total interest-earning assets | | 33,542,941 |
| | 965,354 |
| | 3.85 | % | | 30,813,307 |
| | 835,354 |
| | 3.62 | % |
| Noninterest-earning assets: | | | | | | | | | | | | |
| Cash and due from banks | | 387,440 |
| | | | | | 349,721 |
| | | | |
| Allowance for loan losses | | (268,477 | ) | | | | | | (264,088 | ) | | | | |
| Other assets | | 1,628,638 |
| | | | | | 1,763,505 |
| | | | |
| Total assets | | $ | 35,290,542 |
| | | | | | $ | 32,662,445 |
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | |
| Checking deposits | | $ | 3,830,004 |
| | $ | 12,538 |
| | 0.44 | % | | $ | 3,445,996 |
| | $ | 9,058 |
| | 0.35 | % |
| Money market deposits | | 7,968,457 |
| | 30,409 |
| | 0.51 | % | | 7,519,261 |
| | 19,295 |
| | 0.34 | % |
| Saving deposits | | 2,334,752 |
| | 4,525 |
| | 0.26 | % | | 2,043,547 |
| | 3,207 |
| | 0.21 | % |
| Time deposits | | 5,873,217 |
| | 34,331 |
| | 0.78 | % | | 5,941,760 |
| | 29,148 |
| | 0.66 | % |
| Federal funds purchased and other short-term borrowings | | 40,772 |
| | 877 |
| | 2.88 | % | | 19,384 |
| | 390 |
| | 2.69 | % |
| FHLB advances | | 414,355 |
| | 5,738 |
| | 1.85 | % | | 400,850 |
| | 4,153 |
| | 1.38 | % |
Repurchase agreements (2) | | 170,330 |
| | 7,538 |
| | 5.92 | % | | 182,482 |
| | 6,441 |
| | 4.71 | % |
| Long-term debt | | 181,337 |
| | 4,030 |
| | 2.97 | % | | 201,060 |
| | 3,726 |
| | 2.48 | % |
| Total interest-bearing liabilities | | 20,813,224 |
| | 99,986 |
| | 0.64 | % | | 19,754,340 |
| | 75,418 |
| | 0.51 | % |
| Noninterest-bearing liabilities and stockholders’ equity: | | | | | | | | | | |
| Demand deposits | | 10,323,254 |
| | | | | | 9,107,051 |
| | | | |
| Accrued expenses and other liabilities | | 524,002 |
| | | | | | 534,569 |
| | | | |
| Stockholders’ equity | | 3,630,062 |
| | | | | | 3,266,485 |
| | | | |
| Total liabilities and stockholders’ equity | | $ | 35,290,542 |
| | | | | | $ | 32,662,445 |
| | | | |
| Interest rate spread | | | | | | 3.21 | % | | | | | | 3.11 | % |
| Net interest income and net interest margin | | | | $ | 865,368 |
| | 3.45 | % | | | | $ | 759,936 |
| | 3.29 | % |
| | | | | | | | | | | | | |
| |
(2) | Average balances of resale and repurchase agreements are reported net, pursuant to ASC 210-20-45, Balance Sheet Offsetting.
|
| |
(3) | Yields on tax-exempt securities are not presented on a tax-equivalent basis. |
| |
(4) | Includes the amortization of net premiums on investment securities of $16.3 million and $18.2 million for the nine months ended September 30, 2017 and 2016, respectively. |
| |
(5) | Average balance includes nonperforming loans. |
| |
(6) | Interest income on loans includes net deferred loan fees, accretion of ASC 310-30 discounts and amortization of premiums, which totaled $21.1 million and $39.7 million for the nine months ended September 30, 2017 and 2016, respectively. |
The following table summarizes the extent to which changes in (1) interest ratesrates; and changes in(2) average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into the changechanges attributable to variations in volume and the change attributable to variations in interest rates. Changes that are not solely due to either volume or rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Nonaccrual loans are included in average loans used to compute the table below:
| | | | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2017 vs. 2016 | | 2017 vs. 2016 | | 2020 vs. 2019 |
| | Total Change | | Changes Due to | | Total Change | | Changes Due to | | Total Change | | Changes Due to |
| | | Volume | | Yield/Rate | | Volume | | Yield/Rate | | | Volume | | Yield/Rate |
| Interest-earning assets: | | | | | | | | |
| | |
| | |
| | | | | | |
| Interest-bearing cash and deposits with banks | | $ | 6,462 |
| | $ | 1,988 |
| | $ | 4,474 |
| | $ | 12,053 |
| | $ | 2,018 |
| | $ | 10,035 |
| | $ | (4,302 | ) | | $ | 2,163 |
| | $ | (6,465 | ) |
| Resale agreements | | 67 |
| | (2,566 | ) | | 2,633 |
| | 2,743 |
| | (1,714 | ) | | 4,457 |
| | (2,281 | ) | | (1,045 | ) | | (1,236 | ) |
| Investment securities | | 1,440 |
| | (1,348 | ) | | 2,788 |
| | 6,503 |
| | (2,746 | ) | | 9,249 |
| |
| AFS debt securities | | | 4,394 |
| | 4,002 |
| | 392 |
|
Loans | | 51,623 |
| | 35,780 |
| | 15,843 |
| | 108,850 |
| | 89,417 |
| | 19,433 |
| | (11,665 | ) | | 35,890 |
| | (47,555 | ) |
| Restricted equity securities | | 1 |
| | 6 |
| | (5 | ) | | (149 | ) | | (65 | ) | | (84 | ) | | (267 | ) | | 42 |
| | (309 | ) |
| Total interest and dividend income | | $ | 59,593 |
| | $ | 33,860 |
| | $ | 25,733 |
| | $ | 130,000 |
| | $ | 86,910 |
| | $ | 43,090 |
| | $ | (14,121 | ) | | $ | 41,052 |
| | $ | (55,173 | ) |
| Interest-bearing liabilities: | | |
| | | | | | |
| | |
| | |
| | | | | | |
| Checking deposits | | $ | 1,515 |
| | $ | 464 |
| | $ | 1,051 |
| | $ | 3,480 |
| | $ | 1,083 |
| | $ | 2,397 |
| | $ | (4,009 | ) | | $ | (683 | ) | | $ | (3,326 | ) |
| Money market deposits | | 5,165 |
| | 420 |
| | 4,745 |
| | 11,114 |
| | 1,211 |
| | 9,903 |
| | (7,986 | ) | | 3,277 |
| | (11,263 | ) |
| Savings deposits | | 650 |
| | 175 |
| | 475 |
| | 1,318 |
| | 496 |
| | 822 |
| | (410 | ) | | (15 | ) | | (395 | ) |
| Time deposits | | 2,707 |
| | 654 |
| | 2,053 |
| | 5,183 |
| | (341 | ) | | 5,524 |
| | (3,197 | ) | | 4,052 |
| | (7,249 | ) |
| Federal funds purchased and other short-term borrowings | | — |
| | (17 | ) | | 17 |
| | 487 |
| | 458 |
| | 29 |
| | (60 | ) | | (4 | ) | | (56 | ) |
| FHLB advances | | 586 |
| | 10 |
| | 576 |
| | 1,585 |
| | 144 |
| | 1,441 |
| | 1,187 |
| | 2,395 |
| | (1,208 | ) |
| Repurchase agreements | | (197 | ) | | (2,762 | ) | | 2,565 |
| | 1,097 |
| | (452 | ) | | 1,549 |
| | 499 |
| | 5,529 |
| | (5,030 | ) |
| Long-term debt | | 160 |
| | (132 | ) | | 292 |
| | 304 |
| | (390 | ) | | 694 |
| | (391 | ) | | (1 | ) | | (390 | ) |
| Total interest expense | | $ | 10,586 |
| | $ | (1,188 | ) | | $ | 11,774 |
| | $ | 24,568 |
| | $ | 2,209 |
| | $ | 22,359 |
| | $ | (14,367 | ) | | $ | 14,550 |
| | $ | (28,917 | ) |
| Change in net interest income | | $ | 49,007 |
| | $ | 35,048 |
| | $ | 13,959 |
| | $ | 105,432 |
| | $ | 84,701 |
| | $ | 20,731 |
| | $ | 246 |
| | $ | 26,502 |
| | $ | (26,256 | ) |
|
(1) Includes nonaccrual loans.
Noninterest Income
Noninterest income increased $283 thousand or 1% to $49.6 million for the three months ended September 30, 2017, compared to $49.3 million for the same period in 2016. This increase was primarily due to a $3.8 million increase in net gain on sale of EWIS’s business and an $872 thousand increase in derivative fees and other income, partially offset by a $4.0 million decrease in other fees and operating income. Noninterest income increased $78.9 million or 59% to $213.0 million for the nine months ended September 30, 2017, compared to $134.1 million for the same period in 2016. This increase was comprised of a $71.2 million increase in net gains on sales of fixed assets, primarily related to the sale of a commercial property, and a $3.8 million increase in net gain on the sale of EWIS’s business, partially offset by a $4.5 million decrease in other fees and operating income. Noninterest income represented 14% and 20% of revenue for the three and nine months ended September 30, 2017, respectively, compared to 16% and 15%, respectively, for the same periods in 2016.
The following table presents the components of noninterest income for the periods indicated:first quarters of 2020 and 2019:
|
| | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Branch fees | | $ | 10,803 |
| | $ | 10,408 |
| | 4 | % | | $ | 31,799 |
| | $ | 30,983 |
| | 3 | % |
| Letters of credit fees and foreign exchange income | | 10,154 |
| | 10,908 |
| | (7 | )% | | 33,209 |
| | 31,404 |
| | 6 | % |
| Ancillary loan fees and other income | | 5,987 |
| | 6,135 |
| | (2 | )% | | 16,876 |
| | 13,997 |
| | 21 | % |
| Wealth management fees | | 3,615 |
| | 4,033 |
| | (10 | )% | | 11,682 |
| | 9,862 |
| | 18 | % |
| Derivative fees and other income | | 6,663 |
| | 5,791 |
| | 15 | % | | 12,934 |
| | 9,778 |
| | 32 | % |
| Net gains on sales of loans | | 2,361 |
| | 2,158 |
| | 9 | % | | 6,660 |
| | 6,965 |
| | (4 | )% |
| Net gains on sales of available-for-sale investment securities | | 1,539 |
| | 1,790 |
| | (14 | )% | | 6,733 |
| | 8,468 |
| | (20 | )% |
| Net gains on sales of fixed assets | | 1,043 |
| | 486 |
| | 115 | % | | 74,092 |
| | 2,916 |
| | NM |
|
| Net gain on sale of business | | 3,807 |
| | — |
| | NM |
| | 3,807 |
| | — |
| | NM |
|
| Other fees and operating income | | 3,652 |
| | 7,632 |
| | (52 | )% | | 15,255 |
| | 19,745 |
| | (23 | )% |
| Total noninterest income | | $ | 49,624 |
| | $ | 49,341 |
| | 1 | % | | $ | 213,047 |
| | $ | 134,118 |
| | 59 | % |
| |
|
| | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 | | % Change |
| Lending fees | | $ | 15,773 |
| | $ | 14,969 |
| | 5 | % |
| Deposit account fees | | 10,447 |
| | 9,468 |
| | 10 | % |
| Foreign exchange income | | 7,819 |
| | 5,015 |
| | 56 | % |
| Wealth management fees | | 5,357 |
| | 3,812 |
| | 41 | % |
| Interest rate contracts and other derivative income | | 7,073 |
| | 3,216 |
| | 120 | % |
| Net gains on sales of loans | | 950 |
| | 915 |
| | 4 | % |
| Net gains on sales of AFS debt securities | | 1,529 |
| | 1,561 |
| | (2 | %) |
| Other investment income | | 1,921 |
| | 1,202 |
| | 60 | % |
| Other income | | 3,180 |
| | 1,973 |
| | 61 | % |
| Total noninterest income | | $ | 54,049 |
| | $ | 42,131 |
| | 28 | % |
| |
NM Not Meaningful.
Noninterest income comprised 13% and 10% of total revenue for the first quarters of 2020 and 2019, respectively. First quarter of 2020 noninterest income was $54.0 million, an increase of $11.9 million or 28%, compared with $42.1 million for the same period in 2019. This increase was primarily due to increases in interest rate contracts and other derivative income, foreign exchange income, wealth management fees, and other income. The following discussion provides the composition of the major changes in noninterest income and the factors contributing to the changes.income.
Net gains on sales of fixed assets
Foreign exchange income increased $71.2by $2.8 million to $74.1 million for the nine months ended September 30, 2017, compared to $2.9 million for the same period in 2016. This increase was primarily due to the $71.7 million of pre-tax gain recognizedor 56% from the sale of the commercial property in California during the first quarter of 2017. In2019 to $7.8 million for the first quarter of 2017, East West Bank completed2020. The increase was primarily driven by the sale and leasebackfavorable revaluation of a commercial property in California for cash consideration of $120.6certain foreign currency-denominated balance sheet items, partially offset by losses on foreign exchange transactions.
Wealth management fees increased by $1.5 million and entered into a lease agreement for part of the property, consisting of a retail branch and office facilities. The total pre-tax profitor 41% from the sale was $85.4 million, of which $71.7 million was recognized in the first quarter of 2017, and $13.72019 to $5.4 million was deferred and recognized over the term of the lease agreement.
In the third quarter of 2017, the Company sold its insurance brokerage business, EWIS, for $4.3 million and recognized a pre-tax gain of $3.8 million.
Other fees and operating income decreased $4.0 million or 52% to $3.7 million for the three months ended September 30, 2017 from $7.6 million for the same period in 2016, and decreased $4.5 million or 23% to $15.3 million for the nine months ended September 30, 2017 from $19.7 million for the same period in 2016. The $4.0 million decrease for the three months ended September 30, 2017, compared to the same period in 2016,was mainly attributable to decreases in rental income, as a result of the commercial property sale during the first quarter of 2017,2020. The increase was driven by higher customer activity.
Interest rate contracts and decreases in dividendother derivative income from other investments. The $4.5increased $3.9 million decreaseor 120% to $7.1 million for the nine months ended September 30, 2017, compared to the same period in 2016, was largely due to a decrease in rental income as a result of sale of the commercial property during the first quarter of 2017.2020. This increase reflected strong customer demand for interest rate swaps in response to interest rate volatility, partially offset by a negative credit valuation adjustment related to interest rate derivative contracts, reflecting the year-over-year decline in long-term interest rates.
Other income increased by $1.2 million or 61% from the first quarter of 2019 to $3.2 million for the first quarter of 2020. The increase was driven by a gain recognized on the cash surrender value of bank owned life insurance policies.
Noninterest Expense
NoninterestThe following table presents the components of noninterest expense totaled $164.5 million for the three months ended September 30, 2017,first quarters of 2020 and 2019:
|
| | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 | | % Change |
| Compensation and employee benefits | | $ | 101,960 |
| | $ | 102,299 |
| | — | % |
| Occupancy and equipment expense | | 17,076 |
| | 17,318 |
| | (1 | %) |
| Deposit insurance premiums and regulatory assessments | | 3,427 |
| | 3,088 |
| | 11 | % |
| Legal expense | | 3,197 |
| | 2,225 |
| | 44 | % |
| Data processing | | 3,826 |
| | 3,157 |
| | 21 | % |
| Consulting expense | | 1,217 |
| | 2,059 |
| | (41 | )% |
| Deposit related expense | | 3,563 |
| | 3,504 |
| | 2 | % |
| Computer software expense | | 6,166 |
| | 6,078 |
| | 1 | % |
| Other operating expense | | 21,119 |
| | 22,289 |
| | (5 | )% |
| Amortization of tax credit and other investments | | 17,325 |
| | 24,905 |
| | (30 | )% |
| Total noninterest expense | | $ | 178,876 |
| | $ | 186,922 |
| | (4 | )% |
| |
First quarter 2020 noninterest expense was $178.9 million, a decrease of $6.0$8.0 million or 4%, compared to $170.5with $186.9 million for the same period in 2016.2019. This decrease was primarily due to an $8.8 million decreasedecreases in amortization of tax credit and other investments, and a $2.0other operating expense.
Other operating expense primarily consists of loan related expenses, marketing, telecommunications and postage, travel, charitable contributions, and other miscellaneous expense categories. The $1.2 million or 5% decrease in legal expense, partially offset by a $4.5 million increase in compensation and employee benefits. Noninterest expense totaled $486.7to $21.1 million for the nine months ended September 30, 2017, an increasefirst quarter of $20.7 million or 4%, compared to $466.0 million for the same period in 2016. This increase2020, was primarily due to a $24.8 million increasedecreases in compensationmarketing, other miscellaneous and employee benefits and a $5.3 million increase in amortization of tax credit and other investments,travel expenses, partially offset by an $8.3 million decrease in consulting expense and a $3.8 million decrease in legal expense.
The following table presents the various components of noninterest expense for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| ($ in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Compensation and employee benefits | | $ | 79,583 |
| | $ | 75,042 |
| | 6 | % | | $ | 244,930 |
| | $ | 220,166 |
| | 11 | % |
| Occupancy and equipment expense | | 16,635 |
| | 15,456 |
| | 8 | % | | 47,829 |
| | 45,619 |
| | 5 | % |
| Deposit insurance premiums and regulatory assessments | | 5,676 |
| | 6,450 |
| | (12 | )% | | 17,384 |
| | 17,341 |
| | — | % |
| Legal expense | | 3,316 |
| | 5,361 |
| | (38 | )% | | 8,930 |
| | 12,714 |
| | (30 | )% |
| Data processing | | 3,004 |
| | 2,729 |
| | 10 | % | | 9,009 |
| | 8,712 |
| | 3 | % |
| Consulting expense | | 4,087 |
| | 4,594 |
| | (11 | )% | | 10,775 |
| | 19,027 |
| | (43 | )% |
| Deposit related expenses | | 2,413 |
| | 3,082 |
| | (22 | )% | | 7,283 |
| | 7,675 |
| | (5 | )% |
| Computer software expense | | 4,393 |
| | 3,331 |
| | 32 | % | | 13,823 |
| | 9,267 |
| | 49 | % |
| Other operating expense | | 19,830 |
| | 19,814 |
| | — | % | | 55,357 |
| | 58,508 |
| | (5 | )% |
| Amortization of tax credit and other investments | | 23,827 |
| | 32,618 |
| | (27 | )% | | 66,059 |
| | 60,779 |
| | 9 | % |
| Amortization of core deposit intangibles | | 1,735 |
| | 2,023 |
| | (14 | )% | | 5,314 |
| | 6,177 |
| | (14 | )% |
| Total noninterest expense | | $ | 164,499 |
| | $ | 170,500 |
| | (4 | )% | | $ | 486,693 |
| | $ | 465,985 |
| | 4 | % |
| |
The following provides a discussion of the major changes in noninterest expense and the factors contributing to the changes.
Compensation and employee benefits increased $4.5 million or 6% to $79.6 million for the three months ended September 30, 2017, compared to $75.0 million for the same period in 2016, and increased $24.8 million or 11% to $244.9 million for the nine months ended September 30, 2017, compared to $220.2 million for the same period in 2016. The increases for the three and nine months ended September 30, 2017 were primarily attributable to an increase in headcount to support the Company’s growing business and risk management and compliance requirements, as well as additional severanceloan related expenses.
Amortization of tax credit and other investments decreased $8.8 million or 27% to $23.8 million for the three months ended September 30, 2017, compared to $32.6 million for the same period in 2016, and increased $5.3 million or 9% to $66.1 million for the nine months ended September 30, 2017, compared to $60.8 million for the same period in 2016. The decrease in the third quarter of 2017, compared with the prior year period, was mainly driven by higher amortization, which resulted from a renewable energy tax credit investment newly placed in service in the third quarter of 2016. Likewise, the increase in the first nine months of 2017, compared with the prior year period, was primarily driven by additional renewable energy and historical rehabilitation tax credit investments placed in service during the nine months ended September 30, 2017.
Legal expense decreased $2.0 million or 38% to $3.3 million for the three months ended September 30, 2017, compared to $5.4 million for the same period in 2016, and decreased $3.8$7.6 million or 30% to $8.9$17.3 million for the nine months ended September 30, 2017,first quarter of 2020, compared with the first quarter of 2019. In the first quarter of 2019, the Company fully wrote off the tax credit investments related to $12.7DC Solar and recorded a $7.0 million forimpairment charge, which was included in Amortization of tax credit and other investments. There was no such impairment in the same period in 2016. The decreases for the three and nine months ended September 30, 2017 were predominantly due to lower legal fees and litigation expense following the resolution of previously outstanding litigation.current period.
Consulting expense decreased $507 thousand or 11% to $4.1 million for the three months ended September 30, 2017, compared to $4.6 million for the same period in 2016, and decreased $8.3 million or 43% to $10.8 million for the nine months ended September 30, 2017, compared to $19.0 million for the same period in 2016. The decreases for both periods were primarily attributable to a decline in Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) related consulting expense.
Income Taxes
Income |
| | | | | | | | | | | |
|
| ($ in thousands) |
| Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
| Income before income taxes |
| $ | 164,010 |
|
| $ | 195,091 |
|
| (16 | )% |
| Income tax expense |
| $ | 19,186 |
|
| $ | 31,067 |
|
| (38 | %) |
| Effective tax rate |
| 11.7 | % |
| 15.9 | % |
|
|
|
|
The income tax expense was $42.6$19.2 million and $140.2 million for the three and nine months ended September 30, 2017, respectively, compared to $13.3 million and $90.1 million, respectively, for the same periods in 2016. The effective tax rate was 24.3%11.7% in the first quarter of 2020, compared with an income tax expense of $31.1 million and 25.0%an effective tax rate of 15.9% for the three and nine months ended September 30, 2017, respectively, compared to 10.8% and 21.9%, respectively, for the same periods in 2016.
The higher effective tax rates for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were mainly due to higher projected income before income taxes that was partially offset by increasesfirst quarter of 2019. A year-over-year increase in tax credits primarily generatedrecognized from investments in renewable energy historic rehabilitation and affordable housing partnership projects. Forsolar tax credit projects, and a decrease in income before income taxes contributed to the lower effective tax rate during the three and nine months ended September 30,March 31, 2020.
Impact of Investment in DC Solar Tax Credit Funds
The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. Investors in DC Solar funds, including the Company, received tax credits generated from these investments were $40.0for making renewable energy investments. Between 2014 and 2018, the Company had claimed energy tax credits of approximately $53.9 million, and $106.4 million, respectively, compared to $33.3 million and $83.7 million, respectively, for the same periods in 2016. In addition, the effective tax rates for the three and nine months ended September 30, 2017 were furtherpartially reduced by a deferred tax liability of $5.7 million related to the adoption50% tax basis reduction, for a net impact of Accounting Standards Update$48.2 million to the Consolidated Financial Statements. During the first quarter of 2019, the Company fully wrote off its tax credit investments related to DC Solar and recorded a $7.0 million other-than-temporary impairment (“ASU”OTTI”) 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, beginning January 1, 2017. As a resultcharge within Amortization of the adoption of this ASU, net excess tax benefits for restricted stock units of $151 thousandcredit and $4.6 million were recognized in Income tax expenseother investments on the Consolidated Statement of Income. The Company concluded at that time that there would be no material future cash flows related to these investments, in part because DC Solar has ceased operations and its bankruptcy case had been converted from Chapter 11 to Chapter 7 on March 22, 2019. During the second quarter of 2019, the Company concluded that a portion of the previously claimed tax credits would be recaptured, and reversed $33.6 million 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 tax expense. For additional information related to DC solar, refer to Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 14 — Income Taxes to the Consolidated Financial Statements of Income during the three and nine months ended September 30, 2017, respectively, which partially offset the higher effective tax rates for the same periods.
Management regularly reviewsin the Company’s tax positions2019 Form 10-K.
Tax Impact of CARES Act
On March 27, 2020, the President signed the CARES Act, a $2.2 trillion economic stimulus bill to help individuals and deferred tax assets. Factors considered in this analysis includebusinesses that have been negatively impacted by the Company’s ability to generate future taxable income, implement tax-planning strategies and utilize taxable income from prior carryback years (if such carryback is permitted underCOVID-19 outbreak. Among other provisions, 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. As of September 30, 2017 and December 31, 2016, the Company had net deferred tax assets of $142.0 million and $129.7 million, respectively.
A valuation allowance is established for deferred tax assets if, based on the weight of all positive evidence against all negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is used, as needed, to reduce the deferred tax assets to the amount that is more likely than not to be realized. Management has concluded that it is more likely than not that all of the benefits of the deferred tax assets will be realized, with the exception of the deferred tax assets related toCARES Act allows net operating losses, in certain states. Accordingly, a valuation allowance has been recorded for these amounts.which were modified with the Tax Cuts and Jobs Act of 2017, to be carried back five years. It also modifies the useful lives of qualified leasehold improvements, relaxing the excess loss limitations on pass-through and increasing the interest expense limitation. The Company believes that adequate provisionsdoes not expect the CARES Act to have been made for all incomea material tax uncertainties consistent with ASC 740-10, Income Taxes.impact on the Company’s Consolidated Financial Statements.
Operating Segment Results
The Company definesorganizes its operating segments based on its core strategy and has identifiedoperations into three reportable operating segments: Retail Banking,(1) Consumer and Business Banking; (2) Commercial BankingBanking; 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 15 — Business Segments to the Consolidated Financial Statements in this Form 10-Q.
The Retail BankingNet interest income before provision for credit losses of each segment focuses primarilyrepresents the difference between actual interest income earned on retail operations through the Bank’s branch network. The Commercial Banking segment, which includes commercial and industrial (“C&I”) and commercial real estate (“CRE”) operations, primarily generates commercial loans and interest expense paid on customer deposits of the segment, adjusted for funding charges for loans or funding credits for deposits through domestic commercial lending offices located in California, New York, Texas, Washington, Massachusetts, Nevada and Georgia, and foreign commercial lending offices located 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.
Changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods are generally restated for comparability when there are changes in management structure or reporting methodologies, unless it is deemed not practicable to do so.
The Company’s internal funds transfer pricing process is formulated with(“FTP”) process.During the goalthird quarter of encouraging loan and deposit growth that is consistent with2019, the Company’s overall profitability objectives, as well asCompany enhanced its FTP methodology related to providedeposits by setting a reasonable and consistent basisminimum floor rate for the measurementFTP credits for deposits in consideration of its business segmentsthe flattened and product net interest margins. The Company’s internal funds transfer pricing assumptions and methodologies are reviewed at least annuallyinverted yield curve. This methodology has been retrospectively applied to ensure that the process is reflectivesegment financial results for the first quarter of current market conditions. 2019.
Note 15 — Business Segments to the Consolidated Financial Statements describes the Company’s segment reporting methodology and the business activities of each business segment, and presents financial results of these business segments for the three and nine months ended September 30, 2017 and 2016.
The following tables present the selected segment information for the threefirst quarters of 2020 and nine months ended September 30, 2017 and 2016:2019:
| | | | ($ in thousands) | | Three Months Ended September 30, 2017 | | Three Months Ended March 31, 2020 |
| | Retail Banking | | Commercial Banking | | Other | | Total | | Consumer and Business Banking | | Commercial Banking | | Other | | Total |
| Net interest income | | $ | 147,457 |
| | $ | 138,153 |
| | $ | 17,545 |
| | $ | 303,155 |
| |
| Net interest income before provision for credit losses | | | $ | 152,591 |
| | $ | 183,501 |
| | $ | 26,615 |
| | $ | 362,707 |
|
| Provision for credit losses | | | 7,788 |
| | 66,082 |
| | — |
| | 73,870 |
|
| Noninterest income | | $ | 16,218 |
| | $ | 30,320 |
| | $ | 3,086 |
| | $ | 49,624 |
| | 16,402 |
| | 32,456 |
| | 5,191 |
| | 54,049 |
|
| Noninterest expense | | $ | 56,062 |
| | $ | 45,686 |
| | $ | 62,751 |
| | $ | 164,499 |
| | 86,964 |
| | 70,126 |
| | 21,786 |
| | 178,876 |
|
| Pre-tax income | | $ | 68,554 |
| | $ | 99,025 |
| | $ | 7,705 |
| | $ | 175,284 |
| |
| Segment income before income taxes | | | 74,241 |
| | 79,749 |
| | 10,020 |
| | 164,010 |
|
| Segment net income | | | $ | 53,195 |
| | $ | 57,131 |
| | $ | 34,498 |
| | $ | 144,824 |
|
| Average loans | | | $ | 11,269,489 |
| | $ | 23,884,479 |
| | $ | — |
| | $ | 35,153,968 |
|
| Average deposits | | | $ | 25,593,064 |
| | $ | 9,175,430 |
| | $ | 2,704,546 |
| | $ | 37,473,040 |
|
| | | | | |
| | | | | | | |
| ($ in thousands) | | Three Months Ended September 30, 2016 | | Three Months Ended March 31, 2019 |
| | Retail Banking | | Commercial Banking | | Other | | Total | | Consumer and Business Banking | | Commercial Banking | | Other | | Total |
| Net interest income | | $ | 106,633 |
| | $ | 131,340 |
| | $ | 16,175 |
| | $ | 254,148 |
| |
| Net interest income before provision for credit losses | | | $ | 185,059 |
| | $ | 152,708 |
| | $ | 24,694 |
| | $ | 362,461 |
|
| Provision for credit losses | | | 3,013 |
| | 19,566 |
| | — |
| | 22,579 |
|
| Noninterest income | | $ | 14,700 |
| | $ | 26,218 |
| | $ | 8,423 |
| | $ | 49,341 |
| | 13,772 |
| | 24,544 |
| | 3,815 |
| | 42,131 |
|
| Noninterest expense | | $ | 55,942 |
| | $ | 45,306 |
| | $ | 69,252 |
| | $ | 170,500 |
| | 87,906 |
| | 70,544 |
| | 28,472 |
| | 186,922 |
|
| Pre-tax income | | $ | 32,304 |
| | $ | 80,393 |
| | $ | 10,767 |
| | $ | 123,464 |
| |
| Segment income before income taxes | | | 107,912 |
| | 87,142 |
| | 37 |
| | 195,091 |
|
| Segment net income | | | $ | 77,146 |
| | $ | 62,334 |
| | $ | 24,544 |
| | $ | 164,024 |
|
| Average loans | | | $ | 10,351,770 |
| | $ | 22,063,015 |
| | $ | — |
| | $ | 32,414,785 |
|
| Average deposits | | | $ | 25,048,532 |
| | $ | 8,020,698 |
| | $ | 1,854,146 |
| | $ | 34,923,376 |
|
| | | | | |
|
| | | | | | | | | | | | | | | | |
| | | |
| ($ in thousands) | | Nine Months Ended September 30, 2017 |
| | Retail Banking | | Commercial Banking | | Other | | Total |
| Net interest income | | $ | 430,437 |
| | $ | 408,570 |
| | $ | 26,361 |
| | $ | 865,368 |
|
| Noninterest income | | $ | 43,767 |
| | $ | 82,645 |
| | $ | 86,635 |
| | $ | 213,047 |
|
| Noninterest expense | | $ | 181,811 |
| | $ | 149,510 |
| | $ | 155,372 |
| | $ | 486,693 |
|
| Pre-tax income | | $ | 204,601 |
| | $ | 284,195 |
| | $ | 72,177 |
| | $ | 560,973 |
|
| | | |
|
| | | | | | | | | | | | | | | | |
| | | |
| ($ in thousands) | | Nine Months Ended September 30, 2016 |
| | Retail Banking | | Commercial Banking | | Other | | Total |
| Net interest income | | $ | 329,120 |
| | $ | 389,559 |
| | $ | 41,257 |
| | $ | 759,936 |
|
| Noninterest income | | $ | 37,798 |
| | $ | 70,450 |
| | $ | 25,870 |
| | $ | 134,118 |
|
| Noninterest expense | | $ | 173,337 |
| | $ | 145,695 |
| | $ | 146,953 |
| | $ | 465,985 |
|
| Pre-tax income | | $ | 114,513 |
| | $ | 268,401 |
| | $ | 28,137 |
| | $ | 411,051 |
|
| | | |
RetailConsumer and Business Banking
The RetailConsumer and Business Banking segment reported pre-taxprimarily 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 through the Company’s branch network. Other products and services provided by this segment include wealth management, treasury management and foreign exchange services.
First quarter of 2020 net interest income before provision for credit losses for this segment was $152.6 million, a decrease of $68.6$32.5 million and $204.6or 18%, compared with $185.1 million for the threesame period in 2019. Year-over-year, interest income earned on loans increased by 1%, driven by average loan growth that was nearly entirely offset by a decrease in average loan yields; interest expense paid on deposits decreased by 19%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the loans FTP rate, and nine months ended September 30, 2017, respectively, compared to $32.3FTP credits received for deposits also decreased, reflecting a decline in the deposits FTP rate. Combined, these factors drove the 18% year-over-year decrease in segment net interest income before provision for credit losses, with the largest driver of the negative variance being lower FTP credits received for deposits.
Average loans for this segment were $11.27 billion, an increase of $917.7 million and $114.5 million, respectively,or 9% from $10.35 billion for the same periodsperiod in 2016. The increases in pre-tax income for this segment for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were2019, primarily driven by an increase in net interest income, partially offset by an increase in provision for credit losses.
Net interest incomesingle-family residential loans. Average deposits for this segment increased $40.8 million or 38% to $147.5 million for the three months ended September 30, 2017,were $25.59 billion, essentially flat compared to $106.6 millionwith average deposits of $25.05 billion for the same period in 2016. Net interest income increased $101.3 million or 31% to $430.4 million for the nine months ended September 30, 2017, compared to $329.1 million for the same period in 2016. The increases in net interest income for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were primarily due to the growth in core deposits for the segment, for which the segment receives interest income credit under the Bank’s internal funds transfer pricing system.2019.
Noninterest income for this segment increased $1.5 million or 10% to $16.2 million for the three months ended September 30, 2017, compared to $14.7 million for the same period in 2016. Noninterest income increased $6.0 million or 16% to $43.8 million for the nine months ended September 30, 2017, compared to $37.8 million for the same period in 2016. The increases in noninterest income for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were primarily attributable to increases in branch fees, derivative fees and other income, wealth management fees, and net gains on sales of loans. This was partially offset by a decrease in ancillary loan fees and other income.
Noninterest expense for this segment increased slightly by $120 thousand to $56.1 million for the three months ended September 30, 2017, compared to $55.9 million for the same period in 2016. Noninterest expense increased $8.5 million or 5% to $181.8 million for the nine months ended September 30, 2017, compared to $173.3 million for the same period in 2016. The increases in noninterest expense for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were primarily due to increases in compensation and employee benefits, occupancy and equipment expense, and data processing expense, partially offset by a decrease in consulting expense.
Commercial Banking
The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction and land lending, affordable housing loans and letters of credit, asset-based lending, and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity risk hedging.
The Commercial Banking segment reported pre-taxsegment net income of $99.0 million and $284.2$57.1 million for the three and nine months ended September 30, 2017, respectively,first quarter of 2020, compared to $80.4 million and $268.4 million, respectively, for the same periods in 2016. The increases in pre-tax income for this segment for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were attributable to increases in net interest income and noninterest income.
Net interest income for this segment increased $6.8 million or 5% to $138.2 million for the three months ended September 30, 2017, compared to $131.3with $62.3 million for the same period in 2016. Net2019. The $5.2 million or 8% decrease in segment net income reflected an increase in provision for credit losses, partially offset by increases in net interest income increased $19.0before provision for credit losses and noninterest income. First quarter 2020 provision for credit losses was $66.1 million, an increase of $46.5 million or 5% to $408.6 million for the nine months ended September 30, 2017,238%, compared to $389.6with $19.6 million for the same period in 2016. The increases in net interest income for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were2019. This increase was primarily due to the growthdeterioration in commercial loansmacroeconomic conditions and commercial core deposits, for whichoutlook as a result of the segment receivesCOVID-19 pandemic during the first quarter of 2020.
Net interest income before provision for credit under the Bank’s internal funds transfer pricing system.
Noninterest incomelosses for this segment increased $4.1was $183.5 million, an increase of $30.8 million or 16% to $30.3 million for the three months ended September 30, 2017,20% compared to $26.2with $152.7 million for the same period in 2016. Noninterest2019. Year-over-year, interest income increased $12.2earned on loans decreased by 5%, driven by a decrease in average loan yields, which more than offset income growth from average loan growth; interest expense paid on deposits decreased by 14%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the loans FTP rate, and FTP credits received for deposits also decreased, reflecting a decline in the deposits FTP rate. Combined, these factors drove the 20% year-over-year increase in segment net interest income before provision for credit losses, with the largest driver of the positive variance being lower FTP funding charges assessed for loans.
Average loans for this segment were $23.88 billion, an increase of $1.82 billion or 8% from $22.06 billion for the same period in 2019, primarily driven by growth in CRE loans. Average deposits for this segment were $9.18 billion, an increase of $1.16 billion or 14% from $8.02 billion for the same period in 2019, primarily driven by growth in time deposits and noninterest-bearing demand deposits.
First quarter 2020 noninterest income was $32.5 million, an increase of $8.0 million or 17% to $82.6 million for the nine months ended September 30, 2017,32%, compared to $70.5with $24.5 million for the same period in 2016. The2019. This increase was mainly attributable to increases in noninterest income for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were primarily due to a net gain on sale of the Company’s insurance brokerage business, EWIS, during the three and nine months ended September 30, 2017, and increases in branch fees, ancillary loan feesinterest rate contracts and other derivative income as well as letters of credit fees and foreign exchange income. The increase in interest rate contracts and other derivative income was driven by strong customer demand for interest rate swaps in response to manage risk associated with increased interest rate volatility, partially offset by a negative credit valuation adjustment of related derivative products. The increase in foreign exchange income was primarily driven by favorable revaluation of certain foreign currency-denominated balance sheet items and an increased volume of foreign exchange transactions.
Noninterest expense for this
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, increased slightly by $380 thousandwhich provides broad administrative support to $45.7the two core segments, namely the Consumer and Business Banking and the Commercial Banking segments.
The Other segment reported segment income before income taxes of $10.0 million and segment net income of $34.5 million for the three months ended September 30, 2017,first quarter of 2020, reflecting an income tax benefit of $24.5 million. The Other segment reported segment income before income taxes of $37 thousand and segment net income of $24.5 million for the first quarter of 2019, reflecting an income tax benefit of $24.5 million. The increase in segment income before income taxes was primarily driven by a decrease in noninterest expense. First quarter of 2020 noninterest expense was $21.8 million, a decrease of $6.7 million or 23%, compared to $45.3with $28.5 million for the same period in 2016. Noninterest expense increased $3.8 million or 3% to $149.5 million for the nine months ended September 30, 2017, compared to $145.7 million for the same period in 2016.2019. The increases in noninterest expense for the three and nine months ended September 30, 2017, compared to the same periods in 2016, were primarily due to increases in compensation and employee benefits, and consulting expense, partially offset by a decrease in legal expense.
Other
The Other segment includes the activities of the treasury function, which is responsible for 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 Other segment reported pre-tax income of $7.7 million and $72.2 million for the three and nine months ended September 30, 2017, respectively, compared to $10.8 million and $28.1 million, respectively, for the same periods in 2016. The decrease in pre-tax income for this segment for the three months ended September 30, 2017, compared to the same period in 2016, was primarily driven by decreases in noninterest income and internal funds transfer pricing credits, partially offset by a decrease in noninterest expense and an increase in net interest income. The increase in pre-tax income for this segment for the nine months ended September 30, 2017, compared to the same period in 2016, was primarily driven by an increase in noninterest income as the result of the net gain on sale of the commercial property, partially offset by a decrease in net interest income and an increase in noninterest expense.
Net interest income for this segment increased $1.4 million or 8% to $17.5 million for the three months ended September 30, 2017, compared to $16.2 million for the same period in 2016. Net interest income decreased $14.9 million or 36% to $26.4 million for the nine months ended September 30, 2017, compared to $41.3 million for the same period in 2016. The increase in net interest income for the three months ended September 30, 2017, compared to the same period in 2016, was primarily due to an increase in interest income from investments. The decrease in net interest income for the nine months ended September 30, 2017, compared to the same period in 2016, was due to increases in interest expense on borrowings and deposits.
Noninterest income for this segment decreased $5.3 million or 63% to $3.1 million for the three months ended September 30, 2017, compared to $8.4 million for the same period in 2016. Noninterest income increased $60.8 million or 235% to $86.6 million for the nine months ended September 30, 2017, compared to $25.9 million for the same period in 2016. The decrease in noninterest income for the three months ended September 30, 2017, compared to the same period in 2016, was primarily due to decreases in foreign exchange income arising from valuation changes associated with currency hedges and decreases in rental income. The increase in noninterest income for the nine months ended September 30, 2017, compared to the same period in 2016, was primarily due to the $71.7 million net gain on sale of the commercial property, as discussed in the Noninterest income section of MD&A.
Noninterest expense for this segment decreased $6.5 million or 9% to $62.8 million for the three months ended September 30, 2017, compared to $69.3 million for the same period in 2016. Noninterest expense increased $8.4 million or 6% to $155.4 million for the nine months ended September 30, 2017, compared to $147.0 million for the same period in 2016. The decrease in noninterest expense for the three months ended September 30, 2017, compared to the same period in 2016, was primarily attributable to a decrease of $8.8 million in amortization of tax credit and other investments, partially offsetwhich was elevated by increasesa nonrecurring pre-tax impairment charge of $2.5$7.0 million related to DC Solar during the first quarter of 2019.
The income tax expense or benefit in compensation and employee benefits. The increase in noninterestthe Other segment consists of the remaining unallocated income tax expense for the nine months ended September 30, 2017, comparedor benefit after allocating income tax expense to the same period in 2016, was primarily attributabletwo core segments. Income tax expense is allocated to increases of $5.3 million in amortization ofthe Consumer and Business Banking and the Commercial Banking segments by applying statutory income tax credit and other investments, and $6.5 million in compensation and employee benefits.rates to the segment income before income taxes.
Balance Sheet Analysis
The following istable presents a discussion of the significant changes between September 30, 2017March 31, 2020 and December 31, 2016.2019:
Selected Consolidated Balance SheetsSheet Data
| | | | | | | | | |
| | | | | | | Change | |
| ($ in thousands) | | | March 31, 2020 | | December 31, 2019 | | Change |
| | September 30, 2017 | | December 31, 2016 | | $ | | % | | | $ | | % |
| | | (Unaudited) | | | | | | | | (Unaudited) | | | | | | |
| ASSETS | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,736,749 |
| | $ | 1,878,503 |
| | $ | (141,754 | ) | | (8 | )% | | $ | 3,080,042 |
| | $ | 3,261,149 |
| | $ | (181,107 | ) | | (6 | )% |
| Interest-bearing deposits with banks | | 404,946 |
| | 323,148 |
| | 81,798 |
| | 25 | % | | 293,509 |
| | 196,161 |
| | 97,348 |
| | 50 | % |
| Resale agreements | | 1,250,000 |
| | 2,000,000 |
| | (750,000 | ) | | (38 | )% | | 860,000 |
| | 860,000 |
| | — |
| | — | % |
| Available-for-sale investment securities, at fair value | | 2,956,776 |
| | 3,335,795 |
| | (379,019 | ) | | (11 | )% | |
| Held-to-maturity investment security, at cost | | — |
| | 143,971 |
| | (143,971 | ) | | (100 | )% | |
| AFS debt securities, at fair value (amortized cost of $3,660,413 in 2020) | | | 3,695,943 |
| | 3,317,214 |
| | 378,729 |
| | 11 | % |
| Restricted equity securities, at cost | | 73,322 |
| | 72,775 |
| | 547 |
| | 1 | % | | 78,745 |
| | 78,580 |
| | 165 |
| | 0 | % |
| Loans held-for-sale | | 178 |
| | 23,076 |
| | (22,898 | ) | | (99 | )% | | 1,594 |
| | 434 |
| | 1,160 |
| | 267 | % |
| Loans held-for-investment (net of allowance for loan losses of $285,926 in 2017 and $260,520 in 2016) | | 28,239,431 |
| | 25,242,619 |
| | 2,996,812 |
| | 12 | % | |
| Loans held-for-investment (net of allowance for loan losses of $557,003 in 2020 and $358,287 in 2019) | | | 35,336,390 |
| | 34,420,252 |
| | 916,138 |
| | 3 | % |
| Investments in qualified affordable housing partnerships, net | | 178,344 |
| | 183,917 |
| | (5,573 | ) | | (3 | )% | | 198,653 |
| | 207,037 |
| | (8,384 | ) | | (4 | )% |
| Investments in tax credit and other investments, net | | 203,758 |
| | 173,280 |
| | 30,478 |
| | 18 | % | | 268,330 |
| | 254,140 |
| | 14,190 |
| | 6 | % |
| Premises and equipment | | 131,311 |
| | 159,923 |
| | (28,612 | ) | | (18 | )% | | 115,393 |
| | 118,364 |
| | (2,971 | ) | | (3 | )% |
| Goodwill | | 469,433 |
| | 469,433 |
| | — |
| | — | % | | 465,697 |
| | 465,697 |
| | — |
| | — | % |
| Operating lease right-of-use assets | | | 101,381 |
| | 99,973 |
| | 1,408 |
| | 1 | % |
| Other assets | | 663,718 |
| | 782,400 |
| | (118,682 | ) | | (15 | )% | | 1,452,868 |
| | 917,095 |
| | 535,773 |
| | 58 | % |
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 1,519,126 |
| | 4 | % | | $ | 45,948,545 |
| | $ | 44,196,096 |
| | $ | 1,752,449 |
| | 4 | % |
| LIABILITIES | | |
| | |
| | | |
|
| | | | | | | | |
| Customer deposits | | $ | 31,311,662 |
| | $ | 29,890,983 |
| | $ | 1,420,679 |
| | 5 | % | |
| Noninterest-bearing | | | $ | 11,833,397 |
| | $ | 11,080,036 |
| | $ | 753,361 |
| | 7 | % |
| Interest-bearing | | | 26,853,561 |
| | 26,244,223 |
| | 609,338 |
| | 2 | % |
| Total deposits | | | 38,686,958 |
| | 37,324,259 |
| | 1,362,699 |
| | 4 | % |
| Short-term borrowings | | 24,813 |
| | 60,050 |
| | (35,237 | ) | | (59 | )% | | 66,924 |
| | 28,669 |
| | 38,255 |
| | 133 | % |
| FHLB advances | | 323,323 |
| | 321,643 |
| | 1,680 |
| | 1 | % | | 646,336 |
| | 745,915 |
| | (99,579 | ) | | (13 | )% |
| Repurchase agreements | | 50,000 |
| | 350,000 |
| | (300,000 | ) | | (86 | )% | | 450,000 |
| | 200,000 |
| | 250,000 |
| | 125 | % |
| Long-term debt | | 176,513 |
| | 186,327 |
| | (9,814 | ) | | (5 | )% | |
| Long-term debt and finance lease liabilities | | | 152,162 |
| | 152,270 |
| | (108 | ) | | (0)% |
|
| Operating lease liabilities | | | 109,356 |
| | 108,083 |
| | 1,273 |
| | 1 | % |
| Accrued expenses and other liabilities | | 639,759 |
| | 552,096 |
| | 87,663 |
| | 16 | % | | 933,824 |
| | 619,283 |
| | 314,541 |
| | 51 | % |
| Total liabilities | | 32,526,070 |
| | 31,361,099 |
| | 1,164,971 |
| | 4 | % | | 41,045,560 |
| | 39,178,479 |
| | 1,867,081 |
| | 5 | % |
| STOCKHOLDERS’ EQUITY | | 3,781,896 |
| | 3,427,741 |
| | 354,155 |
| | 10 | % | | 4,902,985 |
| | 5,017,617 |
| | (114,632 | ) | | (2 | )% |
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 1,519,126 |
| | 4 | % | | $ | 45,948,545 |
| | $ | 44,196,096 |
| | $ | 1,752,449 |
| | 4 | % |
| | | | | | | |
As of September 30, 2017,March 31, 2020, total assets were $36.31$45.95 billion, an increase of $1.52$1.75 billion or 4% from December 31, 2016.2019, primarily due to loan growth and an increase in AFS debt securities. The predominant area of assetloan growth was in loans, which was driven by strong increases across all of the Company’s commercial and retail lines of business. These increases were partially offset by maturities of resale agreements, and decreases in investment securities, cash and cash equivalents, and other assets.C&I, CRE, as well as single-family residential loans.
As of September 30, 2017,March 31, 2020, total liabilities were $32.53$41.05 billion, an increase of $1.16$1.87 billion or 4%5% from December 31, 2016, primarily due to increases in customer deposits, reflecting the continued strong growth from existing and new customers. This increase was partially offset by a decrease in repurchase agreements2019, primarily due to an increase in resale agreements that were eligible for netting againstdeposits, which was largely driven by increases in noninterest-bearing demand and money market accounts.
As of March 31, 2020, total stockholders’ equity was $4.90 billion, a decrease of $114.6 million or 2% from December 31, 2019. This decrease was primarily driven by stock repurchase agreements under ASC 210-20-45, Balance Sheet Offsetting.
Stockholders’ equity growth benefited primarily from $420.7 million in net income,transactions and a cumulative-effect adjustment to retained earnings due to the adoption of ASU 2016-13, partially offset by $87.6 millionfirst quarter of cash dividends on common stock.2020 net income.
Investment
Debt Securities
The Company aims to maintain an investmentmaintains a debt securities portfolio that consists of high quality and liquid securities with relatively short durations to minimize overall interest rate and liquidity risks. The Company’s available-for-sale investmentAFS debt securities provide:
interest income for earnings and yield enhancement;
availability for funding needs arising during the normal course of business;
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 balances and mix;conditions; and
collateral to support pledging agreements as required and/or to enhance the Company’s borrowing capacity.
Held-to-maturity investment securityAvailable-for-Sale Debt Securities
During the first quarter of 2016, the Company securitized $201.7 million of multifamily residential loans and retained $160.1 million of the senior tranche of the resulting securities from the securitization as held-to-maturity, which is carried at amortized cost. The held-to-maturity investment security is a non-agency commercial mortgage-backed security maturing on April 25, 2046. During the third quarter of 2017, the Company transferred this non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale. The transfer reflects the Company’s intent to sell the security under active liquidity management.
Available-for-sale investment securities
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the Company’s available-for-sale investmentAFS debt securities portfolio was primarily comprisedconsisted of mortgage-backed securities and debt securities issued by U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities,government-sponsored enterprises, foreign bonds, collateralized loan obligations (“CLOs”), and U.S. Treasury securities and foreign bonds. Investmentsecurities. Debt securities classified as available-for-saleAFS are carried at their estimated fair value with the corresponding changes in fair value recorded in Accumulated other comprehensive loss, net of tax, as a component of Stockholders’ equity on the Consolidated Balance Sheets.Sheet.
The following table presents the breakout of the amortized cost and fair value of available-for-sale investmentAFS debt securities by major categories as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Available-for-sale investment securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 533,035 |
| | $ | 526,332 |
| | $ | 730,287 |
| | $ | 720,479 |
|
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 191,727 |
| | 189,185 |
| | 277,891 |
| | 274,866 |
|
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities | | 1,475,969 |
| | 1,466,106 |
| | 1,539,044 |
| | 1,525,546 |
|
| Municipal securities | | 116,798 |
| | 117,242 |
| | 148,302 |
| | 147,654 |
|
| Non-agency residential mortgage-backed securities | | 9,680 |
| | 9,694 |
| | 11,592 |
| | 11,477 |
|
| Corporate debt securities | | 12,655 |
| | 11,942 |
| | 232,381 |
| | 231,550 |
|
| Foreign bonds | | 505,395 |
| | 489,140 |
| | 405,443 |
| | 383,894 |
|
Other securities (1) | | 147,504 |
| | 147,135 |
| | 40,501 |
| | 40,329 |
|
| Total available-for-sale investment securities | | $ | 2,992,763 |
| | $ | 2,956,776 |
| | $ | 3,385,441 |
| | $ | 3,335,795 |
|
| |
| |
(1) | During the third quarter of 2017, the Company transferred a non-agency commercial mortgage-backed security with a net carrying amount of $115.6 million from held-to-maturity to available-for-sale. |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| AFS debt securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 50,606 |
| | $ | 51,428 |
| | $ | 177,215 |
| | $ | 176,422 |
|
| U.S. government agency and U.S. government-sponsored enterprise debt securities | | 511,176 |
| | 518,408 |
| | 584,275 |
| | 581,245 |
|
| U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities | | 1,993,653 |
| | 2,050,315 |
| | 1,598,261 |
| | 1,607,368 |
|
| Municipal securities | | 300,551 |
| | 309,626 |
| | 101,621 |
| | 102,302 |
|
| Non-agency mortgage-backed securities | | 149,955 |
| | 149,248 |
| | 133,439 |
| | 135,098 |
|
| Corporate debt securities | | 11,250 |
| | 10,963 |
| | 11,250 |
| | 11,149 |
|
Foreign bonds (1) | | 283,822 |
| | 284,521 |
| | 354,481 |
| | 354,172 |
|
| Asset-backed securities | | 65,400 |
| | 61,556 |
| | 66,106 |
| | 64,752 |
|
| CLOs | | 294,000 |
| | 259,878 |
| | 294,000 |
| | 284,706 |
|
| Total AFS debt securities | | $ | 3,660,413 |
| | $ | 3,695,943 |
| | $ | 3,320,648 |
| | $ | 3,317,214 |
|
| |
(1) There were no securities of a single non-governmental agency issuer that exceeded 10% of stockholder’s equity as of both March 31, 2020 and December 31, 2019.
The fair value of the available-for-sale investmentAFS debt securities totaled $2.96$3.70 billion as of September 30, 2017,March 31, 2020, compared to $3.34with $3.32 billion as of December 31, 2016.2019. The decrease of $379.0$378.7 million or 11% increase was primarily reflectedattributable to the salespurchases of corporate debt securities, U.S. Treasury securities, U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise mortgage-backed securities, and municipal securities; partially offset by the sales, repayments, and paydowns, maturities and calls of U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise mortgage-backed securities, U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise debt securities, and U.S. Treasury securities. The decrease was partially offset by purchases of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, foreign bonds, U.S. government agency and U.S. government sponsored enterpriseU.S treasury securities.
The Company’s debt securities U.S. Treasuryportfolio had an effective duration of 2.7 years as of March 31, 2020, which shortened from 3.1 years as of December 31, 2019, primarily due to the decline in interest rates. In addition, the spread between central government-guaranteed securities and municipal securities;private issuers widened, as relatively higher risk premiums were paid for securities issued by private entities. As of March 31, 2020 and December 31, 2019, 96% and 97%, respectively, of the transfercarrying value of a non-agency commercial mortgage-backed security from held-to-maturity security.the Company’s debt securities portfolio was rated “AA-” or “Aa3” or higher by nationally recognized credit rating agencies. Credit ratings of BBB- or higher by Standard and Poor’s (“S&P”) and Fitch Ratings (“Fitch”), or Baa3 or higher by Moody’s Investors Service (“Moody’s”), are considered investment grade.
The Company’s available-for-sale investmentAFS debt securities are carried at fair value with changesnoncredit-related unrealized gains and losses, net of tax, reported in fair value reflected in Other comprehensive income (loss) unlesson the Consolidated Statement of Comprehensive Income. If a security is deemedcredit loss exists, the Company records impairment related to be other-than-temporarily impaired. Ascredit losses through allowance for credit losses with a corresponding Provision for credit losses on the Consolidated Statement of September 30, 2017, the Company’sIncome. Pre-tax net unrealized gains on AFS debt securities were $35.5 million as of March 31, 2020, which improved from net unrealized losses on available-for-sale investment securities were $36.0 million, compared to $49.6of $3.4 million as of December 31, 2016. The favorable2019. This change in the net unrealized losses was primarily attributeddue to the flatteningdecrease in the yield curve with long-term interest rates falling. during the period, partially offset by increased spreads.
Gross unrealized losses on available-for-sale investmentAFS debt securities totaled $42.3$48.8 million as of September 30, 2017,March 31, 2020, compared to $56.3with $23.2 million as of December 31, 2016. 2019. Of the securities with gross unrealized losses, substantially all were rated investment grade as of both March 31, 2020 and December 31, 2019, as classified primarily 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 acrossall major security types were primarily attributable to widened spreads arising from the negative outlook and uncertainty as a result of the COVID-19 pandemic, and yield curve movement. 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 the credit performance deteriorates from the impact of the COVID-19 pandemic. The debt securities issued by the U.S. Treasury and U.S. government agencies are backed by the full faith and credit of the U.S. government, and the U.S. government-sponsored debt securities have the implicit guarantee of the U.S. government. Further, the Company’s portfolio of debt securities issued by supranational organizations are AAA-rated and have strong financial profiles. Based on current assessments and economic outcome expectations, the Company believes that the private entity issuers of CLOs, corporate bonds and asset-backed securities continue to have strong credit profiles or have issued securities with strong credit profiles, and that the securities issued by municipalities continue to have strong credit profiles.
As of September 30, 2017,March 31, 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 wasThe Company assesses individual securities for credit losses for each reporting period. There were no credit losses recognized in earnings for the threefirst quarter of 2020, and nine months ended September 30, 2017no OTTI credit losses recognized in earnings for the first quarter of 2019. For additional information of the Company’s accounting policies, valuation and 2016. For a complete discussion and disclosure,composition, see Note 43 — Fair Value Measurement and Fair Value of Financial Instruments, and Note 65 — Securities to the Consolidated Financial Statements.Statements in this Form 10-Q.
As of September 30, 2017 and December 31, 2016, available-for-sale investment securities with a fair value of $584.9 million and $767.4 million, respectively, were pledged to secure public deposits, repurchase agreements, the Federal Reserve Bank’s discount window and for other purposes required or permitted by law.
The following table presents the weighted averageweighted-average yields and contractual maturity distributions,distribution, excluding periodic principal payments, of the Company’s investmentdebt securities as of the periods indicated.March 31, 2020 and December 31, 2019. Actual maturities of mortgage-backed securities can differ from contractual maturities as the borrowers have the right to prepay the obligations.obligations with or without prepayment penalties. In addition, factors such factors as prepayments and interest rate changesrates may affect the yields on the carrying valuevalues of mortgage-backed securities.
| | | | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
| | Amortized
Cost | | Fair Value | | Yield (1) | | Amortized
Cost | | Fair Value | | Yield (1) | | Amortized
Cost | | Fair Value | | Yield (1) | | Amortized
Cost | | Fair Value | | Yield (1) |
| Available-for-sale investment securities: | | | | | | | | | | | | | |
| AFS debt securities: | | | | | | | | | | | | | |
| U.S. Treasury securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | $ | 150,431 |
| | $ | 150,134 |
| | 0.96 | % | | $ | 100,707 |
| | $ | 100,653 |
| | 0.65 | % | |
| Maturing after one year through five years | | 382,604 |
| | 376,198 |
| | 1.35 | % | | 376,580 |
| | 371,917 |
| | 1.27 | % | | $ | 50,606 |
| | $ | 51,428 |
| | 1.26 | % | | $ | 177,215 |
| | $ | 176,422 |
| | 1.33 | % |
| Maturing after five years through ten years | | — |
| | — |
| | — | % | | 253,000 |
| | 247,909 |
| | 1.59 | % | |
| Total | | 533,035 |
| | 526,332 |
| | 1.24 | % | | 730,287 |
| | 720,479 |
| | 1.29 | % | |
| U.S. government agency and U.S. government sponsored enterprise debt securities: | | | | | | | | | | | | | |
| U.S. government agency and U.S. government- sponsored enterprise debt securities: | | | | | | | | | | | | | |
| Maturing in one year or less | | 24,999 |
| | 24,916 |
| | 1.02 | % | | 118,966 |
| | 118,982 |
| | 0.94 | % | | 288,314 |
| | 289,634 |
| | 2.86 | % | | 328,628 |
| | 326,341 |
| | 2.62 | % |
| Maturing after one year through five years | | 9,732 |
| | 9,774 |
| | 2.37 | % | | 52,622 |
| | 52,630 |
| | 1.38 | % | | 161,997 |
| | 165,790 |
| | 2.69 | % | | 158,490 |
| | 156,431 |
| | 2.69 | % |
| Maturing after five years through ten years | | 103,394 |
| | 101,030 |
| | 2.19 | % | | 81,829 |
| | 78,977 |
| | 2.07 | % | | 27,469 |
| | 28,310 |
| | 2.51 | % | | 44,908 |
| | 45,189 |
| | 2.38 | % |
| Maturing after ten years | | 53,602 |
| | 53,465 |
| | 2.58 | % | | 24,474 |
| | 24,277 |
| | 2.50 | % | | 33,396 |
| | 34,674 |
| | 2.87 | % | | 52,249 |
| | 53,284 |
| | 2.78 | % |
| Total | | 191,727 |
| | 189,185 |
| | 2.15 | % | | 277,891 |
| | 274,866 |
| | 1.49 | % | | 511,176 |
| | 518,408 |
| | 2.79 | % | | 584,275 |
| | 581,245 |
| | 2.63 | % |
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | | | | | | | |
| U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities: | | | | | | | | | | | | | |
| Maturing in one year or less | | | 67 |
| | 67 |
| | 2.65 | % | | 112 |
| | 113 |
| | 2.72 | % |
| Maturing after one year through five years | | 52,312 |
| | 52,055 |
| | 2.33 | % | | 47,278 |
| | 46,950 |
| | 1.74 | % | | 21,784 |
| | 22,664 |
| | 2.57 | % | | 23,144 |
| | 23,289 |
| | 2.29 | % |
| Maturing after five years through ten years | | 66,351 |
| | 65,534 |
| | 2.45 | % | | 79,379 |
| | 78,903 |
| | 3.11 | % | | 100,151 |
| | 104,356 |
| | 2.70 | % | | 85,970 |
| | 88,261 |
| | 2.72 | % |
| Maturing after ten years | | 1,357,306 |
| | 1,348,517 |
| | 2.20 | % | | 1,412,387 |
| | 1,399,693 |
| | 2.34 | % | | 1,871,651 |
| | 1,923,228 |
| | 2.57 | % | | 1,489,035 |
| | 1,495,705 |
| | 2.66 | % |
| Total | | 1,475,969 |
| | 1,466,106 |
| | 2.22 | % | | 1,539,044 |
| | 1,525,546 |
| | 2.36 | % | | 1,993,653 |
| | 2,050,315 |
| | 2.58 | % | | 1,598,261 |
| | 1,607,368 |
| | 2.66 | % |
Municipal securities (2): | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | 12,987 |
| | 13,058 |
| | 3.56 | % | | 6,404 |
| | 6,317 |
| | 2.56 | % | | 61,375 |
| | 61,670 |
| | 2.74 | % | | 37,136 |
| | 37,291 |
| | 2.67 | % |
| Maturing after one year through five years | | 85,244 |
| | 85,767 |
| | 2.29 | % | | 127,178 |
| | 127,080 |
| | 2.31 | % | | 15,569 |
| | 15,803 |
| | 2.50 | % | | 18,699 |
| | 18,948 |
| | 2.52 | % |
| Maturing after five years through ten years | | 6,274 |
| | 6,235 |
| | 2.50 | % | | 9,785 |
| | 9,515 |
| | 2.50 | % | | 112,946 |
| | 119,391 |
| | 2.87 | % | | 12,151 |
| | 12,451 |
| | 3.15 | % |
| Maturing after ten years | | 12,293 |
| | 12,182 |
| | 4.31 | % | | 4,935 |
| | 4,742 |
| | 3.95 | % | | 110,661 |
| | 112,762 |
| | 3.44 | % | | 33,635 |
| | 33,612 |
| | 2.63 | % |
| Total | | 116,798 |
| | 117,242 |
| | 2.67 | % | | 148,302 |
| | 147,654 |
| | 2.40 | % | | 300,551 |
| | 309,626 |
| | 3.04 | % | | 101,621 |
| | 102,302 |
| | 2.69 | % |
| Non-agency residential mortgage-backed securities: | | | | | | | | | | | | | |
| Non-agency mortgage-backed securities: | | | | | | | | | | | | | |
| Maturing in one year or less | | | 7,920 |
| | 7,859 |
| | 2.82 | % | | — |
| | — |
| | — | % |
| Maturing after one year through five years | | | — |
| | — |
| | — | % | | 7,920 |
| | 7,914 |
| | 3.78 | % |
| Maturing after ten years | | 9,680 |
| | 9,694 |
| | 2.72 | % | | 11,592 |
| | 11,477 |
| | 2.52 | % | | 142,035 |
| | 141,389 |
| | 3.13 | % | | 125,519 |
| | 127,184 |
| | 3.21 | % |
| Total | | | 149,955 |
| | 149,248 |
| | 3.11 | % | | 133,439 |
| | 135,098 |
| | 3.24 | % |
| Corporate debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | 12,655 |
| | 11,942 |
| | 2.19 | % | | 12,671 |
| | 11,347 |
| | 1.80 | % | | 1,250 |
| | 1,250 |
| | 5.01 | % | | 1,250 |
| | 1,262 |
| | 5.20 | % |
| Maturing after five years through ten years | | — |
| | — |
| | — | % | | 40,479 |
| | 40,500 |
| | 2.40 | % | |
| Maturing after ten years | | — |
| | — |
| | — | % | | 179,231 |
| | 179,703 |
| | 2.26 | % | |
| Maturing after one year through five years | | | 10,000 |
| | 9,713 |
| | 4.00 | % | | 10,000 |
| | 9,887 |
| | 4.00 | % |
| Total | | 12,655 |
| | 11,942 |
| | 2.19 | % | | 232,381 |
| | 231,550 |
| | 2.26 | % | | 11,250 |
| | 10,963 |
| | 4.11 | % | | 11,250 |
| | 11,149 |
| | 4.13 | % |
| Foreign bonds: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | 405,395 |
| | 389,876 |
| | 2.13 | % | | 304,427 |
| | 287,695 |
| | 2.09 | % | | 229,466 |
| | 229,981 |
| | 2.04 | % | | 354,481 |
| | 354,172 |
| | 2.22 | % |
| Maturing after one year through five years | | 100,000 |
| | 99,264 |
| | 2.70 | % | | 101,016 |
| | 96,199 |
| | 2.11 | % | | 54,356 |
| | 54,540 |
| | 2.29 | % | | — |
| | — |
| | — | % |
| Total | | 505,395 |
| | 489,140 |
| | 2.24 | % | | 405,443 |
| | 383,894 |
| | 2.09 | % | | 283,822 |
| | 284,521 |
| | 2.08 | % | | 354,481 |
| | 354,172 |
| | 2.22 | % |
| Other securities: | | | | | | | | | | | | | |
| Maturing in one year or less | | 31,790 |
| | 31,417 |
| | — | % | | 40,501 |
| | 40,329 |
| | 2.72 | % | |
| Maturing after five years through ten years | | 99 |
| | 103 |
| | 1.43 | % | | — |
| | — |
| | — | % | |
| Asset-backed securities: | | | | | | | | | | | | | |
| Maturing after ten years | | 115,615 |
| | 115,615 |
| | 3.78 | % | | — |
| | — |
| | — | % | | 65,400 |
| | 61,556 |
| | 2.16 | % | | 66,106 |
| | 64,752 |
| | 2.65 | % |
| Total | | 147,504 |
| | 147,135 |
| | 2.96 | % | | 40,501 |
| | 40,329 |
| | 2.72 | % | |
| CLOs: | | | | | | | | | | | | | |
| Maturing after ten years | | | 294,000 |
| | 259,878 |
| | 3.07 | % | | 294,000 |
| | 284,706 |
| | 3.08 | % |
| Total AFS debt securities | | | $ | 3,660,413 |
| | $ | 3,695,943 |
| | 2.65 | % | | $ | 3,320,648 |
| | $ | 3,317,214 |
| | 2.60 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total: | | | | | | | | | | | | | |
| Total aggregated by maturities: | | | | | | | | | | | | | |
| Maturing in one year or less | | 638,257 |
| | 621,343 |
| | | | 583,676 |
| | 565,323 |
| | | | $ | 588,392 |
| | $ | 590,461 |
| | 2.53 | % | | $ | 721,607 |
| | $ | 719,179 |
| | 2.43 | % |
| Maturing after one year through five years | | 629,892 |
| | 623,058 |
| | | | 704,674 |
| | 694,776 |
| | | | 314,312 |
| | 319,938 |
| | 2.42 | % | | 395,468 |
| | 392,891 |
| | 2.11 | % |
| Maturing after five years through ten years | | 176,118 |
| | 172,902 |
| | | | 464,472 |
| | 455,804 |
| | | | 240,566 |
| | 252,057 |
| | 2.76 | % | | 143,029 |
| | 145,901 |
| | 2.65 | % |
| Maturing after ten years | | 1,548,496 |
| | 1,539,473 |
| | | | 1,632,619 |
| | 1,619,892 |
| | | | 2,517,143 |
| | 2,533,487 |
| | 2.69 | % | | 2,060,544 |
| | 2,059,243 |
| | 2.76 | % |
| Total available-for-sale investment securities | | $ | 2,992,763 |
| | $ | 2,956,776 |
| | | | $ | 3,385,441 |
| | $ | 3,335,795 |
| | | |
| Total AFS debt securities | | | $ | 3,660,413 |
| | $ | 3,695,943 |
| | 2.65 | % | | $ | 3,320,648 |
| | $ | 3,317,214 |
| | 2.60 | % |
| | | | | | | | | | | | | | |
| Held-to-maturity investment security: | | | | | | | | | | | | | |
| Non-agency commercial mortgage-backed security: | | | | | | | | | | | | | |
| Maturing after ten years | | $ | — |
| | $ | — |
| | — | % | | $ | 143,971 |
| | $ | 144,593 |
| | 3.91 | % | |
| | |
| |
| (1) | Weighted averageWeighted-average yields are computed based on amortized cost balances. |
| |
| (2) | Yields on tax-exempt securities are not presented on a tax-equivalent basis. |
The following sections discuss additional information on the Company’s loan portfolios, non-purchased credit impaired (“non-PCI”) nonperforming assets and allowance for credit losses.
Total Loan Portfolio
The Company offers a broad range of financial products designed to meet the credit needs of its borrowers. The Company’s loan portfolio segments include CRE,commercial loans, which consist of C&I, CRE, multifamily residential, and construction and land loans; and consumer loans, which consist of single-family residential, home equity lines of credit (“HELOCs”) and other consumer loans. NetTotal net loans, including loans held-for-sale, increased $2.97 billion or 12% to $28.24were $35.34 billion as of September 30, 2017March 31, 2020, an increase of $917.3 million or 3% from $25.27$34.42 billion as of December 31, 2016. The increase2019. This was broad based andprimarily driven by strong increases of $1.14 billion$439.8 million or 22% in residential loans, $1.00 billion or 10%4% in C&I loans, $836.3$403.8 million or 10%4% in CRE loans and $44.1$296.3 million or 2%4% in consumersingle-family residential loans. The composition of the loan portfolio as of March 31, 2020 was similar to the composition as of December 31, 2019.
The following table presents the composition of the Company’s total loan portfolio by loan type as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| | Amount (1) | | Percent | | Amount (1) | | Percent |
| CRE: | | | | | | | | |
| Income producing | | $ | 8,843,776 |
| | 31 | % | | $ | 8,016,109 |
| | 31 | % |
| Construction | | 572,027 |
| | 2 | % | | 551,560 |
| | 2 | % |
| Land | | 111,377 |
| | — | % | | 123,194 |
| | 1 | % |
| Total CRE | | 9,527,180 |
| | 33 | % | | 8,690,863 |
| | 34 | % |
| C&I: | | | | | | | | |
| Commercial business | | 9,776,254 |
| | 34 | % | | 8,959,633 |
| | 35 | % |
| Trade finance | | 868,902 |
| | 3 | % | | 680,930 |
| | 3 | % |
| Total C&I | | 10,645,156 |
| | 37 | % | | 9,640,563 |
| | 38 | % |
| Residential: | | | | | | | | |
| Single-family | | 4,356,009 |
| | 16 | % | | 3,509,779 |
| | 14 | % |
| Multifamily | | 1,876,956 |
| | 7 | % | | 1,585,939 |
| | 6 | % |
| Total residential | | 6,232,965 |
| | 23 | % | | 5,095,718 |
| | 20 | % |
| Consumer | | 2,120,056 |
| | 7 | % | | 2,075,995 |
| | 8 | % |
Total loans held-for-investment (2) | | $ | 28,525,357 |
| | 100 | % | | $ | 25,503,139 |
| | 100 | % |
| Allowance for loan losses | | (285,926 | ) | | | | (260,520 | ) | | |
| Loans held-for-sale | | 178 |
| | | | 23,076 |
| | |
| Total loans, net | | $ | 28,239,609 |
| | | | $ | 25,265,695 |
| | |
| |
|
| | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Amount (1) | | % | | Amount (1) | | % |
| Commercial: | | | | | | | | |
| C&I | | $ | 12,590,764 |
| | 35 | % | | $ | 12,150,931 |
| | 35 | % |
| CRE: | | | |
|
| | | | |
| CRE | | 10,682,242 |
| | 30 | % | | 10,278,448 |
| | 30 | % |
| Multifamily residential | | 2,902,601 |
| | 8 | % | | 2,856,374 |
| | 8 | % |
| Construction and land | | 606,209 |
| | 2 | % | | 628,499 |
| | 2 | % |
| Total CRE | | 14,191,052 |
| | 40 | % | | 13,763,321 |
| | 40 | % |
| Total commercial | | 26,781,816 |
| | 75 | % | | 25,914,252 |
| | 75 | % |
| Consumer: | | | | | | | | |
| Residential mortgage: | | | | | | | | |
| Single-family residential | | 7,403,723 |
| | 20 | % | | 7,108,590 |
| | 20 | % |
| HELOCs | | 1,452,862 |
| | 4 | % | | 1,472,783 |
| | 4 | % |
| Total residential mortgage | | 8,856,585 |
| | 24 | % | | 8,581,373 |
| | 24 | % |
| Other consumer | | 254,992 |
| | 1 | % | | 282,914 |
| | 1 | % |
| Total consumer | — |
| 9,111,577 |
| | 25 | % | | 8,864,287 |
| | 25 | % |
| Total loans held-for-investment | | $ | 35,893,393 |
| | 100 | % | | $ | 34,778,539 |
| | 100 | % |
| Allowance for loan losses | | (557,003 | ) | | | | (358,287 | ) | | |
Loans held-for-sale (2) | | 1,594 |
| | | | 434 |
| | |
| Total loans, net | | $ | 35,337,984 |
| | | | $ | 34,420,686 |
| | |
| |
| |
| (1) | Includes $(29.2) million and $1.2 million as of September 30, 2017 and December 31, 2016, respectively, ofOn January 1, 2020, the Company adopted ASU 2016-13. Total loans include net deferred loan fees, unearned income,fees, unamortized premiums and unaccreted discounts.discounts of $(50.3) million and $(43.2) million as of March 31, 2020 and December 31, 2019, respectively. |
| |
| (2) | Loans netConsists of ASC 310-30 discount.single-family residential loans as of both March 31, 2020 and December 31, 2019. |
Although theCommercial
The commercial loan portfolio, grew 12% during the nine months ended September 30, 2017, the loan type composition remained relatively unchanged from December 31, 2016. The Company’s largest credit risks are concentrated in the commercial lending portfolios, which are comprised 75% of C&I and CRE loans. The commercial lending portfolios comprised 70% and 72% of the total loan portfolioloans as of September 30, 2017both March 31, 2020 and December 31, 2016, respectively,2019, is discussed as follows.
Commercial — Commercial and are discussed further below.
C&I Loans.Industrial Loans. C&I loans of $10.65totaled $12.59 billion and $9.64$12.15 billion which accounted for 37% and 38% of the total loan portfolio as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, include commercial businessand accounted for 35% of total loans as of both dates. The majority of the C&I loans have variable interest rates. 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 financefinance. The Company also had a portfolio of broadly syndicated C&I loans, comprised primarily of Term B loans, which comprised the largest sector in the lending portfolio. Over the last few years, the Company has experienced higher growth in specialized lending verticals in industries suchtotaled $962.1 million and $894.6 million as private equity, energy, entertainment and structured specialty finance. As of September 30, 2017March 31, 2020 and December 31, 2016, specialized lending verticals comprised 42% and 37% of total C&I loans,2019, respectively.
Although the
The C&I industry sectors in which the Company provides financing are diversified, the Company has higher concentrations in the industry sectors of wholesale trade, manufacturing, real estate and leasing, entertainment and private equity. The Company’s C&I loan exposures within the wholesale trade sector, which totaled $1.63 billion and $1.38 billion as of September 30, 2017 and December 31, 2016, respectively, are largely related to U.S. domiciled companies, which import goods from Greater China for U.S. consumer consumption, many of which are companies based in California. The private equity loans are largely capital call lines of credit. The Company also has a syndicated loan portfolio within the C&I loan portfolio, which totaled $627.9 million and $758.5 million as of September 30, 2017 and December 31, 2016, respectively.is well-diversified by industry. The Company monitors the concentrations within the C&I loan portfolio by customer exposure and industry classifications,classification, setting diversification targets and limits for specialized underwriting portfolios. The Company’s exposure to C&I borrowers that are potentially more impacted by the economic disruption stemming from COVID-19 pandemic include those in the travel and leisure, hospitality, restaurant and restaurant supply industries. These exposures are included in the Other C&I category in the graphs below. Combined, these industries represented 4% of total C&I loans as of both March 31, 2020 and December 31, 2019. There were no industry concentrations exceeding 10% of total loans as of both March 31, 2020 and December 31, 2019.
Oil & gas loans comprised 11% of C&I loans and 4% of total loans as of both March 31, 2020 and December 31, 2019. As of March 31, 2020, oil & gas total loans outstanding were $1.37 billion and total exposure, including unfunded commitments, amounted to $1.77 billion. Based on total exposure, 64% of the oil & gas portfolio was reserve-based lending verticalsto upstream (exploration and setting diversification targets.production) companies, 27% was to midstream and downstream companies, and 9% was to companies in oilfield services and other. The oil & gas lending portfolio is geographically diversified. The production mix of upstream borrowers was approximately 61% oil, 29% gas and 10% natural gas liquids in 2019. The majority of the upstream borrowers had commodity hedges in place for 2020 to hedge against the fluctuation in oil and gas prices. The COVID-19 pandemic, as well as the high volatility and downward pressure on oil and gas prices, has impacted the credit risk of the oil & gas industry sector. Accordingly, the Company increased its allowance for loan loss coverage against the oil & gas portfolio to 8% as of March 31, 2020, up from 5% as of December 31, 2019.
Commercial — Total Commercial Real Estate Portfolio. The totalCRE Loans.loan portfolio, which consists of income-producing CRE, loans include income producing real estate,multifamily residential, and construction and land loans, wheretotaled $14.19 billion and $13.76 billion as of March 31, 2020 and December 31, 2019, respectively, accounting for 40% of total loans as of both dates.
As of March 31, 2020, the interest rates may be fixed, variable or hybrid.average loan size of total CRE loans was $2.3 million and the weighted-average loan-to-value (“LTV”) ratio was 51%. As of December 31, 2019, the average loan size of total CRE loans was $2.1 million and the weighted-average LTV ratio was 50%. The Company focuses on providing financing to experienced real estate investors and developers who are long-time customers and have moderate levels of leverage. Loans are generally underwritten with high standards for cash flows, debt service coverage ratios and loan-to-value ratios. Due to the natureconsistency of the Company’s geographical footprintlow LTV underwriting standards have resulted in historically lower levels of credit losses in the income-producing CRE and market presence, the Company hasmultifamily residential loans.
The Company’s total CRE loan concentrations primarily in California,portfolio is broadly diversified by property type, which comprised 74%serves to mitigate some of the geographical concentration in California. The following table summarizes the Company’s total CRE loan portfolio by property type as of each of September 30, 2017March 31, 2020 and December 31, 2016. Accordingly, changes2019: |
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Amount | | % | | Amount | | % |
| Property types: | | | | | | | | |
| Retail | | $ | 3,398,714 |
| | 24 | % | | $ | 3,300,106 |
| | 24 | % |
| Multifamily | | 2,902,601 |
| | 20 | % | | 2,856,374 |
| | 21 | % |
| Offices | | 2,496,013 |
| | 18 | % | | 2,375,087 |
| | 17 | % |
| Industrial | | 2,240,375 |
| | 16 | % | | 2,163,769 |
| | 16 | % |
| Hospitality | | 1,970,060 |
| | 14 | % | | 1,865,031 |
| | 14 | % |
| Construction and land | | 606,209 |
| | 4 | % | | 628,499 |
| | 4 | % |
| Other | | 577,080 |
| | 4 | % | | 574,455 |
| | 4 | % |
| Total CRE loans | | $ | 14,191,052 |
| | 100 | % | | $ | 13,763,321 |
| | 100 | % |
| |
The weighted average LTV ratio of retail CRE loan was 49% as of March 31, 2020, and the average loan size was $2.1 million. A high percentage of the retail CRE loans have personal guarantees from individuals with substantial net worth. Restaurants are a subset of retail CRE portfolio, and totaled $206.8 million or 6% of retail CRE as of March 31, 2020. The weighted average LTV ratio of restaurant loans was 53% and the average loan size was less than $1.0 million as of March 31, 2020. The weighted average LTV ratio of hospitality CRE loans was 49% as of March 31, 2020, and the average loan size was $8.3 million.
The following tables provide a summary of the Company’s CRE, multifamily residential, and construction and land loans by geography as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | CRE | | % | | Multifamily
Residential | | % | | Construction
and Land | | % | | Total CRE | | % |
| Geographic markets: | | | | | | | | | | | | | | | | |
| Southern California | | $ | 5,676,895 |
| | | | $ | 1,755,651 |
| | | | $ | 269,590 |
| | | | $ | 7,702,136 |
| | |
| Northern California | | 2,476,697 |
| | | | 629,468 |
| | | | 179,652 |
| | | | 3,285,817 |
| | |
| California | | 8,153,592 |
| | 76 | % | | 2,385,119 |
| | 82 | % | | 449,242 |
| | 74 | % | | 10,987,953 |
| | 77 | % |
| New York | | 689,547 |
| | 6 | % | | 123,989 |
| | 4 | % | | 84,042 |
| | 14 | % | | 897,578 |
| | 6 | % |
| Texas | | 662,119 |
| | 6 | % | | 129,458 |
| | 5 | % | | 8,525 |
| | 1 | % | | 800,102 |
| | 6 | % |
| Washington | | 308,878 |
| | 3 | % | | 65,521 |
| | 2 | % | | 31,332 |
| | 5 | % | | 405,731 |
| | 3 | % |
| Arizona | | 162,359 |
| | 2 | % | | 11,946 |
| | 0 | % | | — |
| | — | % | | 174,305 |
| | 1 | % |
| Nevada | | 103,696 |
| | 1 | % | | 138,766 |
| | 5 | % | | 39 |
| | 0 | % | | 242,501 |
| | 2 | % |
| Other markets | | 602,051 |
| | 6 | % | | 47,802 |
| | 2 | % | | 33,029 |
| | 6 | % | | 682,882 |
| | 5 | % |
| Total loans | | $ | 10,682,242 |
| | 100 | % | | $ | 2,902,601 |
| | 100 | % | | $ | 606,209 |
| | 100 | % | | $ | 14,191,052 |
| | 100 | % |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2019 |
| | CRE | | % | | Multifamily
Residential | | % | | Construction
and Land | | % | | Total CRE | | % |
| 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 | % |
| |
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. 19%A high percentage of the Company’s commercial real estate borrowers have provided substantial equity into their CRE loans and/or provided the Company with personal guarantees.
Commercial — Commercial Real Estate Loans. Income-producing CRE loans totaled $10.68 billion and $10.28 billion as of March 31, 2020 and December 31, 2019, respectively, and accounted for 30% of total loans as of eachboth dates. The Company focuses on providing financing to experienced real estate investors and developers who have moderate levels of September 30, 2017leverage, many of whom are long-time customers of the Bank. Loans are underwritten with conservative standards for cash flows, debt service coverage and LTV.
As of March 31, 2020 and December 31, 20162019, 19% and 20%, respectively, of the income-producing CRE loans were owner occupied properties, whileproperties; the remaining 81%remainder were non-owner occupied properties (wherewhere 50% or more of the debt service for the loan is primarily provided by unaffiliated rental income). Asincome from a third party. Interest rates on CRE loans may be fixed, variable or hybrid.The distribution of September 30, 2017the CRE loan portfolio reflects the Company’s geographical footprint, with a primary concentration in California accounting for 76% of the CRE loan portfolio as of both March 31, 2020 and December 31, 2016,2019
Commercial — Multifamily Residential Loans. Multifamily residential loans totaled $2.90 billion and $2.86 billion as of March 31, 2020 and December 31, 2019, respectively, and accounted for 8% of total loans as of both dates. The multifamily residential loan portfolio is largely comprised of loans secured by residential properties with five or more units. As of both March 31, 2020 and December 31, 2019, 82% of the Company had an income-producing CRE portfolio that was broadly diversified across all property types.
Company’s multifamily residential loans were concentrated in California. The Company had $572.0offers a variety of first lien mortgages, including fixed- and variable-rate loans, as well as hybrid loans with interest rates that adjust annually after an initial fixed rate period of three to seven years.
Commercial — Construction and Land Loans. Construction and land loans totaled $606.2 million and $628.5 million as of March 31, 2020 and December 31, 2019, respectively, and accounted for 2% of total loans as of both dates. Included in the portfolio were construction loans and $507.3of $544.1 million, ofwith additional unfunded commitments of $326.4 million as of September 30, 2017, compared to $551.6 million ofMarch 31, 2020, and construction loans and $526.4of $558.2 million ofwith additional unfunded commitments of $351.4 million as of December 31, 2016.2019. The construction portfolioloans provide financing for multifamily residential, hotels, offices, industrial and retail structures. Based on total commitment, the construction and land loans had a weighted average LTV of 54% as of September 30, 2017March 31, 2020. Similar to CRE and multifamily residential loans, the Company has a geographic concentration of construction and land loans in California.
Consumer
The following tables summarize the Company’s single-family residential and HELOCs loan portfolios by geography as of March 31, 2020 and December 31, 20162019:
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | Single- Family Residential | | % | | HELOCs | | % | | Total Residential Mortgage | | % |
| Geographic markets: | | | | | | | | | | | | |
| Southern California | | $ | 3,168,482 |
| | | | $ | 699,131 |
| | | | $ | 3,867,613 |
| | |
| Northern California | | 1,058,009 |
| | | | 312,227 |
| | | | 1,370,236 |
| | |
| California | | 4,226,491 |
| | 57 | % | | 1,011,358 |
| | 69 | % | | 5,237,849 |
| | 59 | % |
| New York | | 1,838,248 |
| | 25 | % | | 240,583 |
| | 17 | % | | 2,078,831 |
| | 23 | % |
| Washington | | 623,223 |
| | 8 | % | | 132,146 |
| | 9 | % | | 755,369 |
| | 9 | % |
| Massachusetts | | 237,897 |
| | 3 | % | | 30,848 |
| | 2 | % | | 268,745 |
| | 3 | % |
| Texas | | 189,498 |
| | 3 | % | | — |
| | — | % | | 189,498 |
| | 2 | % |
| Other markets | | 288,366 |
| | 4 | % | | 37,927 |
| | 3 | % | | 326,293 |
| | 4 | % |
| Total | | $ | 7,403,723 |
| | 100 | % | | $ | 1,452,862 |
| | 100 | % | | $ | 8,856,585 |
| | 100 | % |
| Lien priority: | | | | | | | | | | | | |
| First mortgage | | $ | 7,403,722 |
| | 100 | % | | $ | 1,216,294 |
| | 84 | % | | $ | 8,620,016 |
| | 97 | % |
| Junior lien mortgage | | 1 |
| | 0 | % | | 236,568 |
| | 16 | % | | 236,569 |
| | 3 | % |
| Total | | $ | 7,403,723 |
| | 100 | % | | $ | 1,452,862 |
| | 100 | % | | $ | 8,856,585 |
| | 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 — Single-Family Residential Loans. Single-family residential loans totaled $7.40 billion and $7.11 billion as of March 31, 2020 and December 31, 2019, respectively, and accounted for 20% of total loans as of both dates. The Company was largely comprisedin a first lien position for virtually all single-family residential loans as of financing for the constructionboth March 31, 2020 and December 31, 2019. Many of hotels, multifamily and residential condominiums, as well as mixed use (residential and retail) structures.
Residential Loans. Residentialthese loans are comprisedreduced documentation loans where 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 loss rates. As of March 31, 2020 and December 31, 2019, 57% and 58% of the Company’s single-family and multifamily residential loans. The Company offers first lien mortgage loans, secured by one-to-four unit residential properties locatedrespectively, were concentrated in its primary lending areas.California. The Company offers a variety of 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 conforming loansperiod.
Consumer — Home Equity Lines of Credit. HELOCs totaled $1.45 billion and adjustable rate mortgage loans with initial fixed periods of one to seven years, which adjust annually thereafter. The Company’s multifamily loan portfolio is largely comprised of loans secured by smaller multifamily properties ranging from 5 to 15 units in its primary lending areas. 71% and 73% of the Company’s residential loans were concentrated in California$1.47 billion as of September 30, 2017March 31, 2020 and December 31, 2016, respectively.2019, respectively, and accounted for 4% of total loans as of both dates. The Company was in a first lien position for 84% of total HELOCs as of both March 31, 2020 and December 31, 2019. Many of the single-family residential loans within the Company’sthis portfolio are reduced documentation loans, where a substantial down payment is required, resulting in a low loan-to-valueLTV ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and defaultloss rates.
Consumer Loans. Consumer loans are comprised of home equity lines of credit (“HELOCs”), insurance premium financing loans, credit card and auto loans. As of September 30, 2017both March 31, 2020 and December 31, 2016,2019, 69% of the Company’s HELOCs were the largest component of the consumer loan portfolio, and were secured by one-to-four unit residential properties locatedconcentrated in its primary lending areas.California. The HELOC loan portfolio is comprised largely comprised of variable-rate loans.
All commercial and consumer loans originated throughare subject to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks associated with these products. The Company conducts a reduced documentation loan program where a substantial down payment is required, resulting in a low loan-to-value ratio, typically 60% or less. Thevariety 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 positioncompliance with these requirements.
Purchased Credit-Deteriorated Loans
The Company adopted ASU 2016-13 using the prospective transition approach for many of these reduced documentation HELOCs. These loans have historically experienced low delinquency and default rates.
The Company’s total loan portfolio includes originated and purchased loans. Originated and purchased loans, for which there was no evidence of credit deterioration at their acquisition date, are collectively referred(“PCD”) loans that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. On January 1, 2020, the amortized cost basis of the PCD loans was adjusted to as non-PCI loans. Acquiredreflect the $1.2 million addition of allowance for loan losses. The Company did not acquire any PCD loans for which there was, atduring the acquisition date, evidencefirst quarter of credit deterioration are referred to as PCI loans. PCI loans are recorded net of ASC 310-30 discount and totaled $532.3 million and $642.4 million as of September 30, 2017 and December 31, 2016, respectively.2020. For additional details regarding PCIPCD loans, see Note 82 — Summary of Significant Accounting Policies and Note 7 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements.Statements in this Form 10-Q. Prior to the adoption of ASU 2016-13, the carrying value of PCI loans totaled $222.9 million as of December 31, 2019.
The Company’s overseas offices include the branch in Hong Kong and the subsidiary bank in China. Loans Held-for-Sale
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, loans held in the Hong Kong branchheld-for-sale totaled $686.3$1.6 million and $733.3 million, respectively. As$434 thousand, respectively, and consisted of September 30, 2017 and December 31, 2016, loans held in the subsidiary bank in China totaled $499.5 million and $425.3 million, respectively. These overseas loans are comprised mainly of C&I loans made to cross-border or trade finance companies. In total, these loans represented 3% of total consolidated assets as of September 30, 2017 and December 31, 2016.
When a determination is made atsingle-family residential loans. At the time of commitment to originate or purchase loans asa loan, a loan is determined to be held-for-investment if it is the Company’s intent to hold these loansthe loan to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liabilityliquidity and credit risk management. WhenIf the Company subsequently changes its intent to hold certain loans, thethose loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value. As of September 30, 2017,
Loan Purchases, Transfers and Sales
All loans held-for-sale amountedoriginated by the Company are underwritten pursuant to $178 thousand, which were comprised of single-family residential loans. In comparison, as of December 31, 2016,the Company’s policies and procedures. Although the Company’s primary focus is on directly originated loans, held-for-sale amounted to $23.1 million, which were primarily comprised of consumer loans. Loans transferred from held-for-investment to held-for-sale were $74.5 millionin certain circumstances the Company also purchases loans and $418.5 million during the three and nine months ended September 30, 2017, respectively. These loan transfers were primarily comprised of C&Iparticipates in loans for both periods. In comparison, $144.9 million and $720.7 million of loans were transferred from held-for-investment to held-for-sale during the three and nine months ended September 30, 2016, respectively. These loan transfers were primarily comprised of C&I, multifamily residential and CRE loans for both periods.with other banks. The Company recorded $232 thousand and $441 thousandalso participates out interests in write-downscommercial loans to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the three and nine months ended September 30, 2017, respectively. In comparison, there were no write-downs and $1.9 million of write-downs recorded to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the three and nine months ended September 30, 2016, respectively.
During the three and nine months ended September 30, 2017, the Company sold $33.8 million and $101.4 million, respectively, in originated loans, resulting in net gains of $2.3 million and $5.5 million, respectively. Originated loans sold during the three months ended September 30, 2017 were primarily comprised of $15.7 million of CRE loans and $12.3 million of C&I loans. Originated loans sold during the nine months ended September 30, 2017 were primarily comprised of $50.5 million of C&I loans and $34.8 million of CRE loans. In comparison, the Company sold $107.3 million in originated loans during the three months ended September 30, 2016, resulting in net gains of $2.2 million. Originated loans sold during this period were primarily comprised of $53.9 million of C&I loans and $46.0 million of CRE loans. During the nine months ended September 30, 2016, the Company sold or securitized $529.5 million in originated loans, resulting in net gains of $9.3 million. Included in these amounts were $201.7 million of multifamily residential loans securitized during the first quarter of 2016, which resulted in net gains of $1.1 million, $641 thousand in mortgage servicing rights and $160.1 million of held-to-maturity investment security that were recorded. The remaining $327.8 million of originated loans sold during the nine months ended September 30, 2016, primarily comprising of $171.9 million of CRE loans and $99.6 million of C&I loans, resulted in net gains of $8.2 million.
During the three and nine months ended September 30, 2017, the Company purchased $72.4 million and $441.1 million loans, respectively, compared to $256.2 million and $1.04 billion during the three and nine months ended September 30, 2016, respectively. Purchased loans for each of the three and nine months ended September 30, 2017 were primarily comprised of C&I syndication loans. Purchased loans for each of the three and nine months ended September 30, 2016 were primarily comprised of C&I syndication loans and single-family residential loans. The higher loans purchased for the three and nine months ended September 30, 2016, primarily included $165.8 million and $488.3 million, respectively, of single-family residential loans purchased for Community Reinvestment Act purposes.
From time to time, the Company purchasesother financial institutions and sells loans in the secondary market. Certain purchased loans are transferred from held-for-investment to held-for-sale and write-downs to allowance for loan losses are recorded, when appropriate. During the three and nine months ended September 30, 2017, the Company sold loansnormal course of $57.4 million and $354.5 million, respectively, in the secondary market at net gains of $19 thousand and $1.2 million, respectively. In comparison, the Company sold loans of $45.8 million and $179.4 million for the three and nine months ended September 30, 2016, respectively, in the secondary market. Loan sales in the secondary market resulted in no gains or losses and $69 thousand in net gains recorded for the three and nine months ended September 30, 2016, respectively.business.
The Company records valuation adjustments in Net gains on sales of loans on the Consolidated Statements of Income to carry the loans held-for-sale portfolio at the lower of cost or fair value. For each of the three months ended September 30, 2017 and 2016, no valuation adjustments were recorded. For the nine months ended September 30, 2017 and 2016, the Company recorded $61 thousand and $2.4 million, respectively, in valuation adjustments.
Non-PCI Nonperforming Assets
Non-PCI nonperforming assets are comprised of nonaccrual loans and other real estate owned (“OREO”), net. Loans are placed on nonaccrual status when they become 90 days past due or when the full collection of principal or interest becomes uncertain regardless of the length of past due status. The following table presentstables provide information regarding non-PCI nonperforming assets ason loan purchases, transfers and sales during the first quarters of September 30, 20172020 and December 31, 2016:2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| Nonaccrual loans: | | | | |
| Real estate - commercial | | $ | 24,802 |
| | $ | 26,907 |
|
| Real estate - land and construction | | 4,183 |
| | 5,326 |
|
| Commercial | | 73,384 |
| | 81,256 |
|
| Real estate - single-family | | 6,639 |
| | 4,214 |
|
| Real estate - multifamily | | 2,620 |
| | 2,984 |
|
| Consumer | | 3,097 |
| | 2,130 |
|
| Total nonaccrual loans | | 114,725 |
| | 122,817 |
|
| OREO, net | | 2,289 |
| | 6,745 |
|
| Total nonperforming assets | | $ | 117,014 |
| | $ | 129,562 |
|
Non-PCI nonperforming assets to total assets (1) | | 0.32 | % | | 0.37 | % |
Non-PCI nonaccrual loans to loans held-for-investment (1) | | 0.40 | % | | 0.48 | % |
| Allowance for loan losses to non-PCI nonaccrual loans | | 249.23 | % | | 212.12 | % |
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, 2020 |
| | Commercial | | Consumer | Total |
| | C&I | | CRE | | Residential Mortgage |
| | | CRE | | Multifamily Residential | | Single-Family
Residential | |
| Loans purchased | | $ | 130,583 |
| | $ | — |
| | $ | 1,513 |
| | $ | 1,084 |
| | $ | 133,180 |
|
| Loans transferred from held-for-investment to held-for-sale | | $ | 102,973 |
| | $ | 7,250 |
| | $ | — |
| | $ | — |
| | $ | 110,223 |
|
| Loans sold: | | | | | | | | | | |
| Originated loans: | | | | | | | | | | |
| Amount | | $ | 102,973 |
| | $ | 7,250 |
| | $ | — |
| | $ | 4,642 |
| | $ | 114,865 |
|
| Net gains | | $ | 235 |
| | $ | 665 |
| | $ | — |
| | $ | 50 |
| | $ | 950 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, 2019 |
| | Commercial | | Consumer | Total |
| | C&I | | CRE | | Residential Mortgage |
| | | CRE | | Multifamily Residential | | Single-Family
Residential | |
| Loans purchased | | $ | 107,194 |
| | $ | — |
| | $ | 4,218 |
| | $ | 36,402 |
| | $ | 147,814 |
|
| Loans transferred from held-for-investment to held-for-sale | | $ | 75,573 |
| | $ | 16,655 |
| | $ | — |
| | $ | — |
| | $ | 92,228 |
|
| Write-downs to allowance for loan losses | | $ | (73 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (73 | ) |
| Loans sold: | | | | | | | | | | |
| Originated loans: | | | | | | | | | | |
| Amount | | $ | 57,409 |
| | $ | 16,655 |
| | $ | — |
| | $ | 2,442 |
| | $ | 76,506 |
|
| Net gains | | $ | 131 |
| | $ | 753 |
| | $ | — |
| | $ | 31 |
| | $ | 915 |
|
| Purchased loans: | | | | | | | | | | |
| Amount | | $ | 18,237 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 18,237 |
|
| |
| |
| (1) | Total assets andNet gains on sales of purchased loans held-for-investment include PCI loansin the first quarter of $532.3 million and $642.4 million as of September 30, 2017 and December 31, 2016, respectively.2019 were insignificant. |
Typically, changes to nonaccrual loans period-over-period represent inflows for loans thatDeposits and Other Sources of Funds
Deposits are placed on nonaccrual status in accordance with the Company’s accounting policy, offsetprimary 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 reductionsshort and long-term borrowings, and long-term debt. See Item 2— MD&A — Risk Management — Liquidity Risk Management in this Form 10-Q for loans that are paid down, charged off, sold, foreclosed, or no longer classified as nonaccrual as a resultdiscussion of continued performance and improvement in the borrower’s financial condition and loan repayment capabilities. Nonaccrual loans decreased by $8.1 million or 7% to $114.7 millionCompany’s liquidity management. The following table summarizes the Company’s sources of funds as of September 30, 2017 from $122.8 million as of DecemberMarch 31, 2016. The decrease in nonaccrual loans was primarily due to payoffs and paydowns of nonaccrual loans of $70.2 million, transfers of nonaccrual loans to accrual status of $37.2 million, and charge-offs of nonaccrual loans of $19.5 million, partially offset by loans transferred to nonaccrual status of $119.4 million, during the nine months ended September 30, 2017. Nonaccrual loans as a percentage of loans held-for-investment declined from 0.48% as of December 31, 2016 to 0.40% as of September 30, 2017. C&I loans comprised 64% and 66% of total nonaccrual loans as of September 30, 20172020 and December 31, 2016, respectively. Credit risks related to the C&I nonaccrual loans were mitigated by the collateral. In addition, the risk of loss of all nonaccrual loans had been considered as of September 30, 2017 and December 31, 2016 and the Company believes that this was appropriately covered by the allowance for loan losses.
In addition, 36% and 64% of non-PCI nonaccrual loans consisted of loans that were less than 90 days delinquent as of September 30, 2017 and December 31, 2016, respectively.
For additional details regarding the Company’s non-PCI nonaccrual loans policy, see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2016 Form 10-K.
Troubled debt restructurings (“TDRs”) may be designated as performing or nonperforming. A TDR may be designated as performing, if the loan has demonstrated sustained performance under the modified terms. The period of sustained performance may include the periods prior to modification if prior performance has met or exceeded the modified terms. A loan will remain on nonaccrual status until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments.
The following table presents the performing and nonperforming TDRs by loan segment as of September 30, 2017 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| | Performing TDRs | | Nonperforming TDRs | | Performing TDRs | | Nonperforming TDRs |
| CRE | | $ | 10,347 |
| | $ | 19,830 |
| | $ | 20,145 |
| | $ | 14,446 |
|
| C&I | | 20,416 |
| | 44,292 |
| | 44,363 |
| | 23,771 |
|
| Residential | | 18,872 |
| | 486 |
| | 17,178 |
| | 717 |
|
| Consumer | | 1,204 |
| | 375 |
| | 1,552 |
| | 49 |
|
| Total TDRs | | $ | 50,839 |
| | $ | 64,983 |
| | $ | 83,238 |
| | $ | 38,983 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 | | Change |
| | Amount | | % | | Amount | | % | | $ | | % |
| Deposits | | | | | | | | | | | | |
| Noninterest-bearing demand | | $ | 11,833,397 |
| | 30 | % | | $ | 11,080,036 |
| | 30 | % | | $ | 753,361 |
| | 7 | % |
| Interest-bearing checking | | 5,467,508 |
| | 14 | % | | 5,200,755 |
| | 14 | % | | 266,753 |
| | 5 | % |
| Money market | | 9,302,246 |
| | 24 | % | | 8,711,964 |
| | 23 | % | | 590,282 |
| | 7 | % |
| Savings | | 2,117,274 |
| | 6 | % | | 2,117,196 |
| | 6 | % | | 78 |
| | 0 | % |
| Time deposits | | 9,966,533 |
| | 26 | % | | 10,214,308 |
| | 27 | % | | (247,775 | ) | | (2 | )% |
| Total deposits | | $ | 38,686,958 |
| | 100 | % | | $ | 37,324,259 |
| | 100 | % | | $ | 1,362,699 |
| | 4 | % |
| Other Funds | | | | | | | | | | | | |
| Short-term borrowings | | $ | 66,924 |
| | | | $ | 28,669 |
| | | | $ | 38,255 |
| | 133 | % |
| FHLB advances | | 646,336 |
| | | | 745,915 |
| | | | (99,579 | ) | | (13 | )% |
| Repurchase agreements | | 450,000 |
| | | | 200,000 |
| | | | 250,000 |
| | 125 | % |
| Long-term debt | | 147,169 |
| | | | 147,101 |
| | | | 68 |
| | 0 | % |
| Total other funds | | $ | 1,310,429 |
| | | | $ | 1,121,685 |
| | | | $ | 188,744 |
| | 17 | % |
| Total sources of funds | | $ | 39,997,387 |
| | | | $ | 38,445,944 |
| | | | $ | 1,551,443 |
| | 4 | % |
| |
Performing TDRs decreased by $32.4 million or 39% to $50.8 million as of September 30, 2017, primarily due to the transfers of one CRE and two C&I loans from performing to nonperforming status during the nine months ended September 30, 2017. Nonperforming TDRs increased by $26.0 million or 67% to $65.0 million as of September 30, 2017, primarily due to the aforementioned transfers of CRE and C&I loans between performing and nonperforming status and a C&I loan becoming a TDR loan during the nine months ended September 30, 2017.
The Company’s impaired loans include predominantly non-PCI loans held-for-investment on nonaccrual status and non-PCI loans modified as a TDR, on either accrual or nonaccrual status. See Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2016 Form 10-K for additional information regarding the Company’s TDRs and impaired loan policies. As of September 30, 2017, the allowance for loan losses included $20.8 million for impaired loans with a total recorded investment balance of $72.6 million. In comparison, the allowance for loan losses included $12.7 million for impaired loans with a total recorded investment balance of $84.1 million as of December 31, 2016.
The following table presents the recorded investment balances for non-PCI impaired loans as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| | Amount | | Percent | | Amount | | Percent |
| CRE: | | | | | | | | |
| Income producing | | $ | 35,149 |
| | 21 | % | | $ | 46,508 |
| | 23 | % |
| Land | | 4,183 |
| | 3 | % | | 5,870 |
| | 3 | % |
| Total CRE impaired loans | | 39,332 |
| | 24 | % | | 52,378 |
| | 26 | % |
| C&I: | | | | | | | | |
| Commercial business | | 89,092 |
| | 54 | % | | 120,453 |
| | 58 | % |
| Trade finance | | 4,708 |
| | 3 | % | | 5,166 |
| | 2 | % |
| Total C&I impaired loans | | 93,800 |
| | 57 | % | | 125,619 |
| | 60 | % |
| Residential: | | | | | | | | |
| Single-family | | 15,899 |
| | 10 | % | | 14,335 |
| | 7 | % |
| Multifamily | | 12,232 |
| | 7 | % | | 10,041 |
| | 5 | % |
| Total residential impaired loans | | 28,131 |
| | 17 | % | | 24,376 |
| | 12 | % |
| Consumer | | 4,301 |
| | 2 | % | | 3,682 |
| | 2 | % |
| Total impaired loans | | $ | 165,564 |
| | 100 | % | | $ | 206,055 |
| | 100 | % |
| |
Allowance for Credit Losses
Allowance for credit losses consists of allowance for loan losses and allowance for unfunded credit reserves. Unfunded credit reserves include reserves provided for unfunded lending commitments, issued commercial letters of credit and standby letters of credit (“SBLCs”), and recourse obligations for loans sold. The allowance for credit losses is increased by the provision for credit losses which is charged against current period operating results, and is increased or decreased by the amount of net recoveries or charge-offs, respectively, during the period. The allowance for unfunded credit reserves is included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. Net adjustments to the allowance for unfunded credit reserves are included in Provision for credit losses on the Consolidated Statements of Income.
The Company is committed to maintaining the allowance for credit losses at a level that is commensurate with the estimated inherent loss in the loan portfolio, including unfunded credit reserves. In addition to regular quarterly reviews of the adequacy of the allowance for credit losses, the Company performs an ongoing assessment of the risks inherent in the loan portfolio. While the Company believes that the allowance for loan losses is appropriate as of September 30, 2017, future allowance levels may increase or decrease based on a variety of factors, including loan growth, portfolio performance and general economic conditions. For additional details on the Company’s allowance for credit losses, including the methodologies used, see Note 8 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements, and Item 7. MD&A — Critical Accounting Policies and Estimates and Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2016 Form 10-K.
The following table presents a summary of activities in the allowance for credit losses for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Allowance for loan losses, beginning of period | | $ | 276,316 |
| | $ | 266,768 |
| | $ | 260,520 |
| | $ | 264,959 |
|
| Provision for loan losses | | 13,448 |
| | 11,514 |
| | 32,134 |
| | 19,049 |
|
| Gross charge-offs: | | | | | | | | |
| CRE | | — |
| | (309 | ) | | (149 | ) | | (504 | ) |
| C&I | | (7,359 | ) | | (23,696 | ) | | (19,802 | ) | | (31,770 | ) |
| Residential | | — |
| | (29 | ) | | (1 | ) | | (166 | ) |
| Consumer | | (65 | ) | | (13 | ) | | (72 | ) | | (17 | ) |
| Total gross charge-offs | | (7,424 | ) | | (24,047 | ) | | (20,024 | ) | | (32,457 | ) |
| Gross recoveries: | | | | | | | | |
| CRE | | 610 |
| | 634 |
| | 1,714 |
| | 873 |
|
| C&I | | 2,165 |
| | 165 |
| | 9,658 |
| | 2,068 |
|
| Residential | | 809 |
| | 654 |
| | 1,758 |
| | 1,048 |
|
| Consumer | | 2 |
| | 124 |
| | 166 |
| | 272 |
|
| Total gross recoveries | | 3,586 |
| | 1,577 |
| | 13,296 |
| | 4,261 |
|
| Net charge-offs | | (3,838 | ) | | (22,470 | ) | | (6,728 | ) | | (28,196 | ) |
| Allowance for loan losses, end of period | | 285,926 |
| | 255,812 |
| | 285,926 |
| | 255,812 |
|
| | | | | | | | | |
| Allowance for unfunded credit reserves, beginning of period | | 15,188 |
| | 20,318 |
| | 16,121 |
| | 20,360 |
|
| Reversal of unfunded credit reserves | | (452 | ) | | (1,989 | ) | | (1,385 | ) | | (2,031 | ) |
| Allowance for unfunded credit reserves, end of period | | 14,736 |
| | 18,329 |
| | 14,736 |
| | 18,329 |
|
| Allowance for credit losses | | $ | 300,662 |
| | $ | 274,141 |
| | $ | 300,662 |
| | $ | 274,141 |
|
| | | | | | | | | |
| Average loans held-for-investment | | $ | 27,529,103 |
| | $ | 24,258,913 |
| | $ | 26,764,327 |
| | $ | 23,961,288 |
|
| Loans held-for-investment, end of period | | $ | 28,525,357 |
| | $ | 24,731,962 |
| | $ | 28,525,357 |
| | $ | 24,731,962 |
|
| Annualized net charge-offs to average loans held-for-investment | | (0.06 | )% | | (0.37 | )% | | (0.03 | )% | | (0.16 | )% |
| Allowance for loan losses to loans held-for-investment | | 1.00 | % | | 1.03 | % | | 1.00 | % | | 1.03 | % |
As of September 30, 2017, the allowance for loan losses amounted to $285.9 million or 1.00% of loans held-for-investment, compared to $260.5 million or 1.02% and $255.8 million or 1.03% of loans held-for-investment as of December 31, 2016 and September 30, 2016, respectively. The increase in the allowance for loan losses was largely due to the overall growth in the loan portfolio. The allowance for loan losses to loans held-for-investment ratio as of September 30, 2017 decreased slightly compared to both December 31, 2016 and September 30, 2016. The decrease in this ratio was primarily attributable to the higher credit quality of newly originated loans, resulting in loans held-for-investment increasing at a higher rate than the estimated allowance for loan losses. In addition, the extended good economic cycle and sound 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 highly dependent on 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 three and nine months ended September 30, 2017, compared to the same periods in 2016, was reflective of the overall loan portfolio growth, partially offset by a decline in the historical loss factor during the same periods. The Company believes the allowance for credit losses as of September 30, 2017 and December 31, 2016 was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at that date.
The following table presents the Company’s allocation of the allowance for loan losses by segment and the ratio of each loan segment to total loans held-for-investment as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 |
| | Allowance Allocation | | % of Total Loans | | Allowance Allocation | | % of Total Loans |
| CRE | | $ | 74,317 |
| | 33 | % | | $ | 72,916 |
| | 34 | % |
| C&I | | 160,598 |
| | 37 | % | | 142,167 |
| | 38 | % |
| Residential | | 43,905 |
| | 23 | % | | 37,338 |
| | 20 | % |
| Consumer | | 7,106 |
| | 7 | % | | 8,099 |
| | 8 | % |
| Total | | $ | 285,926 |
| | 100 | % | | $ | 260,520 |
| | 100 | % |
| |
The Company maintains an allowance on non-PCI and PCI loans. Based on the Company’s estimates of cash flows expected to be collected, an allowance for the PCI loans is established, with a charge to income through the provision for loan losses. PCI loan losses are estimated collectively for groups of loans with similar characteristics. As of September 30, 2017, the Company established an allowance of $68 thousand on $532.3 million of PCI loans. In comparison, an allowance of $118 thousand was established on $642.4 million of PCI loans as of December 31, 2016. The allowance balances for both periods were attributed mainly to the PCI CRE loans.
Deposits
The Company offers a wide variety of deposit products to both consumer and commercial customers. Deposits are an important low-cost source of funding, and affect net interest income and net interest margin. The following table presents the balances for customer deposits as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | | Change |
| | September 30, 2017 | | % of total deposits | | December 31, 2016 | | % of total
deposits | | $ | | % |
| Core deposits: | | | | | | | | | | | | |
| Noninterest-bearing demand | | $ | 10,992,674 |
| | 35 | % | | $ | 10,183,946 |
| | 34 | % | | $ | 808,728 |
| | 8 | % |
| Interest-bearing checking | | 4,108,859 |
| | 13 | % | | 3,674,417 |
| | 12 | % | | 434,442 |
| | 12 | % |
| Money market | | 7,939,031 |
| | 25 | % | | 8,174,854 |
| | 27 | % | | (235,823 | ) | | (3 | )% |
| Savings | | 2,476,557 |
| | 8 | % | | 2,242,497 |
| | 8 | % | | 234,060 |
| | 10 | % |
| Total core deposits | | 25,517,121 |
| | 81 | % | | 24,275,714 |
| | 81 | % | | 1,241,407 |
| | 5 | % |
| Time deposits | | 5,794,541 |
| | 19 | % | | 5,615,269 |
| | 19 | % | | 179,272 |
| | 3 | % |
| Total deposits | | $ | 31,311,662 |
| | 100 | % | | $ | 29,890,983 |
| | 100 | % | | $ | 1,420,679 |
| | 5 | % |
| | | | | | | |
Total deposits increased mainly due to growth in noninterest-bearing demand and interest-bearing checking deposits from existing and new customers. The Company’s deposit strategy is to grow and retain relationship-based deposits, which provides a stable and provide alow-cost source of low-cost funding and liquidity to the Company. Core
Total deposits were $38.69 billion as of March 31, 2020, an increase of $1.36 billion or 4% from $37.32 billion as of December 31, 2019.This growth was primarily due to a $753.4 million or 7% increase in noninterest-bearing demand and a $590.3 million or 7% increase in money market, partially offset by a $247.8 million or 2% decrease in time deposits. Noninterest-bearing demand deposits comprised 81%30% of total deposits as of each of September 30, 2017both March 31, 2020 and December 31, 2016. 2019. Additional information regarding the impact of deposits on net interest income and a comparison of average deposit balances and rates are provided in Item 2. MD&A — Results of Operations — Net Interest Income in this Form 10-Q.
Other Funds
The $1.24 billion or 5% increase in core deposits was primarily due to the increases in noninterest-bearing demand depositsCompany’s other sources of funding consist of short-term borrowings, FHLB advances, repurchase agreements and interest-bearing checking deposits. Noninterest-bearing demand deposits comprised 35% and 34%long-term debt.
The Company had $66.9 million of total depositsshort-term borrowings outstanding as of September 30, 2017 and DecemberMarch 31, 2016, respectively. Interest-bearing checking deposits comprised 13% and 12% of total deposits as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, deposits were 110% of total loans,2020, compared to 117%with $28.7 million as of December 31, 2016, as the growth in total loans outpaced deposit growth.
Borrowings
The Company utilizes short-term and long-term borrowings to manage its liquidity position. Borrowings include short-term borrowings, long-term FHLB advances and repurchase agreements.
As of September 30, 2017 and December 31, 2016, short-term borrowings were comprised of2019. This funding was entered into by the Company’s subsidiary, East West Bank (China) Limited’sLimited, and will mature in 2020 and the first quarter of 2021. As of March 31, 2020, short-term borrowings of $24.8 million and $60.1 million, respectively. Thehad fixed interest rates of these borrowings rangedranging from 2.96%3.65% to 3.27% and 2.80% to 3.27% as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, the short-term borrowings of $24.8 million are due to mature in the fourth quarter of 2017. 3.73%.
FHLB advances increased by $1.7 million to $323.3were $646.3 million as of September 30, 2017March 31, 2020, a decrease of $99.6 million or 13% from $321.6$745.9 million as of December 31, 2016.2019. As of September 30, 2017,March 31, 2020, FHLB advances had fixed and floating interest rates ranging from 1.48%1.18% to 1.72%2.34% with remaining maturities between 1.41.1 years and 5.12.6 years.
Gross repurchase agreements totaled $450.0 million as of each of September 30, 2017both March 31, 2020 and December 31, 2016.2019. Resale and repurchase agreements are reported net, pursuant to ASC 210-20-45, 210-20-45-11, Balance Sheet Offsetting. Net repurchase agreements totaled $50.0 millionOffsetting: Repurchase and $350.0 million as of September 30, 2017 and December 31, 2016, respectively.Reverse Repurchase Agreements. As of September 30, 2017, $400.0 million of repurchaseMarch 31, 2020, the Company did not have gross resale agreements that were eligible for netting against resale agreements, resulting in $50.0 million ofpursuant to ASC 210-20-45-11. In comparison, net repurchase agreements reported. In comparison, $100.0totaled $200.0 million as of December 31, 2019, after netting $250.0 million of gross repurchase agreements were eligible for netting against gross resale agreements, resulting in $350.0 million of net repurchase agreements reported as of December 31, 2016.agreements. As of September 30, 2017,March 31, 2020, gross repurchase agreements of $450.0 million had interest rates ranging between 3.54%from 3.23% to 3.58% and4.06%, original terms ranging between 10.04.0 years and 16.59.0 years and remaining maturities between 2.6 years and 3.4 years. The remaining maturity terms of the repurchase agreements range between 5.1 and 5.9 years.
Repurchase agreements are accounted for as collateralized financing transactions and recorded atas liabilities based on the balancesvalues at which the securities wereare sold. TheAs of March 31, 2020, the collateral for the repurchase agreements is primarilywas comprised of U.S. Treasury securities, U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities and U.S. government agency and U.S. government sponsoredgovernment-sponsored enterprise debtmortgage-backed securities. To ensure that 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 fundingfunds from a diverse group of counterparties and entering into repurchase agreements with longer durations, when appropriate. For additional details, see Note 5 4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements.Statements in this Form 10-Q.
Long-Term Debt
The Company uses long-term debt to provide funding to acquire income earninginterest-earning assets, as well as to enhance liquidity and enhance liquidity.regulatory capital. Long-term debt which consiststotaled $147.2 million and $147.1 million as of March 31, 2020 and December 31, 2019, respectively. Long-term debt is comprised of junior subordinated debt, and a term loan, decreased $9.8 million or 5% from $186.3 millionwhich qualifies as of December 31, 2016 to $176.5 million as of September 30, 2017. The decrease was primarily due to the quarterly repayment on the term loan, totaling $10.0 million, during the nine months ended September 30, 2017.
Tier 2 capital for regulatory purposes. The junior subordinated debt was issued in connection with the Company’s various pooled trust preferred securities offerings. Junior subordinated debt is recorded as a component of long-term debtofferings and includes the value of the common stock issued by six wholly-owned subsidiaries of the Company in conjunction with these transactions. The junior subordinated debt totaled $152.6 million and $146.3 million as of September 30, 2017 and December 31, 2016, respectively.offerings. The junior subordinated debt had a weighted averageweighted-average interest rate of 2.73%3.13% and 2.22%4.30% for the nine months ended September 30, 2017first quarters of 2020 and 2016,2019, respectively, with remaining maturities ranging between 14.7 years and remaining maturity terms of 17.2 to 20.017.5 years as of September 30, 2017. BeginningMarch 31, 2020.
Foreign Outstandings
The Company’s overseas offices, which include the branch in 2016, trust preferred securities no longer qualifyHong Kong and the subsidiary bank in China, are subject to the general risks inherent in conducting business in foreign countries, such as Tier 1 capitalregulations, or economic and are limited to Tier 2 capital for regulatory purposes, based on Basel III Capital Rules. For further discussion, see Item 1. Business — Supervision and Regulation — Capital Requirements ofpolitical uncertainties. In addition, the Company’s 2016 Form 10-K.
In 2013,financial assets held in the Company entered into a $100.0 million three-year term loan agreement. The terms of the agreement were modified in 2015 to extend the term loan maturity from July 1, 2016 to December 31, 2018, where principal repayments of $5.0 million are due quarterly. The term loan bears interest at the rate of the three-month London Interbank Offered Rate plus 150 basis pointsHong Kong branch and the weighted average interest rate was 2.65%subsidiary bank in China may be affected by fluctuations in currency exchange rates or other factors. The Company’s country risk exposure is largely concentrated in China and 2.19% forHong Kong. The following table presents the nine months ended September 30, 2017 and 2016, respectively. The outstanding balance ofmajor financial assets held in the term loan was $30.0 million and $40.0 millionCompany’s overseas offices as of September 30, 2017March 31, 2020 and December 31, 2016, respectively.2019:
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Amount | | % of Total Consolidated Assets | | Amount | | % of Total Consolidated Assets |
| Hong Kong branch: | | | | | | | | |
| Cash and cash equivalents | | $ | 294,054 |
| | 1 | % | | $ | 511,639 |
| | 1 | % |
AFS debt securities (1) | | $ | 204,942 |
| | 0 | % | | $ | 204,948 |
| | 0 | % |
Loans held-for-investment (2) | | $ | 542,697 |
| | 1 | % | | $ | 573,305 |
| | 1 | % |
| Total assets | | $ | 1,132,054 |
| | 2 | % | | $ | 1,361,652 |
| | 3 | % |
| Subsidiary bank in China: | | | | | | | | |
| Cash and cash equivalents | | $ | 544,860 |
| | 1 | % | | $ | 548,930 |
| | 1 | % |
| Interest-bearing deposits with banks | | $ | 219,517 |
| | 0 | % | | $ | 142,587 |
| | 0 | % |
Loans held-for-investment (2) | | $ | 745,553 |
| | 2 | % | | $ | 819,110 |
| | 2 | % |
| Total assets | | $ | 1,562,179 |
| | 3 | % | | $ | 1,520,627 |
| | 3 | % |
| |
(1)Comprised of foreign bonds as of March 31, 2020 and comprised of foreign bonds and U.S. Treasury securities as of December 31, 2019.
(2)Primarily comprised of C&I loans as of both March 31, 2020 and December 31, 2019.
The following table presents the total revenue generated by the Company’s overseas offices for the first quarters of 2020 and 2019:
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| | Amount | | % of Total Consolidated
Revenue | | Amount | | % of Total Consolidated
Revenue |
| Hong Kong branch: | | | | | | | | |
| Total revenue | | $ | 6,929 |
| | 2 | % | | $ | 8,897 |
| | 2 | % |
| Subsidiary bank in China: | | | | | | | | |
| Total revenue | | $ | 7,179 |
| | 2 | % | | $ | 7,084 |
| | 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 compliance 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 authorized the repurchase of up to $500.0 million of the Company’s common stock. This $500.0 million repurchase authorization is inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The Company determines the timing and amount of repurchases, based on its assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the economic environment. The Company repurchased 4,471,682 shares at a total cost of $146.0 million during the first quarter of 2020. The Company's total remaining available share repurchase authorization as of March 31, 2020 was $354.0 million.
The Company’s stockholders’ equity increased by $354.2 million or 10% to $3.78was $4.90 billion as of September 30, 2017, compared to $3.43March 31, 2020, a $114.6 million or 2% decrease from $5.02 billion as of December 31, 2016.2019. The decrease in the Company’s primary source of capital is the retention of its operating earnings. Retained earnings increased by $333.1 million or 15%to $2.52 billion as of September 30, 2017, compared to $2.19 billion as of December 31, 2016. The increasestockholders’ equity was primarily due to share repurchase activity of $146.0 million; a decrease in opening retained earnings of $98.0 million as a result of the adoption of ASU 2016-13, and cash dividends declared of $40.5 million during the first quarter of 2020, offset by first quarter 2020 net income of $420.7 million, reduced by $87.6 million of cash dividends during the nine months ended September 30, 2017. In addition, common stock and additional paid-in capital increased by $17.7 million or 1.0% primarily due to the activities in employee stock compensation plans.$144.8 million. For other factors that contributed to the changes in stockholders’ equity, refer to theItem 1. Consolidated Financial Statements — Consolidated Statement of Changes in Stockholders’ Equity.Equity in this Form 10-Q.
Book value was $26.17$34.67 per common share based on 144.5 million common shares outstanding as of September 30, 2017,March 31, 2020, compared to $23.78with $34.46 per common share based on 144.2 million common shares outstanding as of December 31, 2016.2019. The Company madepaid a quarterly cash dividend payments of $0.20$0.275 and $0.230 per common share in each quarter duringfor the nine months ended September 30, 2017first quarters of 2020 and 2016.2019, respectively. In October 2017,April 2020, the Company’s Board of Directors (the “Board”) declared fourthsecond quarter 20172020 cash dividends for the Company’sof $0.275 per common stock.share. The common stock cash dividend of $0.20 per share is payablewill be paid on NovemberMay 15, 20172020 to stockholders of record as of November 1, 2017.May 4, 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 — Capital Requirements of the Company’s 20162019 Form 10-K for additional details.
The Basel III Capital Rules became effective for the Company and the Bankadopted ASU 2016-13 on January 1, 2015 (subject to2020. The Company has elected the phase-in periodsoption provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital for certain components).
The Basel III Capital Rules require that banking organizations maintain a minimum CET1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%,two years and a total capital ratio of 8.0%. Moreover,phases the rules require that banking organizations maintain a capital conservation buffer of 2.5% above the capital minimums are being phased-inimpact over fourthree years beginning in 2016 (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). When fully phased-in in 2019,2022. As a result, the banking organizations will be required to maintain a minimum CET1 capital ratioMarch 31, 2020 ratios exclude the impact of 7.0%, a minimum Tier 1 capital ratio of 8.5% and a minimum total capital ratio of 10.5% to avoid limitations on capital distributions (including common stock dividends and share repurchases) and certain discretionary incentive compensation payments.
The Company is committed to maintaining capital at a level sufficient to assure the Company’s stockholders, customers and regulators that the Company and the Bank are financially sound. As of September 30, 2017 and December 31, 2016, both the Company and the Bank were considered “well-capitalized,” and met all capital requirements on a fully phased-in basis under the Basel III Capital Rules.
increased allowance for credit losses. The following table presents the Company’s and the Bank’s capital ratios as of September 30, 2017March 31, 2020 and December 31, 20162019 under the Basel III Capital Rules, and those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| | | Basel III Capital Rules |
| | September 30, 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 | % | | 11.3 | % | | 10.9 | % | | 11.3 | % | | 4.5 | % | | 6.5 | % | | 7.0 | % |
| Tier 1 risk-based capital | | 11.4 | % | | 11.3 | % | | 10.9 | % | | 11.3 | % | | 6.0 | % | | 8.0 | % | | 8.5 | % |
| Total risk-based capital | | 12.9 | % | | 12.3 | % | | 12.4 | % | | 12.3 | % | | 8.0 | % | | 10.0 | % | | 10.5 | % |
| Tier 1 leverage capital | | 9.4 | % | | 9.3 | % | | 8.7 | % | | 9.1 | % | | 4.0 | % | | 5.0 | % | | 4.0 | % |
| |
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| | | Basel III Capital Rules |
| | March 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: | | | | | | | | | | | | | | |
| CET1 capital | | 12.4 | % | | 12.3 | % | | 12.9 | % | | 12.9 | % | | 4.5 | % | | 7.0 | % | | 6.5 | % |
| Tier 1 capital | | 12.4 | % | | 12.3 | % | | 12.9 | % | | 12.9 | % | | 6.0 | % | | 8.5 | % | | 8.0 | % |
| Total capital | | 13.9 | % | | 13.4 | % | | 14.4 | % | | 13.9 | % | | 8.0 | % | | 10.5 | % | | 10.0 | % |
Tier 1 leverage (1) | | 10.2 | % | | 10.1 | % | | 10.3 | % | | 10.3 | % | | 4.0 | % | | 4.0 | % | | 5.0 | % |
| |
| |
| (1) | The Tier 1 leverage well-capitalized requirement applies to the Bank only because there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank-holding company. |
| |
| (2) | As of January 1, 2019, the 2.5% capital conservation buffer above the minimum capital ratios is required in order to avoid limitations on distributions, including dividend payments and certain discretionary bonus payments to executive officers. |
The Company is committed to maintaining strong capital levels to assure the Company’s CET1investors, customers and Tier 1regulators that the Company and the Bank are financially sound. As of March 31, 2020 and December 31, 2019, both the Company and the Bank continued to exceed all “well-capitalized” capital ratios have improved by 49 basis points, whilerequirements and the total risk-based and Tier 1 leveragefully phased-in required minimum capital ratios increased by 48 and 65 basis points, respectively, duringrequirements under the nine months ended September 30, 2017. The improvement was primarily driven by the increases in revenues, primarily due toBasel III Capital Rules. Total risk-weighted assets were $36.55 billion as of March 31, 2020, an increase in net interest income and net gains recorded from the sale of commercial property during the first quarter of 2017. The $1.82$1.41 billion or 7% increase in risk-weighted assets increased4% from $27.36$35.14 billion as of December 31, 2016 to $29.18 billion as of September 30, 20172019. The increase in the risk-weighted assets was primarily due to loan growth and an increase in derivative fair values.
Other Matters
LIBOR Transition
On July 27, 2017, the growthUnited Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), announced that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021. Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including to the Company. The Company’s commercial and consumer businesses issue, trade, and hold various products that are currently indexed to LIBOR. A portion of the Company’s Consolidated Balance Sheets. As of September 30, 2017, the Company’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capital ratiosloans, derivatives, debt securities, resale agreements, FHLB advances, and Tier 1 leverage capital ratios were 11.4%, 11.4%, 12.9%deposits, as well as junior subordinated debt and 9.4%, respectively, well above the well-capitalized requirements of 6.5%, 8.0%, 10.0%repurchase agreements are indexed to LIBOR and 5.0%, respectively.
Regulatory Matters
mature after 2021. 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 BSA and AML programs detailed in a joint examination by the Federal Reserve Bank of San Francisco (“FRB”) and the California Department of Business Oversight (“DBO”). The Bank also entered into a related Memorandum of Understanding (“MOU”) with the DBO in 2015. See Item 7. MD&A — Regulatory Matters and Note 18 — Regulatory Requirements and Matters to the Consolidated Financial Statementsvolume of the Company’s 2016 Form 10-Kproducts that are indexed to LIBOR is significant, and if not sufficiently planned for, further details.the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks.
The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR. In early 2019, the ARRC released final recommended fallback contract language for new issuances of LIBOR indexed bilateral business loans, syndicated loans, floating-rate notes and securitizations. The International Swaps and Derivatives Association, Inc. is in the process of developing detailed guidance on fallback contract language.
The Company believeshas been closely monitoring the impact of COVID-19 and any potential delay in the cessation of LIBOR. Although the Financial Conduct Authority has expressed that it is assessing the potential impacts of COVID-19 on transition timelines, the target date currently remains unchanged.
Due to the uncertainty surrounding the future of LIBOR, the transition is anticipated to span several reporting periods through the end of 2021, unless there is a delay in the cessation of LIBOR due to impacts of COVID-19. Certain actions already taken by the Company related to the transition of LIBOR include (1) establishing a cross-functional team to identify, assess and monitor risks associated with the transition of LIBOR and other benchmark rates, (2) developing an inventory of LIBOR indexed products, and (3) implementing more robust fallback contract language for new loans, which identifies LIBOR cessation trigger events, provides for an alternative index and permits an adjustment to the margin as applicable. The Company continues to monitor this activity and evaluate the related risks. The Company’s cross-functional team also manages communication of the Company’s transition plans with both internal and external stakeholders and ensures that the Bank is making progress in executingCompany appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruption during and after the compliance plans 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 Bank has added significant resources to meet the monitoring and reporting obligations imposed by the Written Agreement and will continue to require significant management and third party consultant resources to comply with the Written Agreement and MOU, and to address anyLIBOR transition. For additional findings or recommendations by the regulators. These incremental administrative and third party costs, as well as the operational restrictions imposed by the Written Agreement, may adversely affect the Bank’s results of operations.
If additional compliance issues are identified or the regulators determine the Bank has not satisfactorily complied with the terms of the Written Agreement, the regulators could take further actions with respectinformation related to the Bank and, if such further actions were taken, such actions could have a material adverse effectpotential impact surrounding the transition from LIBOR on the Bank. The operating and other conditionsCompany’s business, see Item 1A. Risk Factors in the BSA and AML program and the auditing and oversight of the program that led to the Written Agreement and MOU could also lead to an increased risk of being subject to additional actions by the DBO and FRB, an increased risk of future examinations that may downgrade the regulatory ratings of the Bank, and an increased risk investigations by other government agencies may result in fines, penalties, increased expenses or restrictions on operations. Company’s 2019 Form 10-K.
Off-Balance Sheet Arrangements
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 SheetsSheet and are considered to be off-balance sheet arrangements. Off-balance sheet arrangements are any contractual arrangements whereby an unconsolidatedto 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.
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 September 30, 2017:is provided in Note 10 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.
|
| | | | |
| |
| ($ in thousands) | | Commitments
Outstanding |
| Loan commitments | | $ | 4,956,515 |
|
| Commercial letters of credit and SBLCs | | $ | 1,757,648 |
|
| |
Guarantees
In the ordinary course of business, the Company enters into various guarantee agreements in which the Company sells or securitizes loans with recourse. Under these guarantee arrangements, the Company is contingently obligated to repurchase the recourse component of the loans when the loans default. Additional information regarding guarantees is provided in Note 10 —Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.
A discussion of significant contractual arrangements under which the Company may be held contingently liable is included in Note 11 10—Commitments and Contingenciesto the Consolidated Financial Statements.Statements in this Form 10-Q. In addition, the Company has commitments and obligations under post-retirement benefit plans as described in Note 15 17 — Employee Benefit Plans to the Consolidated Financial Statements of the Company’s 20162019 Form 10-K, and has contractual obligations for future payments on debts, borrowings and lease obligations as detailed in Item 7 —7. MD&A — Off-Balance Sheet Arrangements and Aggregate Contractual Obligations of the Company’s 20162019 Form 10-K.
Asset Liability and Market Risk Management
LiquidityOverview
Liquidity refersIn the course of 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 abilitybusinesses. The Company operates under a Board approved enterprise risk management (“ERM”) framework, which outlines its 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 capital risk, strategic risk, credit risk, liquidity risk, market risk, operational risk, reputational risk, and legal and compliance risk.
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 analyses of each major risk area are included in the following sub-sections of Risk Management.
Credit Risk Management
Credit risk is the risk that a borrower or counterparty will fail to perform according to terms and conditions of a loan or investment and expose the Company to loss. Credit risk exists with many of our assets and exposures such as loans and certain derivatives. The majority of our 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, portfolio credit risk management and processes to enable management to control credit risk including diversification and liquidity. 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 reports on the overall credit risk portfolio to senior management and the Risk Oversight Committee. The Independent Asset Review function supports a strong credit risk management culture by providing independent and objective assessments of the quality of underwriting and documentation, reporting directly to the Board’s Risk Oversight Committee. A key to our credit risk management is adherence to a well-controlled underwriting process.
A meaningful way to assess overall credit quality performance of our held-for-investment portfolio is through an analysis of specific performance ratios. This approach forms the basis of the discussion in the sections immediately following: Non-performing Assets, Troubled Debt Restructurings (“TDRs”), and Allowance for Credit Losses.
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, other real estate owned (“OREO”), and other nonperforming assets. OREO and other nonperforming assets are repossessed assets and properties 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 Financial Statements of the Company’s 2019 Form 10-K.
The following table presents information regarding nonperforming assets as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Nonaccrual Loans | | Non-PCI Nonaccrual Loans |
| Commercial: | | | | |
| C&I | | $ | 89,079 |
| | $ | 74,835 |
|
| CRE: | | | | |
| CRE | | 6,298 |
| | 16,441 |
|
| Multifamily residential | | 803 |
| | 819 |
|
| Total CRE | | 7,101 |
| | 17,260 |
|
| Consumer: | | | | |
| Residential mortgage: | | | | |
| Single-family residential | | 17,536 |
| | 14,865 |
|
| HELOCs | | 10,446 |
| | 10,742 |
|
| Total residential mortgage | | 27,982 |
| | 25,607 |
|
| Other consumer | | 2,506 |
| | 2,517 |
|
| Total nonaccrual loans | | 126,668 |
| | 120,219 |
|
| | | | | |
| OREO, net | | 19,504 |
| | 125 |
|
| Other nonperforming assets | | 4,758 |
| | 1,167 |
|
| Total nonperforming assets | | $ | 150,930 |
| | $ | 121,511 |
|
Nonperforming assets to total assets | | 0.33 | % | | 0.27 | % |
| Nonaccrual loans to loans held-for-investment | | 0.35 | % | | 0.35 | % |
| Allowance for loan losses to nonaccrual loans | | 439.73 | % | | 298.03 | % |
| Annualized quarterly net charge-offs to average loans held-for-investment | | 0.01 | % | | 0.10 | % |
| TDR included in nonperforming loans | | $ | 34,364 |
| | $ | 54,566 |
|
| |
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 for loan repayments and for loans that are 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. Nonaccrual loans were $126.7 million as of March 31, 2020, an increase of $6.4 million or 5% from $120.2 million as of December 31, 2019. This increase is primarily due to new additions from C&I and residential mortgage loans, partially offset by charge-offs and loans returned to accrual status, paid down or paid off. Nonaccrual loans as a percentage of loans held-for-investment were 0.35% as of both March 31, 2020 and December 31, 2019. C&I nonaccrual loans were 70% and 62% of total nonaccrual loans as of March 31, 2020 and December 31, 2019, respectively. Credit risk related to the C&I nonaccrual loans were partially mitigated by the collateral in place. As of March 31, 2020, $61.9 million, or 49%, of the $126.7 million nonaccrual loans were less than 90 days delinquent. In comparison, $35.6 million or 30%, of the $120.2 million nonaccrual loans were less than 90 days delinquent as of December 31, 2019.
OREO was $19.5 million as of March 31, 2020, a quarter-over-quarter increase of $19.4 million because the Company took possession of a retail CRE property located in Southern California.
The following table presents the accruing loans past due by portfolio segments as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Total Accruing Past Due Loans (1) | | Change | | Percentage of Total Loans Outstanding |
| | March 31, 2020 | | December 31, 2019 | | | March 31, 2020 | | December 31, 2019 |
| Commercial: | | | | | | | | | | | | |
| C&I | | $ | 18,385 |
| | $ | 48,155 |
| | $ | (29,770 | ) | | (62 | )% | | 0.15 | % | | 0.40 | % |
| CRE: | | | | | | | | | | | | |
| CRE | | 6,986 |
| | 24,807 |
| | (17,821 | ) | | (72 | )% | | 0.07 | % | | 0.24 | % |
| Multifamily residential | | 876 |
| | 729 |
| | 147 |
| | 20 | % | | 0.03 | % | | 0.03 | % |
| Total CRE | | 7,862 |
| | 25,536 |
| | (17,674 | ) | | (69 | )% | | 0.06 | % | | 0.19 | % |
| Total commercial | | 26,247 |
| | 73,691 |
| | (47,444 | ) | | (64 | )% | | 0.10 | % | | 0.29 | % |
| Consumer: | | | | | | | | | | | | |
| Residential mortgage: | | | | | | | | | | | | |
| Single-family residential | | 58,663 |
| | 20,517 |
| | 38,146 |
| | 186 | % | | 0.79 | % | | 0.29 | % |
| HELOCs | | 14,634 |
| | 7,064 |
| | 7,570 |
| | 107 | % | | 1.01 | % | | 0.48 | % |
| Total residential mortgage | | 73,297 |
| | 27,581 |
| | 45,716 |
| | 166 | % | | 0.83 | % | | 0.32 | % |
| Other consumer | | 63 |
| | 11 |
| | 52 |
| | 473 | % | | 0.02 | % | | 0.00 | % |
| Total consumer | | 73,360 |
| | 27,592 |
| | 45,768 |
| | 166 | % | | 0.81 | % | | 0.31 | % |
| Total | | $ | 99,607 |
| | $ | 101,283 |
| | $ | (1,676 | ) | | (2 | )% | | 0.28 | % | | 0.29 | % |
| |
| |
| (1) | There were no accruing loans past due 90 days or more as of both March 31, 2020 and December 31, 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. Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectibility and meet the borrower’s financial needs. The Company has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act, the Company has elected to not apply TDR classification to any COVID-19 related loan modifications. On April 7, 2020, the federal banking regulators issued the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronovirus (Revised)” (the Interagency Statement). The Interagency Statement provides additional TDR relief as it clarifies that it is not necessary to consider the impact of the COVID-19 pandemic on the financial condition of a borrower in connection with a short-term (e.g., six months) COVID-19 related loan modification provided that the borrower is current at the date the modification program is implemented. For COVID-19 related loan modifications in the form of payment deferrals, the delinquency status will not advance and loans that were accruing at the time that the relief is provided will generally not be placed on nonaccrual status during the deferral period. Interest income will continue to be recognized over the contractual life of the loan.
The following table presents the performing and nonperforming TDRs by portfolio segments as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Performing TDRs | | Nonperforming TDRs | | Performing TDRs | | Nonperforming TDRs |
| Commercial: | | | | | | | | |
| C&I | | $ | 30,186 |
| | $ | 31,956 |
| | $ | 39,208 |
| | $ | 41,014 |
|
| CRE: | | | | | | | | |
| CRE | | 5,133 |
| | 385 |
| | 5,177 |
| | 11,503 |
|
| Multifamily residential | | 3,320 |
| | 222 |
| | 3,644 |
| | 229 |
|
| Construction and land | | 19,691 |
| | — |
| | 19,691 |
| | — |
|
| Total CRE | | 28,144 |
| | 607 |
| | 28,512 |
| | 11,732 |
|
| Consumer: | | | | | | | | |
| Residential mortgage: | | | | | | | | |
| Single-family residential | | 6,764 |
| | 1,085 |
| | 7,346 |
| | 1,098 |
|
| HELOCs | | 2,814 |
| | 716 |
| | 2,832 |
| | 722 |
|
| Total residential mortgage | | 9,578 |
| | 1,801 |
| | 10,178 |
| | 1,820 |
|
| Total TDRs | | $ | 67,908 |
| | $ | 34,364 |
| | $ | 77,898 |
| | $ | 54,566 |
|
| |
Performing TDRs were $67.9 million as of March 31, 2020, a decrease of $10.0 million or 13% from $77.9 million as of December 31, 2019. This decrease reflects performing C&I loans no longer classified as TDR, loan pay-offs and loan paydowns, offset by three C&I loans that were newly designated as TDR. Nonperforming TDRs were $34.4 million as of March 31, 2020, a decrease of $20.2 million, or 37% from $54.6 million as of December 31, 2019. This decrease primarily reflects one CRE loan transferred to OREO.
Allowance for Credit Losses
The allowance for credit losses includes the allowance for loan losses and the allowance for unfunded credit commitments.
Allowance for Loan Losses — The allowance for loan losses is a valuation account that is deducted from, or added to, the amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loan loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loan loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level as well as for changes in environmental conditions.
Allowance for loan losses is measured on a collective basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral, adjusted for selling cost as appropriate.
Allowance for Unfunded Credit Commitments— The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for unfunded credit commitments is adjusted through Provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance for unfunded credit commitments include reserves provided for unfunded lending commitments, SBLCs, and recourse obligations for loans sold.
The allowance for loan losses is reported separately on the Consolidated Balance Sheet, whereas the allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. The Provision for credit losses is reported on the Consolidated Statement of Income.
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. In addition to regular quarterly reviews of the adequacy of the allowance for credit losses, the Company performs ongoing assessments of the risks inherent in the loan portfolio. While the Company believes that the allowance for credit losses was appropriate as of March 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. The Company adopted ASU2016-13 on January 1, 2020. For additional information, see Note 2 —Current Accounting Developments and Summary of Significant Accounting Policies —New Accounting Pronouncements Adopted. The calculation of the allowance for credit losses involves subjective and complex judgments. For additional details about the Company’s allowance for credit losses, including the methodologies used, see Note 7 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements and Item 7. MD&A — Critical Accounting Policies and Estimates in this Form 10-Q.
The following table presents a summary of activities in the allowance for loan losses for loans by portfolio segments for the first quarter of 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Residential Mortgage | | Other Consumer | |
| | | CRE | | Multi-Family Residential | | Construction and Land | | Single- Family Residential | | HELOCs | | |
| Allowance for loan losses, December 31, 2019 | | $ | 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 |
|
| Allowance for loan losses, January 1, 2020 | | 312,613 |
| | 112,678 |
| | 14,714 |
| | 9,515 |
| | 24,857 |
| | 3,467 |
| | 5,601 |
| | 483,445 |
|
| Provision for (reversal of ) credit losses | | 60,618 |
| | 11,435 |
| | 1,281 |
| | 1,482 |
| | 1,700 |
| | 412 |
| | (2,272 | ) | | 74,656 |
|
| Gross charge-offs | | (11,977 | ) | | (954 | ) | | — |
| | — |
| | — |
| | — |
| | (26 | ) | | (12,957 | ) |
| Gross recoveries | | 1,575 |
| | 9,660 |
| | 535 |
| | 21 |
| | 265 |
| | 2 |
| | 1 |
| | 12,059 |
|
| Total net charge-offs | | (10,402 | ) | | 8,706 |
| | 535 |
| | 21 |
| | 265 |
| | 2 |
| | (25 | ) | | (898 | ) |
| Foreign currency translation adjustments | | (200 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (200 | ) |
| Allowance for loan losses, March 31, 2020 | | $ | 362,629 |
| | $ | 132,819 |
| | $ | 16,530 |
| | $ | 11,018 |
| | $ | 26,822 |
| | $ | 3,881 |
| | $ | 3,304 |
| | $ | 557,003 |
|
| |
The following table presents a summary of activities in the allowance for unfunded credit commitments for the first quarter of 2020:
|
| | | | |
| |
| ($ in thousands) | | Three Months Ended
March 31, 2020 |
| Unfunded credit facilities | | |
| Allowance for unfunded credit commitments, December 31, 2019 | | $ | 11,158 |
|
| Impact of ASU 2016-13 adoption | | 10,457 |
|
| Allowance for unfunded credit commitments, January 1, 2020 | | 21,615 |
|
| Reversal of credit losses | | (786 | ) |
| Allowance for unfunded credit commitments, March 31, 2020 | | $ | 20,829 |
|
| | | |
| Total provision for credit losses | | $ | 73,870 |
|
| |
The following table presents a summary of activities in the allowance for loan losses and the allowance for unfunded credit commitments for the first quarter of 2019:
|
| | | | |
| |
| ($ in thousands) | | Three Months Ended
March 31, 2019 |
| Allowance for loan losses, beginning of period | | $ | 311,322 |
|
| Provision for loan losses | (a) | 20,640 |
|
| Gross charge-offs: | | |
| Commercial: | | |
| C&I | | (17,244 | ) |
| Consumer: | | |
| Other consumer | | (14 | ) |
| Total gross charge-offs | | (17,258 | ) |
| Gross recoveries: | | |
| Commercial: | | |
| C&I | | 2,251 |
|
| CRE: | | |
| CRE | | 222 |
|
| Multifamily residential | | 281 |
|
| Construction and land | | 63 |
|
| Total CRE | | 566 |
|
| Consumer: | | |
| Residential mortgage: | | |
| Single-family residential | | 2 |
|
| HELOCs | | 2 |
|
| Total residential mortgage | | 4 |
|
| Total gross recoveries | | 2,821 |
|
| Net charge-offs | | (14,437 | ) |
| Foreign currency translation adjustments | | 369 |
|
| Allowance for loan losses, end of period | | $ | 317,894 |
|
| | | |
| Unfunded credit facilities | | |
| Allowance for unfunded credit commitments, beginning of period | | $ | 12,566 |
|
| Provision for credit losses | (b) | 1,939 |
|
| Allowance for unfunded credit commitments, end of period | | $ | 14,505 |
|
| | | |
| Total provision for credit losses | (a) + (b) | $ | 22,579 |
|
| |
The following table presents the Company’s credit quality ratios for the first quarters of 2020 and 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Average loans held-for-investment | | $ | 35,153,522 |
| | $ | 32,414,467 |
|
| Loans held-for-investment | | $ | 35,893,393 |
| | $ | 32,863,286 |
|
| Allowance for loan losses on loans to loans held-for-investment | | 1.55 | % | | 0.97 | % |
| Annualized net charge-offs to average loans held-for-investment | | 0.01 | % | | 0.18 | % |
| |
As of March 31, 2020, the allowance for loan losses amounted to $557.0 million or 1.55% of loans held-for-investment, compared with $358.3 million or 1.03% and $317.9 million or 0.97% of loans held-for-investment as of December 31, 2019 and March 31, 2019, respectively. The increase in allowance for loan losses was largely due to a combination of factors: the adoption of ASU 2016-13 which increased allowance for loan losses by $125.2 million, a deterioration in the forecasted macroeconomic variables related to the impact of COVID-19 pandemic and loan growth that resulted in a $73.9 million increase in provision for credit losses. Gross charge-offs of $13.0 million were primarily from C&I loans, which were almost entirely offset by recoveries, primarily from CRE loans. C&I charge-offs in the first quarter of 2020 of $12.0 million, primarily resulted from our oil and gas loan portfolio.
The allowance for unfunded credit commitments was $20.8 million as of March 31, 2020 and $11.2 million as of December 31, 2019. The allowance for unfunded credit commitments as of March 31, 2020 included a cumulative-effect adjustment due to the adoption of ASU 2016-13. The Company believes that the allowance for credit losses as of March 31, 2020 and December 31, 2019 was adequate.
The following table presents the Company’s allocation of the allowance for loan losses by portfolio segment and the ratio of each loan type to total loans held-for-investment as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Allowance Allocation | | % of Allowance to Total Allowance | | Loans as % of Total Loans | | Allowance Allocation | | % of Allowance to Total Allowance | | Loans as % of Total Loans |
| Commercial: | | | | | | | | | | | | |
| C&I | | $ | 362,629 |
| | 65 | % | | 35 | % | | $ | 238,376 |
| | 67 | % | | 35 | % |
| CRE: | | | | | | | | | | | | |
| CRE | | 132,819 |
| | 24 | % | | 30 | % | | 40,509 |
| | 11 | % | | 30 | % |
| Multifamily residential | | 16,530 |
| | 3 | % | | 8 | % | | 22,826 |
| | 6 | % | | 8 | % |
| Construction and land | | 11,018 |
| | 2 | % | | 2 | % | | 19,404 |
| | 5 | % | | 2 | % |
| Total CRE | | 160,367 |
| | 29 | % | | 40 | % | | 82,739 |
| | 22 | % | | 40 | % |
| Consumer: | | | | | | | | | | | | |
Residential mortgage:
| | | | | | | | | | | | |
| Single-family residential | | 26,822 |
| | 4 | % | | 20 | % | | 28,527 |
| | 8 | % | | 20 | % |
| HELOCs | | 3,881 |
| | 1 | % | | 4 | % | | 5,265 |
| | 2 | % | | 4 | % |
| Total residential mortgage | | 30,703 |
| | 5 | % | | 24 | % | | 33,792 |
| | 10 | % | | 24 | % |
| Other consumer | | 3,304 |
| | 1 | % | | 1 | % | | 3,380 |
| | 1 | % | | 1 | % |
| Total | | $ | 557,003 |
| | 100 | % | | 100 | % | | $ | 358,287 |
| | 100 | % | | 100 | % |
| |
The allowance for loan losses increased $198.7 million or 55% from December 31, 2019, primarily driven by ASU 2016-13 adoption impact of $74.2 million in C&I and $72.2 million in CRE loans, as well as first quarter 2020 provision for C&I credit losses of $60.6 million mainly due to the significant deterioration in the economic outlook from the COVID-19 pandemic.
Upon adoption of ASU 2016-13, allowance for loan losses for PCD loans is determined using the same methodology as other loans held-for-investment. As of December 31, 2019, the Company had no allowance for loan losses against $222.9 million of PCI loans.
Liquidity Risk Management
Liquidity
Liquidity is a financial institution’s capacity to meet its contractualdeposit and contingent financialother counterparties’ obligations on or off-balance sheet, as they become due.come due, or to obtain adequate funding at a reasonable cost to meet those obligations. The Company’s primaryobjective of liquidity management objective is to provide sufficient funding for its businesses throughout market cyclesmanage the potential mismatch of asset and be ableliability cash flows. Maintaining an adequate level of liquidity depends on the institution’s ability to manageefficiently meet both expected and unexpected cash flowflows, and collateral needs and requirements without adversely impactingaffecting daily operations or the financial healthcondition of the Company.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”) sets the liquidity guidelines that govern the day-to-day active management of the Company’s liquidity position. The ALCO regularly monitors the Company’s liquidity status and related management processes, and provides regular reports to the Board.Board of Directors.
Liquidity Risk — Liquidity Sources. The Company’s primary source of funding is from deposits generated by its banking business, which is relatively stable and low-cost. Total deposits amounted to $38.69 billion as of March 31, 2020, compared with $37.32 billion as of December 31, 2019. The Company’s loan-to-deposit ratio was 93% as of both March 31, 2020 and December 31, 2019. In addition, the Company has access to various sources of wholesale funding, as well as borrowing capacity at the FHLB and Federal Reserve Bank of San Francisco (“FRB”) 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 2— MD&A — Balance Sheet Analysis — Deposits and Other Sources of Funds in this Form 10-Q for further detail related to the Company’s funding sources.
The Company maintains liquidity in the form ofCompany’s liquid assets include cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements and available-for-sale investmentAFS debt securities. These assets totaled $5.10 billion and $5.54 billion, accounting for 14% and 16% of totalThe following table presents the Company’s liquid assets as of September 30, 2017March 31, 2020 and December 31, 2016, respectively. Traditional forms of funding such as customer deposits2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | March 31, 2020 | | December 31, 2019 |
| | Encumbered | | Unencumbered | | Total | | Encumbered | | Unencumbered | | Total |
| Cash and cash equivalents | | $ | — |
| | $ | 3,080,042 |
| | $ | 3,080,042 |
| | $ | — |
| | $ | 3,261,149 |
| | $ | 3,261,149 |
|
| Interest-bearing deposits with banks | | — |
| | 293,509 |
| | 293,509 |
| | — |
| | 196,161 |
| | 196,161 |
|
| Short-term resale agreements | | — |
| | 400,000 |
| | 400,000 |
| | — |
| | 400,000 |
| | 400,000 |
|
| AFS debt securities | | 742,410 |
| | 2,953,533 |
| | 3,695,943 |
| | 479,432 |
| | 2,837,782 |
| | 3,317,214 |
|
| Total | | $ | 742,410 |
| | $ | 6,727,084 |
| | $ | 7,469,494 |
| | $ | 479,432 |
| | $ | 6,695,092 |
| | $ | 7,174,524 |
|
| |
Unencumbered liquid assets totaled $6.73 billion and borrowings augment these liquid assets. Total customer deposits amounted to $31.31$6.70 billion as of September 30, 2017, compared to $29.89 billion as of DecemberMarch 31, 2016, of which core deposits comprised 81% of total deposits as of each of September 30, 20172020 and December 31, 2016. 2019, respectively. AFS debt securities included as part of liquidity sources are primarily comprised of mortgage-backed securities and debt securities issued by U.S. government agency and U.S. government-sponsored enterprises, municipal securities, and foreign bonds. The Company believes these AFS debt securities provide quick sources of liquidity to obtain financing, regardless of market conditions, through sale or pledging.
As a means of augmenting the Company’s liquidity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB and FRB, unsecured federal funds’funds lines of credit with various correspondent banks, for purchase of overnight funds, and several master repurchase agreements with major brokerage companies. The Company’s available borrowing capacity with the FHLB and FRB was $6.45$6.68 billion and $3.23$2.91 billion, respectively, as of September 30, 2017.March 31, 2020. Unencumbered loans and/or securities were pledged to the FHLB and FRB discount window as collateral. Eligibility of collateral is defined in guidelines from the FHLB and FRB and is subject to change at their discretion. The Bank’s unsecured federal funds’funds lines of credit, subject to availability, totaled $731.0$875.0 million with correspondent banks as of September 30, 2017. TheMarch 31, 2020. Estimated borrowing capacity from unpledged AFS debt securities totaled $2.51 billion as of March 31, 2020. In sum, the Company had available borrowing capacity of $13.0 billion as of March 31, 2020, and the Company believes that its liquidity sources are sufficient to meet all reasonably foreseeable short-term needs over the next 12 months.
Liquidity Risk — Liquidity for East West. East West’s primary source of liquidity is from cash dividends by its subsidiary, East West Bank. The Bank is subject to various statutory and intermediate-term needs.
The Company experienced net cash inflows from operating activitiesregulatory restrictions on its ability to pay dividends as discussed in Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of $665.0Funds of the Company’s 2019 Form 10-K. During the first quarters of 2020 and 2019, the Bank paid total dividends of $211.0 million and $417.6$40.0 million duringto East West, respectively.
Liquidity Risk — Liquidity Stress Testing. Liquidity stress testing is performed at the nine months ended September 30, 2017Company level, as well as at the foreign subsidiary and 2016, respectively. The $247.4 million increase in net cash inflows from operating activities between these periods was primarily dueforeign branch levels. Stress testing and scenario analysis are intended to quantify the potential impact of a $99.8 million increase in net income, a $108.3 million increase in netliquidity event on the financial and liquidity position of the entity. These scenarios include assumptions about significant changes in cash flows receivable from other assetskey 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 $76.2 million increase in net changes invariety of time horizons, both immediate and longer term, and over a variety of stressed conditions. Given the cash flows from accrued expenses and other liabilities, partially offset by a $32.5 million change in non-cash amounts. The $108.3 million increase in net changes in cash flows receivable from other assets, comparing the nine months ended September 30, 2017 to the same period in 2016, was primarily due to a reduction in tax receivables, and an increase in fair valuerange of interest rate swaps and options during the nine months ended September 30, 2016 contributing to operating cash outflows in that period. The $76.2 million increase in net changes in the cash flows from accrued expenses and other liabilities, comparing the nine months ended September 30, 2017 to the same period in 2016, was primarily due to a larger wire transfer in transit and an increase in tax payables.
Net cash used in investing activities totaled $2.07 billion and $473.3 million during the nine months ended September 30, 2017 and 2016, respectively. The $1.59 billion increase in net cash used in investing activities was primarily due to a $1.69 billion increase in net cash outflows from loans held-for-investment, partially offset by a $150.0 million increase in net cash inflows from resale agreements.
During the nine months ended September 30, 2017 and 2016,potential stresses, the Company experienced net cash inflows from financing activitiesmaintains a series of $1.24 billioncontingency funding plans on a consolidated basis and $365.6 million, respectively. Net cash inflows from financing activities of $1.24 billion during the nine months ended September 30, 2017 was primarily comprised of a $1.39 billion net increase in customer deposits, partially offset by $87.9 million in cash dividends paid. Net cash inflows from financing activities of $365.6 million during the same period in 2016 were primarily comprised of a $1.13 billion net increase in customer deposits and a $37.7 million increase in short-term borrowings, partially offset by a $700.0 million repayment of short-term FHLB advances and $87.0 million in cash dividends paid.for individual entities.
As of September 30, 2017,In response to recent developments relating to COVID-19, the Company is not awareclosely monitoring the impact of any trends, events or uncertainties that had or were reasonably likely to have a material effectthe pandemic on its business. The uncertainty surrounding COVID-19 and in the financial service industry in general could potentially impact the liquidity position. Furthermore,of the Company. The strained economic, capital, credit and/or financial market conditions may expose the Company isto liquidity risk. As of March 31, 2020, the Company was not aware of any material commitments for capital expenditures in the foreseeable future.future and believes it has adequate liquidity resources to conduct operations and meet other needs in the ordinary course of business. Given the uncertainty and the rapidly changing market and economic conditions related to the COVID-19 pandemic, the Company will continue to actively evaluate the nature and extent of the impact of the COVID-19 pandemic on its business and financial position.
Consolidated Cash Flows Analysis
The following table presents a summary of the Company’s Consolidated Statement of Cash Flows for the periods indicated, which may be helpful to highlight business strategies and macro trends. In addition to this cash flow analysis, the discussion related to liquidity in Item 7. MD&A — Risk Management — Liquidity Risk Management — Liquidity may provide a more useful context in evaluating the Company’s liquidity position and related activity.
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Net cash provided by operating activities | | $ | 91,703 |
| | $ | 139,241 |
|
| Net cash used in investing activities | | (1,405,330 | ) | | (118,681 | ) |
| Net cash provided by financing activities | | 1,119,028 |
| | 749,370 |
|
| Effect of exchange rate changes on cash and cash equivalents | | 13,492 |
| | 14,018 |
|
| Net (decrease) increase in cash and cash equivalents | | (181,107 | ) | | 783,948 |
|
| Cash and cash equivalents, beginning of period | | 3,261,149 |
| | 3,001,377 |
|
| Cash and cash equivalents, end of period | | $ | 3,080,042 |
| | $ | 3,785,325 |
|
| | | | | |
Operating Activities — Net cash provided by operating activities was $91.7 million and $139.2 million for the first quarters of 2020 and 2019, respectively. During the first quarters of 2020 and 2019, net cash provided by operating activities mainly reflected inflows of $144.8 million and $164.0 million from net income, respectively. During the first quarter of 2020, net operating cash inflows also benefited from $105.3 million of non-cash adjustments to reconcile net income to net operating cash, as well as $304.7 million of net changes in accrued expenses and other liabilities, partially offset by $462.8 million of net changes in accrued interest receivable and other assets. In comparison, during the same period in 2019, net operating cash inflows benefited from $62.2 million of non-cash adjustments to reconcile net income to net operating cash, which was offset by $60.8 million of net changes in accrued expenses and other liabilities, and $27.6 million of net changes in accrued interest receivable and other assets.
East West’s liquidity has historically been dependent onInvesting Activities —Net cash used in investing activities was $1.41 billion and $118.7 million for the paymentfirst quarters of 2020 and 2019, respectively. During the first quarter of 2020, net cash dividendsused in investing activities primarily reflected cash outflows of $1.14 billion from loans held-for-investment, $372.0 million from AFS debt securities, $115.4 million from interest-bearing deposits with banks, and $27.6 million from net funding of investments in qualified affordable housing partnerships, tax credit and other investments. The cash outflows from loans held-for-investment were primarily due to C&I, CRE and single-family residential loan growth during the first quarter of 2020. These cash outflows used in investing activities were partially offset by its subsidiary, East West Bank, subject to applicable statutes, regulationscash inflows of $250.0 million from resale agreements. During the same period in 2019, net cash used in investing activities primarily reflected cash outflows of $465.0 million from loans held-for-investment and special approval. The Bank paid total dividends$33.3 million from net funding of $255.0investments in qualified affordable housing partnerships, tax credit and other investments, partially offset by a $245.4 million increase in interest-bearing deposits with banks and net cash inflows from AFS debt securities of $137.2 million.
Financing Activities —Net cash provided by financing activities was $1.12 billion and $749.4 million for the first quarters of 2020 and 2019, respectively. During the first quarters of 2020, net cash provided by financing activities primarily reflected net increases of $1.37 billion in deposits and $40.0 million in short-term borrowings, partially offset by $146.0 million in shares repurchased, $100.0 million to East West duringrepayment of FHLB advances, and $41.4 million in cash dividends. During the nine months ended September 30, 2017 and 2016, respectively. In addition,same period in October 2017,2019, net cash provided by financing activities primarily reflected a net increase of $800.1 million in deposits, partially offset by $34.9 million in cash dividends.
Market Risk Management
Market risk is the Board declared a quarterly cash dividend of $0.20 per share forrisk that the Company’s common stock payable on November 15, 2017financial condition may change resulting from adverse movements in market rates or prices including interest rates, foreign exchange rates, interest rate contracts, investment securities prices, and related risk resulting from mismatches in rate sensitive assets and liabilities.
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 stockholders of record on November 1, 2017.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, and 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, and 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 investment 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, customer 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 incorporates 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-pricing characteristics of the Company’s interest-rate sensitive assets, liabilities and related derivative contracts. It also incorporates various assumptions, which management believes to be reasonable but may have a significant impact on results. These assumptions include, but are not limited to, the timing and magnitude of changes in interest rates, the yield curve evolution and shape, the correlation between various interest rate indices, financial instrument future repricing characteristics and spread relative to benchmark rates, and the effect of interest rate floors and caps. The modeled results are highly sensitive to the deposit decay and deposit beta assumptions, used for deposits that do not have specific maturities. The Company uses historicalderived from a regression analysis of the Company’s internalhistorical deposit data as a guidedata. Deposit beta commonly refers to set deposit decay assumptions. In addition, the model is also highly sensitive to certain assumptions on the correlation of the change 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 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.
Existing investment securities, loans, customer deposits and borrowings are assumed to roll into new instruments at a similar spread relative to benchmark interest rates and internal pricing guidelines. The assumptions applied in the model are documented and supported for reasonableness. Changes to key model assumptions are reviewed by the ALCO. Due to the sensitivity of the model results, the Company performs periodic testing to assess the impact of the assumptions. The Company also makes appropriate calibrations when necessary. Scenarios do not reflect strategies that management could employ to limit the impact as interest rate expectations change. Simulation results are highly dependent on theseinput assumptions. To the extent actual behavior is different from the assumptions in the models, there could be a material change in interest rate sensitivity. The assumptions applied in the model are documented and supported for reasonableness, and periodically back-tested to assess their effectiveness. The Company makes appropriate calibrations to the model as needed, continually refining the model, methodology and results. Changes to key model assumptions are reviewed by the ALCO. Scenario results do not reflect strategies that management could employ to limit the impact of changing interest rate expectations.
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 following table presents the Company’s net interest income and economic value of equity (“EVE”) sensitivity as of September 30, 2017March 31, 2020 and December 31, 20162019 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions:
| | | Change in Interest Rates (BP) | | Net Interest Income Volatility (1) | | EVE Volatility (2) | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | |
Change in Interest Rates
(Basis Points) | | | Net Interest Income Volatility (1) |
| | March 31, 2020 | | December 31, 2019 |
| +200 | | 20.5 | % | | 22.4 | % | | 13.4 | % | | 12.3 | % | | 12.8 | % | | 13.2 | % |
| +100 | | 11.4 | % | | 12.0 | % | | 7.0 | % | | 7.5 | % | | 5.7 | % | | 6.7 | % |
| -100 | | (8.0 | )% | | (6.8 | )% | | (3.7 | )% | | (5.0 | )% | | (0.4 | )% | | (5.5 | )% |
| -200 | | (10.4 | )% | | (7.5 | )% | | (9.6 | )% | | (9.3 | )% | | (0.7 | )% | | (8.7 | )% |
|
| |
| (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 estimated twelve-month net interest income sensitivity as of March 31, 2020 was lower when compared with the sensitivity as of December 31, 2019, for both the upward 100 and upward 200 basis point rate scenarios. This reflects a greater rate of upward repricing in the Company’s deposit portfolio, which offsets simulated increases in interest income from higher interest rates on assets. The reduction in simulated increases in interest income is also impacted by the increase in the population of floating rate loans that are currently at their floors, which has increased under the current low interest rate environment. In both of the simulated downward interest rate scenarios, sensitivity is primarily decreased as a result of the 150 basis point reduction in the federal funds target rate range to 0.00% and 0.25% during March 2020.
The Company’s net interest income profile as of March 31, 2020 reflects an asset sensitive position. Net interest income would be expected to increase if interest rates rise and to decrease if interest rates decline, albeit the federal funds rate is floored at the target 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. The Company’s deposit portfolio is primarily comprised of non-maturity deposits, which are not directly tied to short-term interest rate indices, but are, nevertheless, sensitive to changes in short-term interest rates.
The federal funds target rate was between 0.00% and 0.25% as of March 31, 2020 and between 1.50% and 1.75% as of December 31, 2019. In its statement released on March 3, 2020, the Federal Open Market Committee decided to lower the target range for the federal funds rate to a range of between 1.00% to 1.25% and, on March 15, 2020, further announced its decision to lower the target range to 0.00% and 0.25%. The Fed deemed that the effects of the COVID-19 pandemic will weigh on economic activity in the near term and pose risks to the economic outlook.
While an instantaneous and sustained non-parallel shift in market interest rates was used in the simulation model described in the preceding paragraphs, the Company believes that any shift in interest rates would likely be more gradual and would therefore have a more modest impact. The rate ramp table below shows the net income volatility under a gradual non-parallel shift upward and downward of the yield curve in even quarterly increments over the first twelve months, followed by rates held constant thereafter:
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| | | | | | |
| |
Change in Interest Rates
(Basis Points) | | Net Interest Income Volatility (1) |
| | March 31, 2020 | | December 31, 2019 |
| +200 Rate Ramp | | 5.0 | % | | 6.0 | % |
| +100 Rate Ramp | | 2.2 | % | | 3.0 | % |
| -100 Rate Ramp | | (0.3 | )% | | (2.6 | )% |
| -200 Rate Ramp | | (0.4 | )% | | (5.1 | )% |
| |
| |
(2)(1) | The percentage change represents net interest income under a gradual non-parallel shift in even quarterly increments over 12 months. |
The Company believes that the rate ramp table, shown above, when evaluated together with the results of the rate shock simulation, presents a better indication of the potential impact to the Company’s twelve-month net interest income in a rising and falling rate scenario. Between March 31, 2020 and December 31, 2019, the Company’s modeled sensitivity slightly decreased under a ramp simulation.
Economic Value of Equity at Risk
Economic value of equity (“EVE”) is a cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows. This calculation is used for asset/liability management and measures changes in the economic value of the bank. The fair market values of a bank's assets and liabilities are directly linked to interest rates. In some ways, the economic value approach provides a broader scope than the net income volatility approach since it captures all anticipated cash flows.
EVE simulation reflects the effect of interest rate shifts on the value of the Company and is used to assess the degree of interest rate risk exposure. In contrast to the earnings perspective, the economic perspective identifies risk arising from repricing or maturity gaps for the life of the balance sheet. Changes in economic value indicate anticipated changes in the value of the bank’s future cash flows. Thus, the economic perspective can provide a leading indicator of the bank’s future earnings and capital values. The economic valuation method also reflects those sensitivities across the full maturity spectrum of the bank’s assets and liabilities.
The following table presents the Company’s EVE sensitivity as of March 31, 2020 and December 31, 2019 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions:
|
| | | | | | |
| | | | | |
Change in Interest Rates
(Basis Points) | | EVE Volatility (1) |
| | March 31, 2020 | | December 31, 2019 |
| +200 | | 11.2 | % | | 7.0 | % |
| +100 | | 6.5 | % | | 3.6 | % |
| -100 | | (0.9 | )% | | (1.4 | )% |
| -200 | | (5.8 | )% | | (3.5 | )% |
| | | | | |
| |
| (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. |
Twelve-Month Net Interest Income Simulation
The Company’s estimated twelve-month net interest income sensitivity as of September 30, 2017 was slightly lower compared to December 31, 2016 for both upward interest rate scenarios, as simulated increases in interest income are offset by an increase in 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.
Under most rising interest rate environments, the Company would expect some customers to move balances in demand deposits into higher interest-bearing deposits such as money market, savings or time deposits. The models are particularly sensitive to the assumption about the rate of such migration. The federal funds target rate was between 0.50% and 0.75% as of December 31, 2016, and between 1.00% and 1.25% as of September 30, 2017. It should be noted that despite the two interest rate increases in 2017, as of September 30, 2017, the Company has not experienced this deposit movement, though there can be no assurance as to how long this is expected to last.
The following table presents the Company’s net interest income sensitivity as of September 30, 2017 for the +100 and +200 basis points interest rate scenarios assuming a $1.00 billion, $2.00 billion and $3.00 billion demand deposit migrations:
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| | | | | | | | | |
| |
Change in Interest Rates
(BP) | | Net Interest Income Volatility |
| | September 30, 2017 |
| | $1.00 Billion Migration 12 Months | | $2.00 Billion Migration
12 Months | | $3.00 Billion Migration
12 Months |
| +200 | | 18.3 | % | | 16.0 | % | | 13.8 | % |
| +100 | | 9.9 | % | | 8.5 | % | | 7.0 | % |
| | | |
Economic Value of Equity at Risk
The Company’s EVE sensitivity increased as of September 30, 2017, compared to December 31, 2016, for both of the upward interest rate scenarios. Inscenarios increased as of March 31, 2020. The sensitivity for the simulated upwarddownward 100 basis points andscenario decreased while the sensitivity for the downward 200 basis points interest rate scenarios,scenario increased as of March 31, 2020, as compared with the results as of December 31, 2019. The changes in EVE sensitivity was 7.0% and 13.4%, respectively. The increase in sensitivity as of September 30, 2017 compared to December 31, 2016 in the upward interest rate scenario wasduring this period were primarily due to changesthe reduced base EVE and the change in the balance sheet portfolio mix. EVE declined 3.7%level and 9.6%shape of the base level as of September 30, 2017 in declining rate scenarios of 100 and 200 basis points, respectively.yield curve.
The Company’s net interest income and EVE profile as of September 30, 2017, as presented in the net interest income and EVE tables,March 31, 2020 reflects an asset sensitive net interest income position and an asset sensitive EVE position. The Company is naturally asset sensitive due to its large portfolio of rate-sensitive loans that are funded in 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. 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, 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, primarily to manage exposures 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 the financial institutions.
Interest Rate Swaps on CertificatesThe Company is subject to credit risk associated with the counterparties to the derivative contracts. This counterparty credit risk is a multidimensional form of Deposit risk, affected by both the exposure and credit quality of the counterparty, both of which are sensitive to market-induced changes. The Company’s Credit Risk Management Committee provides oversight of credit risks and the Company has guidelines in place to manage counterparty concentration, tenor limits and collateral. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, entering into legally enforceable master netting arrangements and requiring collateral arrangements, where possible. The Company may also transfer counterparty credit risk related to interest rate swaps to institutional third parties through the use of credit risk participation agreements (“RPAs”). Certain derivative contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk. The Company incorporates credit value adjustments and other market standard methodologies to appropriately reflect its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives.
Fair Value Hedges — As of September 30, 2017 and DecemberMarch 31, 2016,2020, the Company had two cancellable interest rate swap contracts with original terms of 20 years. These swap contracts involve the exchange of variable rate payments over the life of the agreements without the exchange of the underlying notional amounts. The objective of these interest rate swaps, which were designated aschanges in fair value hedges, was to obtain low-cost floating rate funding on the Company’s brokered certificates of deposit. As of September 30, 2017 and December 31, 2016, under the terms of the swap contracts, the Company received a fixed interest rate and paid a variable interest rate. As of September 30, 2017 and December 31, 2016, the notional amounts of the Company’shedged brokered certificates of deposit interest rate swaps were $42.6 million and $48.4 million, respectively. Theare expected to be effectively offset by the changes in fair value liabilities of the interest rate swaps were $6.6 million and $6.0 million asthroughout the terms of September 30, 2017 and December 31, 2016, respectively.these contracts.
Interest Rate Swaps and OptionsNet Investment Hedges — The Company also offers various interest rate derivative products to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with registered swap dealers. These 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 Sheets or to forecasted transactions in a hedge relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. Fair values are determined from verifiable third-party sources that have considerable experience with derivative markets. The Company provides data to the third party source to calculate the credit valuation component of the fair values of the client derivative contracts.
As of September 30, 2017, the total notional amounts of interest rate swaps and options, including mirrored transactions with institutional counterparties and the Company’s customers, totaled $4.37 billion for derivatives that were in an asset valuation position and $4.37 billion for derivatives that were in a liability valuation position. As of December 31, 2016, the total notional amounts of interest rate swaps and options, including mirrored 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 were in a liability valuation position. The fair values of interest rate swap and option contracts with institutional counterparties and the Company’s customers amounted to a $64.8 million asset and a $64.2 million liability as of September 30, 2017. The fair values 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.
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, primarily comprised of forward, swap and spot contracts to enable its customers to hedge their transactions in foreign currencies from 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, the Company enters into offsetting foreign exchange contracts with institutional counterparties to mitigate the foreign exchange risk. These transactions are economic hedges and the Company does not apply hedge accounting. The Company’s policies also permit taking proprietary currency positions within approved limits, in compliance with the proprietary trading exemption provided under Section 619 of the Dodd-Frank Act. The Company does not speculate in the foreign exchange markets, and actively manages its foreign exchange exposures within prescribed risk limits and defined controls.
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 enteringentered into foreign currency forward contracts to hedge its investment in East West Bank (China) Limited, a non-U.S. dollar (“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’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 Chinese Renminbi (“RMB”). As of March 31, 2020, the outstanding foreign currency forwards effectively hedged approximately 92% of the RMB exposure in East West Bank (China) Limited. The notional amount andfluctuation in foreign currency translation of the hedged exposure is expected to be offset by changes in the fair value of the net investment hedges were $83.0 million and a $4.3 million asset, respectively, as of December 31, 2016. Since recent policy changesforwards.
Interest Rate Contracts — The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades 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 People’s Bank of China,extent the central bankclearing organizations’ rulebooks legally characterize the variation margin as settlement. Derivative contracts allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are not linked to specific Company assets or liabilities on the Consolidated Balance Sheet or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked-to-market at each reporting period. The changes in fair values of the People’s Republic of China, as well as market sentiments have caused a divergencederivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in the exchange rate movementsfair values of the on-shore Chinese Renminbi and off-shore Chinese Renminbi,derivative transactions executed with customers throughout the net investment hedge relationships were dedesignated during the first quarter of 2017, even though they continued to meet the hedge effectiveness test. As of September 30, 2017, the notional amount and fair valueterms of these twocontracts, except for the credit valuation adjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements.
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forward, spot, swap and option contracts designated as economic hedges were $93.3 million and a $4.8 million liability, respectively, and have been included into accommodate the foreign exchange contracts’ notional amountbusiness needs of $1.13 billion and fair value of $14.2 million disclosed below.
As of September 30, 2017 and December 31, 2016, the Company’s total notional amounts ofits customers. For the foreign exchange contracts that were not designated as hedging instruments were $1.13 billionentered into with its customers, the Company managed its foreign exchange exposure by entering into offsetting foreign exchange contracts with third-party financial institutions and/or entering into bilateral collateral and $767.8 million, respectively.master netting agreements with customer counterparties to manage its credit exposure. 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. The Company also utilizes foreign exchange contracts were a $14.2 million assetthat are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and a $20.1 million liability, respectively, asliabilities, primarily foreign currency denominated deposits offered to its customers. The Company’s policies permit taking proprietary currency positions within approved limits, in compliance with the proprietary trading exemption provided under Section 619 of September 30, 2017the Dodd-Frank Wall Street Reform and an $11.9 million assetConsumer Protection Act (the “Dodd-Frank Act”). The Company does not speculate in the foreign exchange markets, and an $11.2 million liability, respectively, as of December 31, 2016.actively manages its foreign exchange exposures within prescribed risk limits and defined controls.
Credit Risk Participation AgreementsContracts — The Company has enteredmay periodically enter into credit risk participation agreements (“RPAs”) under which the Company assumed its pro-rata share ofRPAs to manage the credit exposure on interest rate contracts associated with the borrower’s performance related to interest rate derivative contracts.its syndicated loans. The Company may enter into protection sold or may not be a party toprotection purchased RPAs with institutional counterparties. Under the interest rate derivative contract and enters into such RPAs in instances whereRPA, the Company iswill receive or make a party to the related loan participation agreement with the borrower. The Company will make/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 credit risk on the RPAs by monitoring the credit worthiness of the borrowers, which is based on the Company’s normal credit review process. The notional amount
Equity Contracts — As part of the RPAs reflectsloan origination process, from time to time, the Company’s pro-rata share of the derivative instrument. As of September 30, 2017, the notional amount and fair value of the RPAs purchased were $47.8 million and a $1 thousand liability, respectively. As of September 30, 2017, the notional amount and fair value of the RPAs sold were $20.6 million and a $2 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.
Warrants — The Company obtained warrants to purchase preferred andand/or common stock of technology and life sciences companies as part of the loan origination process. As of September 30, 2017, theit provides loans to. The warrants included on the Consolidated Financial Statements were from public and private companies.
Commodity Contracts — The Company valued these warrants based onentered into energy commodity contracts with its customers to allow them to hedge against the Black-Scholes option pricing model. For warrants from public companies,risk of fluctuation in energy commodity prices. To economically hedge against the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. For warrants from private companies, the model uses inputs such as the offering price observedrisk of fluctuation in commodity prices in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The option volatility assumption was based on publicproducts offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions including with central clearing organizations. Certain derivative contracts entered with central clearing organizations are settled to market indices that include members that operate in similar industries as the companies in our private company portfolio. The model values were further adjusted for a general lack of liquidity duedaily to the private natureextent the central clearing organizations’ rulebooks legally characterize the variation margin as settlement. The changes in fair values of the underlying companies. As of September 30, 2017,energy commodity contracts traded with third-party financial institutions are expected to be largely comparable to the totalchanges in fair valuevalues of the warrants held in public and private companies was a $1.5 million asset.energy commodity transactions executed with customers throughout the terms of these contracts.
Additional information on the Company’s derivatives is presented in Note 1 — Summary of Significant Accounting Policies — Derivatives to the Consolidated Financial Statements of the Company’s 20162019 Form 10-K, Note 4 3 —Fair Value Measurement and Fair Value of Financial Instruments and Note 7 6 — Derivatives to the Consolidated Financial Statements.Statements of this Form 10-Q.
Impact of Inflation
The consolidated financial statements and related financial data presented in this report have been prepared according to GAAP, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and 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. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Critical Accounting Policies and Estimates
SignificantThe Company’s significant accounting policies (see and use of estimates (for significant accounting policies and use of estimates of allowance for credit losses, seeNote 1 2 — Current Accounting Developments and Summary of Significant Accounting Policiesto the Consolidated Financial Statements in this Form 10-Q and Item 7. MD&A for all other significant accounting policies and use of estimates, see Note 1 — CriticalSummary of Significant Accounting Policies and Estimates of the Company’s 20162019 Form 10-K) are fundamental to understanding the Company’s reported results.its results of operations and financial condition. Some accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In addition, some significant accounting policies require significant judgment in applying complex accounting principles to individual transactions to determine the most appropriate treatment. The Company has procedures and processes in place to facilitate making these judgments.
Certain accounting policies are considered to have a critical effect on the Company’s Consolidated Financial Statements in the Company’s judgment. 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. 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. ActualThe following accounting policies are 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, and future changes in the key variables could change future valuations and impact the results of operations. The following is a list of the more judgmental and complex accounting estimates and principles:estimates:
fair value of financial instruments;
available-for-sale investment securities;
PCI loans;
allowance for credit losses;
goodwill impairment; and
income taxes.
Recently Issued Accounting Standards
For detailed discussion and disclosure on new accounting pronouncements adopted and recent accounting pronouncements issued, see Note 2—Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements.Statements in this Form 10-Q.
Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures
To supplement the Company’s unaudited interim Consolidated Financial Statements presented in accordance with GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not in accordance with, or an alternative to GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement. 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 the first quarter of 2019, the Company recorded a $7.0 million pre-tax impairment charge related to DC Solar.
The following tables present the reconciliations of GAAP to non-GAAP financial measures for the periods presented:
|
| | | | | | | | | | |
| |
| ($ and shares in thousands, except per share data) | | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Net income | | (a) | | $ | 144,824 |
| | $ | 164,024 |
|
Add: Impairment charge related to DC Solar (1) | | | | — |
| | 6,978 |
|
Tax effect of adjustments (2) | | | | — |
| | (2,063 | ) |
| Non-GAAP net income | | (b) | | $ | 144,824 |
| | $ | 168,939 |
|
| | | | | | | |
| Diluted weighted-average number of shares outstanding | | | | 145,285 |
| | 145,921 |
|
| | | | | | | |
| Diluted EPS | | | | $ | 1.00 |
| | $ | 1.12 |
|
| Diluted EPS impact of impairment charge related to DC Solar, net of tax | | | | — |
| | 0.04 |
|
| Non-GAAP diluted EPS | | | | $ | 1.00 |
| | $ | 1.16 |
|
| | | | | | | |
| Average total assets | | (c) | | $ | 44,755,509 |
| | $ | 40,738,404 |
|
| Average stockholders’ equity | | (d) | | $ | 5,022,005 |
| | $ | 4,537,301 |
|
ROA (3) | | (a)/(c) | | 1.30 | % | | 1.63 | % |
Non-GAAP ROA (3) | | (b)/(c) | | 1.30 | % | | 1.68 | % |
ROE (3) | | (a)/(d) | | 11.60 | % | | 14.66 | % |
Non-GAAP ROE (3) | | (b)/(d) | | 11.60 | % | | 15.10 | % |
| |
| |
| (1) | Included in Amortization of tax credit and other investments on the Consolidated Statement of Income. |
| |
| (2) | Applied statutory rates of 28.35% for the first quarter of 2020 and 29.56% for the first quarter of 2019. |
|
| | | | | | | | | | |
| |
| ($ in thousands) | | | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Net interest income before provision for credit losses | | (a) | | $ | 362,707 |
| | $ | 362,461 |
|
| Total noninterest income | | | | 54,049 |
| | 42,131 |
|
| Total revenue | | (b) | | $ | 416,756 |
| | $ | 404,592 |
|
| | | | | | | |
| Total noninterest expense | | (c) | | $ | 178,876 |
| | $ | 186,922 |
|
| Less: Amortization of tax credit and other investments | | | | (17,325 | ) | | (24,905 | ) |
| Amortization of core deposit intangibles | | | | (953 | ) | | (1,174 | ) |
| Non-GAAP noninterest expense | | (d) | | $ | 160,598 |
| | $ | 160,843 |
|
| | | | | | | |
| Efficiency ratio | | (c)/(b) | | 42.92 | % | | 46.20 | % |
| Non-GAAP efficiency ratio | | (d)/(b) | | 38.54 | % | | 39.75 | % |
| |
|
| | | | | | | | | | | | | | |
| |
($ and shares in thousands, except per share data) | | | March 31,
2020 | | December 31,
2019 | | March��31,
2019 |
| Stockholders’ equity | | (a) | | $ | 4,902,985 |
| | $ | 5,017,617 |
| | $ | 4,591,930 |
|
| Less: Goodwill | | | | (465,697 | ) | | (465,697 | ) | | (465,697 | ) |
Other intangible assets (1) | | | | (14,769 | ) | | (16,079 | ) | | (21,109 | ) |
| Non-GAAP tangible common equity | | (b) | | $ | 4,422,519 |
| | $ | 4,535,841 |
| | $ | 4,105,124 |
|
| | | | | | | | | |
| Number of common shares at period-end | | (c) | | 141,435 |
| | 145,625 |
| | 145,501 |
|
| Non-GAAP tangible common equity per share | | (b)/(c) | | $ | 31.27 |
| | $ | 31.15 |
| | $ | 28.21 |
|
| |
| |
| (1) | Includes core deposit intangibles and mortgage servicing assets. |
Forward-Looking Statements
Certain matters discussed in this Form 10-Q contains certain forward-looking information about us that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” “assumes,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs, and the negative thereof. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company.
There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such differences, some of which are beyond the Company’s control, include, but are not limited to
the impact of disease pandemics, such as the outbreak and worldwide spread of COVID-19, on the Company, its operations and its customers and employees; and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may precipitate or exacerbate one or more of the below-mentioned and/or other risks, and significantly disrupt or prevent the Company from operating its business in the ordinary course for an extended period;
changes in the U.S. economy, including an economic slowdowns or recession, inflation, deflation, employment levels, rate of growth and general business conditions;
fluctuations in the Company’s stock price;
government intervention in the financial system, including changes in government interest rate policies;
changes in income tax laws and regulations;
the changes and effects thereof in trade, monetary and fiscal policies and laws, including the ongoing trade dispute between the U.S. and the People’s Republic of China;
the Company’s ability to compete effectively against other financial institutions in its banking markets;
success and timing of the Company’s business strategies;
the Company’s ability to retain key officers and employees;
impact on the Company’s funding costs, net interest income and net interest margin from changes in key variable market interest rates, competition, regulatory requirements and the Company’s product mix;
changes in the Company’s costs of operation, compliance and expansion;
the Company’s ability to adopt and successfully integrate new technologies into its business in a strategic manner;
impact of benchmark interest rate reform in the U.S. that resulted in the SOFR selected as the preferred alternative reference rate to the LIBOR;
impact of failure in, or breach of, the Company’s operational or security systems or infrastructure, or those of third parties with whom the Company does business, including as a result of cyber attacks; and other similar matters which could result in, among other things, confidential and/or proprietary information being disclosed or misused;
adequacy of the Company’s risk management framework, disclosure controls and procedures and internal control over financial reporting;
future credit quality and performance, including the Company’s expectations regarding future credit losses and allowance levels;
impact of adverse changes to the Company’s credit ratings from major credit rating agencies;
impact of adverse judgments or settlements in litigation;
changes in the commercial and consumer real estate markets;
changes in consumer spending and savings habits;
impact on the Company’s international operations due to political developments, disease pandemics, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;
changes in laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the SEC, the Consumer Financial Protection Bureau and the California Department of Business Oversight - Division of Financial Institutions;
impact of the Dodd-Frank Act on the Company’s business, business practices, cost of operations and executive compensation;
heightened regulatory and governmental oversight and scrutiny of the Company’s business practices, including dealings with consumers;
impact of reputational risk from negative publicity, fines and penalties and other negative consequences from regulatory violations and legal actions and from the Company’s interactions with business partners, counterparties, service providers and other third parties;
impact of regulatory enforcement actions;
changes in accounting standards as may be required by the Financial Accounting Standards Board or other regulatory agencies and their impact on critical accounting policies and assumptions;
impact of other potential federal tax changes and spending cuts;
the Company’s capital requirements and its ability to generate capital internally or raise capital on favorable terms;
impact on the Company’s liquidity due to changes in the Company’s ability to receive dividends from its subsidiaries;
any future strategic acquisitions or divestitures;
continuing consolidation in the financial services industry;
changes in the equity and debt securities markets;
fluctuations in foreign currency exchange rates;
a recurrence of significant turbulence or disruption in the capital or financial markets, which could result in, among other things, a reduction in the availability of funding or increases in funding costs, a reduction in investor demand for mortgage loans and declines in asset values and/or recognition of OTTI on securities held in the Company’s AFS debt securities portfolio; and
impact of natural or man-made disasters or calamities, such as wildfires, or conflicts or other events that may directly or indirectly result in a negative impact on the Company’s financial performance.
For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2019 Form 10-K, under the heading Item 1A. Risk Factors and the information set forth under Item 1A. Risk Factors in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update or revise any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risk in the Company’s portfolio, see Item 1. Consolidated Financial Statements — Note 76 — Derivatives and Item 2. MD&A — Asset Liability andRisk Management — Market Risk Management in Part I of this report. Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of September 30, 2017,March 31, 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 design and operation 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 September 30, 2017.March 31, 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.
Change in Internal Control over Financial Reporting
There hashave been no changechanges in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2017,March 31, 2020, that hashave materially affected or isare reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 1. Consolidated Financial Statements —Note 1110 —Commitments and Contingencies— Litigation in Part I of this report, incorporated herein by reference.
ITEM 1A. RISK FACTORS
The Company’s 20162019 Form 10-K contains disclosure regarding the risks and uncertainties related to the Company’s business under the heading Item 1A. Risk Factors. There has been no material changechanges to the Company’s risk factors as presented in the Company’s 20162019 Form 10-K.10-K, other than the risk factors set forth below:
The effects of the COVID-19 disease pandemic will impact the Company’s businesses, results of operations and financial condition, and the extent and duration of these impacts remain uncertain. In December 2019, COVID-19 was reported in China, which rapidly spread to other countries, including the U.S. In March 2020, the WHO characterized COVID-19 as a global pandemic and recommended containment and mitigation measures. On January 31, 2020, the U.S. declared a national public health emergency, and the President announced a National Emergency on March 13, 2020. Many states and municipalities have declared emergencies as well. Along with these declarations, there have been extraordinary and wide-ranging actions undertaken by international, federal, state and local public health and governmental authorities to contain the outbreak and spread of COVID-19 across the world and in the U.S., including quarantines, “stay-at-home” orders and similar mandates for individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the broader economies, financial markets and overall demand environment for the Company’s businesses.
East West Bank is considered an essential business in the seven states where we have branches. As part of the CARES Act passed by Congress in March 2020, various initiatives to protect individuals, businesses and local economies, such as the SBA PPP were established. The Company participates in the SBA PPP, and intends to participate in additional new government-sponsored programs, as they are enacted. In addition, to provide relief to customers during these turbulent times, we are providing payment accommodations for certain small-to medium-sized business, nonprofit organization and consumer customers impacted by COVID-19, and pausing action on collections and foreclosures on certain residential mortgage loans. These initiatives and accommodations made to our customers are expected to negatively impact our revenue and results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time.
Further, in order to facilitate our business and in response to enhanced safety measures, the Company has consolidated certain branch locations in the U.S., resulting in temporary closure of certain branches, adjusted branch hours and implemented certain employee travel restrictions. In addition, we have implemented business continuity plans, which include shifting a majority of our corporate and division office functions to work remotely, alternating workplace arrangements such as split work sites and rotating shifts for certain employees to suit the changing business requirements. To date, the business continuity plans work as designed and support our ongoing normal course of business. However, our ability to provide services has been, and may continue to be, to some extent, negatively impacted by interruptions due to illnesses of our employees, or the safety measures implemented to prevent illnesses of our employees, including the potential closure of particular branches and certain employees working remotely.
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, and because 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, hence potentially increasing our level of charge-offs and provision for credit losses. Further, the disruptions related to COVID-19 may decrease our borrowers’ confidence or with respect to purchasing real estate or homes and adversely affect the demand for the Company’s loans and other products and services, the valuation of our loans, securities and derivatives portfolios, the carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations.
In addition, recent developments and reports relating to COVID-19 have coincided with heightened volatility in financial markets in the U.S. and worldwide. Our businesses and results of operations are affected by the financial markets and general economic conditions primarily in the U.S. and Greater China. The Company executes transactions with various counterparties in the financial industry, including brokers and dealers, commercial banks and investment banks. Defaults by financial services institutions and uncertainty in the financial services industry in general could lead to market-wide liquidity problems and may expose the Company to credit risk in the event of default of its counterparties or clients. This pandemic, and any further measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a material adverse impact on our results of operations and financial condition. Additionally, the earnings impacts from recent and future emergency interest rate cuts could further compress interest margins, which could potentially have an adverse effect on our results of operations and financial condition.
The extent to which the COVID-19 pandemic and any resultant economic downturn impacts our business, operations, and financial results is uncertain and will depend on numerous evolving factors that are outside our control and we may not be able to accurately predict, including the duration and scope of the pandemic and the governmental, business and individual actions taken in response to the pandemic and the impact of those actions on global economic activity.
PriceDeclines in Oil & Gas Sector May Adversely Affect Our Business. The fluctuations in the oil and gas markets have generally been dependent upon the prevailing view of future gas and oil prices, which are influenced by numerous supply and demand factors, including availability and cost of capital, global and domestic economic conditions, environmental regulations, policies of Organization of Petroleum Exporting Countries and Russia, geopolitics, U.S. consumer demand and consumption, transportation industry activity, and other factors. The COVID-19 pandemic, along with recent actions by Saudi Arabia and Russia, have led to a significant decline in oil and gas prices. In consideration of any further price declines in this sector, we have increased our allowance for loan loss against the oil & gas loan portfolio. However, continuous volatility and downward pressure on oil and gas prices in the global market could lead to increased credit losses, which could adversely affect our financial results. For a description of our oil and gas loan exposure, refer to Part 1. Item 2. MD&A — Balance Sheet Analysis — Loan Portfolio — Commercial — Commercial and Industrial Loans in this Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities or repurchase activities duringfor the three months ended September 30, 2017.March 31, 2020. The following table summarizes common stock repurchased by the Company under the Company’s common stock repurchase program for the three months ended March 31, 2020:
|
| | | | | | | | | | | | | | |
| | | | | | | | | |
| Period | | Total Number of Shares Repurchased (1) | | Average Price Paid per Share of Common Stock | | Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($ in millions) (2) |
| January 1, 2020 - January 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 500.0 |
|
| February 1, 2020 - February 29, 2020 | | — |
| | — |
| | — |
| | 500.0 |
|
| March 1, 2020 - March 31, 2020 | | 4,471,682 |
| | 32.64 |
| | 4,471,682 |
| | 354.0 |
|
| Total | | 4,471,682 |
| | $ | 32.64 |
| | 4,471,682 |
| | $ | 354.0 |
|
| | | | | | | | | |
| |
| (1) | Excludes activity of common stock pursuant to various stock compensation plans and agreements totaling $7.6 million. |
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| (2) | On March 3, 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 is inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The share repurchase authorization has no expiration date. |
ITEM 6. EXHIBITS
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this report:
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| Exhibit No. | | Exhibit Description |
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| 10.1 | | |
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| 10.2 | | |
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| 31.1 | | |
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| 101.INS | | The instance document does not appear in the interactive data file because its XBRL Instance Document.tags are embedded within the inline XBRL document. |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. Filed herewith. |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith. |
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith. |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. Filed herewith. |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith. |
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| 104 | | Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith). Filed herewith. |
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* Denotes management contract or compensatory plan or arrangement.
All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted.
GLOSSARY OF ACRONYMS
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| AFS | Available-for-sale | LTV | Loan-to-value |
| ALCO | Asset/Liability Committee |
AML | Anti-Money Laundering |
AOCI | Accumulated other comprehensive income (loss) |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
BP | Basis point |
BSA | Bank Secrecy Act |
C&I | Commercial and industrial |
CET1 | Common Equity Tier 1 |
CRA | Community Reinvestment Act |
CRE | Commercial real estate |
DBO | California Department of Business Oversight |
EPS | Earnings per share |
EVE | Economic value of equity |
EWIS | East West Insurance Service, Inc. |
FASB | Financial Accounting Standards Board |
FHLB | Federal Home Loan Bank |
FRB | Federal Reserve Bank of San Francisco |
GAAP | Generally Accepted Accounting Principles |
HELOCs | Home equity lines of credit |
| MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
MOUAOCI | Memorandum of UnderstandingAccumulated other comprehensive income (loss) | MMBTU | Million British thermal unit |
Non-GAAPARRC | Non-Generally Accepted Accounting PrinciplesAlternative Reference Rates Committee | Moody's | Moody’s Investors Service |
Non-PCIASC | Non-purchased credit impairedAccounting Standards Codification | NAV | Net Asset Value |
| ASU | Accounting Standards Update | OREO | Other real estate owned |
| C&I | Commercial and industrial | OTTI | Other-than-temporary impairment |
| CARES Act | The Coronavirus Aid, Relief, and Economic Security Act | PCD | Purchased financial assets with credit deterioration |
| CECL | Current expected credit loss | PCI | Purchased credit impaired |
RPAsCET1 | Common Equity Tier 1 | PD | Probability of default |
| CLO | Collateralized loan obligation | PPP | Paycheck Protection Program |
| CME | Chicago Mercantile Exchange | RMB | Chinese Renminbi |
| CRA | Community Reinvestment Act | ROA | Return on average assets |
| CRE | Commercial real estate | ROE | Return on average equity |
| EPS | Earnings per share | RPA | Credit risk participation agreementsagreement |
RSAsERM | Enterprise Risk Management | RSU | Restricted stock awardsunit |
RSUsEVE | Restricted stock unitsEconomic value of equity | S&P | Standard & Poor's |
SBLCsFHLB | Federal Home Loan Bank | SBLC | Standby lettersletter of credit |
S&PFitch | StandardFitch Ratings | SEC | U.S. Securities and Poor’sExchange Commission |
TDRsFRB | Federal Reserve Bank of San Francisco | SOFR | Secured Overnight Financing Rate |
| FTP | Funds transfer pricing | TDR | Troubled debt restructuringsrestructuring |
| GAAP | Generally accepted accounting principles | U.S. | United States |
U.S. GAAPHELOC | United States Generally Accepted Accounting PrinciplesHome equity lines of credit |
| USD | U.S. Dollardollar |
| LCH | London Clearing House | VIE | Variable interest entity |
| LGD | Loss given default | WHO | World Health Organization |
| LIBOR | London Interbank Offered Rate | | |
SIGNATURE
Pursuant to the requirements 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.
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| Dated: | November 7, 2017May 8, 2020 | |
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| | | EAST WEST BANCORP, INC. (Registrant) |
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| | | By | /s/ IRENE H. OH | |
| | | | Irene H. Oh |
| | | | Executive Vice President and Chief Financial Officer |
EXHIBIT INDEX
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2, furnished with this report:
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Exhibit No. | | Exhibit Description |
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101.INS | | XBRL Instance Document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted.
