false--12-31Q320190001069157P1Y0.520.490.560.450.500.070.150.040.500.120.200.04001185470001144180000.2750.230.630.2750.780.0010.00120000000020000000016586758716655470600014700000000020590035000218259180001177000001091000000004358330005244130000400000000450000000P3Y02090622420986994 0001069157 ewbc:ReceivablesOriginatedOrAcquiredWithoutDeterioratedCreditQualityMember us-gaap:ConsumerPortfolioSegmentMember ewbc:OtherConsumerMember 2018-01-01 2018-09-30
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, 20172019
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, 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: 144,542,911145,625,385 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 | | September 30,
2019 | | December 31,
2018 |
| | | (Unaudited) | | | | (Unaudited) | | |
| ASSETS | | | | | | | | |
| Cash and due from banks | | $ | 364,328 |
| | $ | 460,559 |
| | $ | 475,291 |
| | $ | 516,291 |
|
| Interest-bearing cash with banks | | 1,372,421 |
| | 1,417,944 |
| | 2,566,990 |
| | 2,485,086 |
|
| Cash and cash equivalents | | 1,736,749 |
| | 1,878,503 |
| | 3,042,281 |
| | 3,001,377 |
|
| Interest-bearing deposits with banks | | 404,946 |
| | 323,148 |
| | 160,423 |
| | 371,000 |
|
| Securities purchased under resale agreements (“resale agreements”) | | 1,250,000 |
| | 2,000,000 |
| | 860,000 |
| | 1,035,000 |
|
| 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 investment securities, at fair value (includes assets pledged as collateral of $524,413 in 2019 and $435,833 in 2018) | | | 3,284,034 |
| | 2,741,847 |
|
| Restricted equity securities, at cost | | 73,322 |
| | 72,775 |
| | 78,334 |
| | 74,069 |
|
| Loans held-for-sale | | 178 |
| | 23,076 |
| | 294 |
| | 275 |
|
| 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 $345,576 in 2019 and $311,322 in 2018; includes assets pledged as collateral of $21,825,918 in 2019 and $20,590,035 in 2018) | | | 33,679,400 |
| | 32,073,867 |
|
| Investments in qualified affordable housing partnerships, net | | 178,344 |
| | 183,917 |
| | 190,000 |
| | 184,873 |
|
| Investments in tax credit and other investments, net | | 203,758 |
| | 173,280 |
| | 211,603 |
| | 231,635 |
|
| 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 $114,418 in 2019 and $118,547 in 2018) | | | 120,859 |
| | 119,180 |
|
| Goodwill | | 469,433 |
| | 469,433 |
| | 465,697 |
| �� | 465,547 |
|
| Operating lease right-of-use assets | | | 103,894 |
| | — |
|
| Other assets | | 663,718 |
| | 782,400 |
| | 1,077,840 |
| | 743,686 |
|
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 43,274,659 |
| | $ | 41,042,356 |
|
| LIABILITIES | | |
| | |
| | | | |
| Customer deposits: | | |
| | |
| |
| Deposits: | | | | | |
| Noninterest-bearing | | $ | 10,992,674 |
| | $ | 10,183,946 |
| | $ | 10,806,937 |
| | $ | 11,377,009 |
|
| Interest-bearing | | 20,318,988 |
| | 19,707,037 |
| | 25,852,589 |
| | 24,062,619 |
|
| Total deposits | | 31,311,662 |
| | 29,890,983 |
| | 36,659,526 |
| | 35,439,628 |
|
| Short-term borrowings | | 24,813 |
| | 60,050 |
| | 47,689 |
| | 57,638 |
|
| Federal Home Loan Bank (“FHLB”) advances | | 323,323 |
| | 321,643 |
| | 745,494 |
| | 326,172 |
|
| Securities sold under repurchase agreements (“repurchase agreements”) | | 50,000 |
| | 350,000 |
| | 50,000 |
| | 50,000 |
|
| Long-term debt | | 176,513 |
| | 186,327 |
| |
| Long-term debt and finance lease liabilities | | | 152,390 |
| | 146,835 |
|
| Operating lease liabilities | | | 112,142 |
| | — |
|
| Accrued expenses and other liabilities | | 639,759 |
| | 552,096 |
| | 624,754 |
| | 598,109 |
|
| Total liabilities | | 32,526,070 |
| | 31,361,099 |
| | 38,391,995 |
| | 36,618,382 |
|
| COMMITMENTS AND CONTINGENCIES (Note 11) | |
|
| |
|
| |
| COMMITMENTS AND CONTINGENCIES (Note 12) | | |
|
| |
|
|
| 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; 166,554,706 and 165,867,587 shares issued in 2019 and 2018, respectively | | | 166 |
| | 166 |
|
| Additional paid-in capital | | 1,745,181 |
| | 1,727,434 |
| | 1,817,100 |
| | 1,789,811 |
|
| Retained earnings | | 2,520,817 |
| | 2,187,676 |
| | 3,545,824 |
| | 3,160,132 |
|
| 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 — 20,986,994 shares in 2019 and 20,906,224 shares in 2018 | | | (479,459 | ) | | (467,961 | ) |
| Accumulated other comprehensive loss (“AOCI”), net of tax | | | (967 | ) | | (58,174 | ) |
| Total stockholders’ equity | | 3,781,896 |
| | 3,427,741 |
| | 4,882,664 |
| | 4,423,974 |
|
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 43,274,659 |
| | $ | 41,042,356 |
|
|
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
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
| INTEREST AND DIVIDEND INCOME | | | | | | |
| | |
| | | | | | | | |
| Loans receivable, including fees | | $ | 306,939 |
| | $ | 255,316 |
| | $ | 872,039 |
| | $ | 763,189 |
| | $ | 433,658 |
| | $ | 385,538 |
| | $ | 1,291,642 |
| | $ | 1,088,997 |
|
| Investment securities | | 14,828 |
| | 13,388 |
| | 43,936 |
| | 37,433 |
| |
| Available-for-sale investment securities | | | 15,945 |
| | 15,180 |
| | 47,378 |
| | 45,695 |
|
| Resale agreements | | 7,901 |
| | 7,834 |
| | 25,222 |
| | 22,479 |
| | 6,881 |
| | 7,393 |
| | 22,070 |
| | 21,509 |
|
| Restricted equity securities | | 612 |
| | 611 |
| | 1,859 |
| | 2,008 |
| | 656 |
| | 721 |
| | 1,874 |
| | 2,155 |
|
| Interest-bearing cash and deposits with banks | | 9,630 |
| | 3,168 |
| | 22,298 |
| | 10,245 |
| | 19,772 |
| | 13,353 |
| | 52,103 |
| | 36,013 |
|
| Total interest and dividend income | | 339,910 |
| | 280,317 |
| | 965,354 |
| | 835,354 |
| | 476,912 |
| | 422,185 |
| | 1,415,067 |
| | 1,194,369 |
|
| INTEREST EXPENSE | | | | | | |
| | |
| | | | | | | | |
| Customer deposits | | 31,086 |
| | 21,049 |
| | 81,803 |
| | 60,708 |
| |
| Deposits | | | 96,820 |
| | 65,032 |
| | 286,789 |
| | 155,433 |
|
| Federal funds purchased and other short-term borrowings | | 212 |
| | 212 |
| | 877 |
| | 390 |
| | 382 |
| | 643 |
| | 1,359 |
| | 774 |
|
| FHLB advances | | 1,947 |
| | 1,361 |
| | 5,738 |
| | 4,153 |
| | 5,021 |
| | 2,732 |
| | 12,011 |
| | 7,544 |
|
| Repurchase agreements | | 2,122 |
| | 2,319 |
| | 7,538 |
| | 6,441 |
| | 3,239 |
| | 3,366 |
| | 10,200 |
| | 8,714 |
|
| Long-term debt | | 1,388 |
| | 1,228 |
| | 4,030 |
| | 3,726 |
| |
| Long-term debt and finance lease liabilities | | | 1,643 |
| | 1,692 |
| | 5,114 |
| | 4,812 |
|
| Total interest expense | | 36,755 |
| | 26,169 |
| | 99,986 |
| | 75,418 |
| | 107,105 |
| | 73,465 |
| | 315,473 |
| | 177,277 |
|
| Net interest income before provision for credit losses |
| 303,155 |
| | 254,148 |
| | 865,368 |
| | 759,936 |
|
| 369,807 |
| | 348,720 |
| | 1,099,594 |
| | 1,017,092 |
|
| Provision for credit losses | | 12,996 |
| | 9,525 |
| | 30,749 |
| | 17,018 |
| | 38,284 |
| | 10,542 |
| | 80,108 |
| | 46,296 |
|
| Net interest income after provision for credit losses | | 290,159 |
| | 244,623 |
| | 834,619 |
| | 742,918 |
| | 331,523 |
| | 338,178 |
| | 1,019,486 |
| | 970,796 |
|
| 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 | | | 14,846 |
| | 15,367 |
| | 45,884 |
| | 44,072 |
|
| Deposit account fees | | | 9,918 |
| | 9,777 |
| | 29,347 |
| | 30,347 |
|
| Foreign exchange income | | | 8,065 |
| | 6,077 |
| | 20,366 |
| | 14,069 |
|
| Wealth management fees | | 3,615 |
| | 4,033 |
| | 11,682 |
| | 9,862 |
| | 4,841 |
| | 3,535 |
| | 12,453 |
| | 10,989 |
|
| Derivative fees and other income | | 6,663 |
| | 5,791 |
| | 12,934 |
| | 9,778 |
| |
| Interest rate contracts and other derivative income | | | 8,423 |
| | 4,595 |
| | 22,037 |
| | 17,855 |
|
| Net gains on sales of loans | | 2,361 |
| | 2,158 |
| | 6,660 |
| | 6,965 |
| | 2,037 |
| | 1,145 |
| | 2,967 |
| | 5,081 |
|
| Net gains on sales of available-for-sale investment securities | | 1,539 |
| | 1,790 |
| | 6,733 |
| | 8,468 |
| | 58 |
| | 35 |
| | 3,066 |
| | 2,374 |
|
| Net gains on sales of fixed assets | | 1,043 |
| | 486 |
| | 74,092 |
| | 2,916 |
| | 48 |
| | 3,402 |
| | 48 |
| | 5,602 |
|
| Net gain on sale of business | | 3,807 |
| | — |
| | 3,807 |
| | — |
| | — |
| | — |
| | — |
| | 31,470 |
|
| Other fees and operating income | | 3,652 |
| | 7,632 |
| | 15,255 |
| | 19,745 |
| |
| Other income | | | 3,238 |
| | 2,569 |
| | 10,196 |
| | 7,355 |
|
| Total noninterest income | | 49,624 |
| | 49,341 |
| | 213,047 |
| | 134,118 |
| | 51,474 |
| | 46,502 |
| | 146,364 |
| | 169,214 |
|
| NONINTEREST EXPENSE | | | | | | |
| | |
| | | | | | | | |
| Compensation and employee benefits | | 79,583 |
| | 75,042 |
| | 244,930 |
| | 220,166 |
| | 97,819 |
| | 96,733 |
| | 300,649 |
| | 285,832 |
|
| Occupancy and equipment expense | | 16,635 |
| | 15,456 |
| | 47,829 |
| | 45,619 |
| | 17,912 |
| | 17,292 |
| | 52,592 |
| | 50,879 |
|
| Deposit insurance premiums and regulatory assessments | | 5,676 |
| | 6,450 |
| | 17,384 |
| | 17,341 |
| | 3,550 |
| | 6,013 |
| | 9,557 |
| | 18,118 |
|
| Legal expense | | 3,316 |
| | 5,361 |
| | 8,930 |
| | 12,714 |
| | 1,720 |
| | 1,544 |
| | 6,300 |
| | 6,636 |
|
| Data processing | | 3,004 |
| | 2,729 |
| | 9,009 |
| | 8,712 |
| | 3,328 |
| | 3,289 |
| | 9,945 |
| | 10,017 |
|
| Consulting expense | | 4,087 |
| | 4,594 |
| | 10,775 |
| | 19,027 |
| | 2,559 |
| | 2,683 |
| | 6,687 |
| | 10,155 |
|
| Deposit related expense | | 2,413 |
| | 3,082 |
| | 7,283 |
| | 7,675 |
| | 3,584 |
| | 2,600 |
| | 10,426 |
| | 8,201 |
|
| Computer software expense | | 4,393 |
| | 3,331 |
| | 13,823 |
| | 9,267 |
| | 6,556 |
| | 5,478 |
| | 18,845 |
| | 16,081 |
|
| Other operating expense | | 19,830 |
| | 19,814 |
| | 55,357 |
| | 58,508 |
| | 22,769 |
| | 23,394 |
| | 67,737 |
| | 61,780 |
|
| Amortization of tax credit and other investments | | 23,827 |
| | 32,618 |
| | 66,059 |
| | 60,779 |
| | 16,833 |
| | 20,789 |
| | 58,477 |
| | 58,670 |
|
| Amortization of core deposit intangibles | | 1,735 |
| | 2,023 |
| | 5,314 |
| | 6,177 |
| |
| Total noninterest expense | | 164,499 |
| | 170,500 |
| | 486,693 |
| | 465,985 |
| | 176,630 |
| | 179,815 |
| | 541,215 |
| | 526,369 |
|
| INCOME BEFORE INCOME TAXES | | 175,284 |
| | 123,464 |
| | 560,973 |
| | 411,051 |
| | 206,367 |
| | 204,865 |
| | 624,635 |
| | 613,641 |
|
| INCOME TAX EXPENSE | | 42,624 |
| | 13,321 |
| | 140,247 |
| | 90,108 |
| | 34,951 |
| | 33,563 |
| | 138,815 |
| | 82,958 |
|
| NET INCOME | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
| | $ | 171,416 |
| | $ | 171,302 |
| | $ | 485,820 |
| | $ | 530,683 |
|
| EARNINGS PER SHARE (“EPS”) | | | | | | | | | | | | | | | | |
| BASIC | | $ | 0.92 |
| | $ | 0.76 |
| | $ | 2.91 |
| | $ | 2.23 |
| | $ | 1.18 |
| | $ | 1.18 |
| | $ | 3.34 |
| | $ | 3.66 |
|
| DILUTED | | $ | 0.91 |
| | $ | 0.76 |
| | $ | 2.88 |
| | $ | 2.21 |
| | $ | 1.17 |
| | $ | 1.17 |
| | $ | 3.33 |
| | $ | 3.63 |
|
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | | | | | | | | |
| WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | | | | | | | | | |
| BASIC | | 144,498 |
| | 144,122 |
| | 144,412 |
| | 144,061 |
| | 145,559 |
| | 144,921 |
| | 145,455 |
| | 144,829 |
|
| DILUTED | | 145,882 |
| | 145,238 |
| | 145,849 |
| | 145,086 |
| | 146,120 |
| | 146,173 |
| | 146,088 |
| | 146,158 |
|
| 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
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
| | $ | 171,416 |
| | $ | 171,302 |
| | $ | 485,820 |
| | $ | 530,683 |
|
| 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 (losses) on available-for-sale investment securities | | | 11,863 |
| | (13,608 | ) | | 62,901 |
| | (41,261 | ) |
| Foreign currency translation adjustments | | 3,870 |
| | (555 | ) | | 8,013 |
| | (5,226 | ) | | (2,858 | ) | | (4,761 | ) | | (5,694 | ) | | (4,785 | ) |
| Other comprehensive income (loss) | | 1,964 |
| | (5,462 | ) | | 15,929 |
| | 7,767 |
| | 9,005 |
| | (18,369 | ) | | 57,207 |
| | (46,046 | ) |
| COMPREHENSIVE INCOME | | $ | 134,624 |
| | $ | 104,681 |
| | $ | 436,655 |
| | $ | 328,710 |
| | $ | 180,421 |
| | $ | 152,933 |
| | $ | 543,027 |
| | $ | 484,637 |
|
|
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)
(Unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Common Stock and
Additional Paid-in Capital | | Retained
Earnings | | Treasury
Stock | | AOCI,
Net of Tax | | Total
Stockholders’
Equity |
| | | Shares | | Amount | | | | |
| BALANCE, JULY 1, 2018 | | 144,904,629 |
| | $ | 1,770,038 |
| | $ | 2,883,201 |
| | $ | (467,488 | ) | | $ | (71,467 | ) | | $ | 4,114,284 |
|
| Net income | | — |
| | — |
| | 171,302 |
| | — |
| | — |
| | 171,302 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (18,369 | ) | | (18,369 | ) |
| Net activity of common stock pursuant to various stock compensation plans and agreements | | 24,802 |
| | 11,685 |
| | — |
| | (341 | ) | | — |
| | 11,344 |
|
| Cash dividends on common stock ($0.23 per share) | | — |
| | — |
| | (33,711 | ) | | — |
| | — |
| | (33,711 | ) |
| BALANCE, SEPTEMBER 30, 2018 | | 144,929,431 |
| | $ | 1,781,723 |
| | $ | 3,020,792 |
| | $ | (467,829 | ) | | $ | (89,836 | ) | | $ | 4,244,850 |
|
| BALANCE, JULY 1, 2019 | | 145,546,569 |
| | $ | 1,809,062 |
| | $ | 3,414,901 |
| | $ | (479,398 | ) | | $ | (9,972 | ) | | $ | 4,734,593 |
|
| Net income | | — |
| | — |
| | 171,416 |
| | — |
| | — |
| | 171,416 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 9,005 |
| | 9,005 |
|
| Net activity of common stock pursuant to various stock compensation plans and agreements | | 21,143 |
| | 8,204 |
| | — |
| | (61 | ) | | — |
| | 8,143 |
|
| Cash dividends on common stock ($0.275 per share) | | — |
| | — |
| | (40,493 | ) | | — |
| | — |
| | (40,493 | ) |
| BALANCE, SEPTEMBER 30, 2019 | | 145,567,712 |
| | $ | 1,817,266 |
| | $ | 3,545,824 |
| | $ | (479,459 | ) | | $ | (967 | ) | | $ | 4,882,664 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | 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, 2018 | | 144,543,060 |
| | $ | 1,755,495 |
| | $ | 2,576,302 |
| | $ | (452,327 | ) | | $ | (37,519 | ) | | $ | 3,841,951 |
|
Cumulative effect of change in accounting principle related to marketable equity securities (1) | | — |
| | — |
| | (545 | ) | | — |
| | 385 |
| | (160 | ) |
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (2) | | — |
| | — |
| | 6,656 |
| | — |
| | (6,656 | ) | | — |
|
| Net income | | — |
| | — |
| | 530,683 |
| | — |
| | — |
| | 530,683 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (46,046 | ) | | (46,046 | ) |
| Net activity of common stock pursuant to various stock compensation plans and agreements | | 386,371 |
| | 26,228 |
| | — |
| | (15,502 | ) | | — |
| | 10,726 |
|
| Cash dividends on common stock ($0.63 per share) | | — |
| | — |
| | (92,304 | ) | | — |
| | — |
| | (92,304 | ) |
| BALANCE, SEPTEMBER 30, 2018 | | 144,929,431 |
| | $ | 1,781,723 |
| | $ | 3,020,792 |
| | $ | (467,829 | ) | | $ | (89,836 | ) | | $ | 4,244,850 |
|
| 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 (3) | | — |
| | — |
| | 14,668 |
| | — |
| | — |
| | 14,668 |
|
| Net income | | — |
| | — |
| | 485,820 |
| | — |
| | — |
| | 485,820 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 57,207 |
| | 57,207 |
|
| Warrants exercised | | 180,226 |
| | 1,711 |
| | — |
| | 2,732 |
| | — |
| | 4,443 |
|
| Net activity of common stock pursuant to various stock compensation plans and agreements | | 426,123 |
| | 25,578 |
| | — |
| | (14,230 | ) | | — |
| | 11,348 |
|
| Cash dividends on common stock ($0.78 per share) | | — |
| | — |
| | (114,796 | ) | | — |
| | — |
| | (114,796 | ) |
| BALANCE, SEPTEMBER 30, 2019 | | 145,567,712 |
| | $ | 1,817,266 |
| | $ | 3,545,824 |
| | $ | (479,459 | ) | | $ | (967 | ) | | $ | 4,882,664 |
|
| |
| |
| (1) | Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of 2018. |
| |
| (2) | Represents amounts reclassified from AOCI to retained earnings due to early adoption of ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2018. |
| |
| (3) | Represents the impact of the adoption of ASU 2016-02, Leases (Topic 842) and subsequent related ASUsin the first quarter of 2019. Refer to Note 2 — Current Accounting Developments and Note 11 —Leases to the Consolidated Financial Statements in 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)
|
| | | | | | | | |
| |
| | | Nine Months Ended September 30, |
| | | 2019 | | 2018 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
| Net income | | $ | 485,820 |
| | $ | 530,683 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
| Depreciation and amortization | | 103,220 |
| | 95,777 |
|
| Accretion of discount and amortization of premiums, net | | (12,917 | ) | | (14,471 | ) |
| Stock compensation costs | | 23,012 |
| | 24,201 |
|
| Deferred income tax (benefit) expense | | (2,434 | ) | | 1,371 |
|
| Provision for credit losses | | 80,108 |
| | 46,296 |
|
| Net gains on sales of loans | | (2,967 | ) | | (5,081 | ) |
| Net gains on sales of available-for-sale investment securities | | (3,066 | ) | | (2,374 | ) |
| Net gains on sales of fixed assets | | (48 | ) | | (5,602 | ) |
| Net gain on sale of business | | — |
| | (31,470 | ) |
| Loans held-for-sale: | | | | |
| Originations and purchases | | (6,341 | ) | | (17,642 | ) |
| Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | | 6,341 |
| | 16,652 |
|
| Proceeds from distributions received from equity method investees | | 3,012 |
| | 2,670 |
|
| Net change in accrued interest receivable and other assets | | (363,187 | ) | | (38,164 | ) |
| Net change in accrued expenses and other liabilities | | 77,693 |
| | 92,036 |
|
| Other net operating activities | | 773 |
| | (1,566 | ) |
| Total adjustments | | (96,801 | ) | | 162,633 |
|
| Net cash provided by operating activities | | 389,019 |
| | 693,316 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| | |
|
| Net (increase) decrease in: | | |
| | |
|
| Investments in qualified affordable housing partnerships, tax credit and other investments | | (103,284 | ) | | (72,983 | ) |
| Interest-bearing deposits with banks | | 204,474 |
| | (24,925 | ) |
| Resale agreements: | | | | |
| Proceeds from paydowns and maturities | | 300,000 |
| | 175,000 |
|
| Purchases | | (125,000 | ) | | (160,000 | ) |
| Available-for-sale investment securities: | | | | |
| Proceeds from sales | | 476,231 |
| | 296,252 |
|
| Proceeds from repayments, maturities and redemptions | | 283,974 |
| | 404,070 |
|
| Purchases | | (1,219,300 | ) | | (514,622 | ) |
| Loans held-for-investment: | | | | |
| Proceeds from sales of loans originally classified as held-for-investment | | 224,662 |
| | 363,209 |
|
| Purchases | | (395,502 | ) | | (451,037 | ) |
| Other changes in loans held-for-investment, net | | (1,509,235 | ) | | (2,160,858 | ) |
| Premises and equipment: | | |
| | |
|
| Purchases | | (8,504 | ) | | (9,418 | ) |
| Payment on sale of business, net of cash transferred | | — |
| | (503,687 | ) |
| Proceeds from sales of other real estate owned (“OREO”) | | — |
| | 3,602 |
|
| Proceeds from distributions received from equity method investees | | 4,563 |
| | 4,264 |
|
| Other net investing activities | | (1,897 | ) | | (3,002 | ) |
| Net cash used in investing activities | | (1,868,818 | ) | | (2,654,135 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| | |
|
| Net increase in deposits | | 1,252,237 |
| | 2,092,022 |
|
| Net (decrease) increase in short-term borrowings | | (9,035 | ) | | 63,131 |
|
| FHLB advances: | | | | |
| Proceeds | | 1,500,000 |
| | — |
|
| Repayment | | (1,082,000 | ) | | — |
|
| Repayment of long-term debt and finance lease liabilities | | (658 | ) | | (15,000 | ) |
| Common stock: | | | | |
| Proceeds from issuance pursuant to various stock compensation plans and agreements | | 1,895 |
| | 1,328 |
|
| Stock tendered for payment of withholding taxes | | (14,230 | ) | | (15,502 | ) |
| Cash dividends paid | | (114,986 | ) | | (92,632 | ) |
| Net cash provided by financing activities | | 1,533,223 |
| | 2,033,347 |
|
| Effect of exchange rate changes on cash and cash equivalents | | (12,520 | ) | | (28,333 | ) |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | 40,904 |
| | 44,195 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | 3,001,377 |
| | 2,174,592 |
|
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 3,042,281 |
| | $ | 2,218,787 |
|
| |
|
| | | | | | | | |
| |
| | | 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 |
|
| | | | | |
|
| | | | | | | | |
| |
| | | Nine Months Ended September 30, |
| | | 2019 | | 2018 |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | |
| Cash paid during the period for: | | | | |
| Interest | | $ | 313,793 |
| | $ | 166,422 |
|
| Income taxes, net | | $ | 116,074 |
| | $ | 71,064 |
|
| Non-cash investing and financing activities: | | | | |
| Loans transferred from held-for-investment to held-for-sale | | $ | 222,434 |
| | $ | 363,591 |
|
| Loans transferred from held-for-sale to held-for-investment | | $ | — |
| | $ | 2,306 |
|
| Loans transferred to OREO | | $ | 2,013 |
| | $ | — |
|
| |
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, 2017,2019, East West also has six6 wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with FASBFinancial Accounting Standards Board (“FASB”) 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. (“EWIS”). In the third quarter of 2017, the Company sold the insurance brokerage business of EWIS, which remains a subsidiary of East West and continues to maintain its insurance broker license. In the first quarter of 2019, the Company acquired Enstream Capital Markets, LLC, a private broker dealer, as a wholly-owned subsidiary of the Company. In the third quarter of 2019, the Company established East West Investment Management LLC, a registered investment adviser, as a wholly-owned subsidiary of the Company.
The unaudited interim Consolidated Financial Statements are presented in accordance with United States Generally Accepted Accounting Principlesgenerally accepted accounting principles (“U.S. 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. 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, 2018, filed with the United States Securities and Exchange Commission on February 27, 2019 (the “Company’s 2018 Form 10-K”).
Note 2 — Current Accounting Developments
New Accounting Pronouncements Adopted
|
| | | |
| Standard | Required Date of Adoption | Description | Effect on Financial Statements |
| Standards Adopted in 2019 |
ASU 2016-02, Leases (Topic 842) and subsequent related ASUs | January 1, 2019 for leases standards other than ASU 2019-01.
January 1, 2020 for ASU 2019-01 Early adoption is permitted. | ASC Topic 842, Leases, supersedes ASC Topic 840, Leases. This ASU 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 Sheet, 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 assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Lessee accounting for finance leases, as well as lessor accounting are largely unchanged. The standard may be adopted using a modified retrospective approach through a cumulative-effect adjustment. In addition, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides companies the option to continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt ASU 2016-02. Companies that elect this transition option can recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.
| The Company adopted all the new lease standards on January 1, 2019 using the alternative transition method, which allows the adoption of the accounting standard prospectively without revising comparable prior periods’ financial information.
On January 1, 2019, the Company recognized $109.1 million and $117.7 million increase in right-of-use assets and associated lease liabilities, respectively, based on the present value of the expected remaining operating lease payments. In addition, the Company also recognized a cumulative-effect adjustment of $14.7 million to increase beginning balance of retained earnings as of January 1, 2019 related to the deferred gains on our prior sale and leaseback transactions that occurred prior to the date of adoption. The adoption of the new leases standards did not have a material impact on the Company’s Consolidated Statement of Income. Disclosures related to leases are included in Note 11 — Leases to the Consolidated Financial Statements in this Form 10-Q. |
ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes | January 1, 2019
Early adoption (including adoption in an interim period) is permitted for entities that already adopted ASU 2017-12. | This ASU amends ASC Topic 815, Derivatives and Hedging, by adding the OIS rate based on SOFR to the list of United States (“U.S.”) benchmark interest rates that are eligible to be hedged to facilitate the London Interbank Offered Rate to SOFR transition. The guidance should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. | The Company adopted ASU 2018-16 prospectively on January 1, 2019. The adoption of this guidance did not impact existing hedges but may impact new hedge relationships that are benchmarked against the SOFR OIS rate. |
In
Recent Accounting Pronouncements
|
| | | |
| Standard | Required Date of Adoption | Description | Effect on Financial Statements |
| Standards Not Yet Adopted |
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”) impairment model that applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loan receivables, available-for-sale 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. 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’s implementation efforts have included, but not limited to, identifying and evaluating key interpretations; modifying data, system, and operational process requirements against the new guidance; and developing and validating models. The Company has completed its parallel run in the third quarter of 2019. During the fourth quarter, the Company will continue to analyze model results, review qualitative factors, update the allowance documentation, and address any gaps arising from internal reviews, model validation, implementation testing, and upcoming fourth quarter parallel runs.
The Company expects to adopt this ASU on January 1, 2020 without electing the fair value option on eligible financial instruments. While the Company is still evaluating the impact on its Consolidated Financial Statements, the Company expects that this ASU may result in an increase in the allowance for credit losses due to the following factors: 1) the allowance for credit losses provides for expected credit losses over the remaining expected life of the loan portfolio; and 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. The ultimate effect of this ASU will also depend on the composition and credit quality of the portfolio and economic conditions at the time of adoption. |
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 does not expect the adoption of this guidance to have a material impact on the Company’s Consolidated Financial Statements. The Company expects to adopt this ASU on January 1, 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
Early adoption is permitted. | 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 does not expect the adoption of this guidance to have a material impact on the Company’s Consolidated Financial Statements. The Company expects to adopt this ASU on January 1, 2020. |
Note 3 — Dispositions
On March 2016,17, 2018, the FASB issued Accounting Standards UpdateBank completed the sale of its 8 Desert Community Bank (“ASU”DCB”) 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, to clarify that a changebranches located in the counterpartyHigh Desert area of Southern California to Flagstar Bank, a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not be considered a terminationwholly-owned subsidiary of Flagstar Bancorp, Inc. The assets and liabilities of the derivative instrument or a changeDCB branches that were sold in this transaction primarily consisted of $613.7 million of deposits, $59.1 million of loans, $9.0 million of cash and cash equivalents, and $7.9 million of premises and equipment. The transaction resulted 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 bothnet 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.
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.
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.
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$499.9 million have been recognized by the Company asto Flagstar Bank. After transaction costs, the sale resulted in a componentpre-tax gain of Income tax expense on the Consolidated Statements of Income during$31.5 million for the nine months ended September 30, 2017. The guidance also removes the impact2018, which was reported as Net gain on sale 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 inflowbusiness 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
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 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. The Company has completed a comprehensive scoping exercise to determine the revenue streams that are in the scope 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 guidance is not expected to have a material impact on its Consolidated Balance Sheets or Consolidated Statements of Income. The next phase of the Company’s implementation work will be to evaluate any changes that may be required to its applicable disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments, except those accounted for under the equity method of accounting or consolidated, to be measured at fair 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 estimate the fair value of financial instruments measured at amortized cost and changes the presentation of financial 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. 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, the 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 assets and lease liabilities. Lessor accounting is largely unchanged. ASU 2016-02 is effective on January 1, 2019, with early adoption permitted. The guidance should be applied using a modified retrospective transition method through a cumulative-effect adjustment. The Company is currently evaluating the potential impact on its Consolidated Financial Statements by reviewing its existing lease contracts and service contracts 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 leases on its Consolidated Balance Sheets. The Company does not expect a material impact to its recognition of operating lease expense on its Consolidated Statements of Income. Upon completion of the contract reviews and consideration of system requirements, the Company will evaluate 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 types of financial instruments, which modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new “expected credit loss” impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loan receivables, available-for-sale and held-to-maturity 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 change 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 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). ASU 2016-13 is effective on January 1, 2020, with early adoption permitted on January 1, 2019. 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. While the Company is still evaluating the impact on its Consolidated Financial Statements, the Company expects that ASU 2016-13 may result in an increase in the allowance for credit losses due to the following factors: 1) 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.
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.Income.
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-SaleInvestment Securities — When available, the Company uses quoted market prices to determine the fair value of available-for-sale investment securities, which are classified as Level 1. Level 1 available-for-sale investment 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 investment 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 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, the 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 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 for certain securities, valued using such methodsthe Company requests market quotes from various independent external brokers and utilizes the average quoted market prices. Since 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 of cost or fair value. Loans held-for-sale Equity securities were comprised of single-family residential loansmutual funds as of both September 30, 2017,2019 and were primarily comprised of consumer loans as of December 31, 2016.2018. 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, 2017,2019 and December 31, 2018, 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 are 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 is 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 methodologies 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 valueThe Company held foreign currency non-deliverable forward contracts as of contractual cash flows using current market rates for instruments with similar maturities. Due to the observable natureSeptember 30, 2019 and held foreign swap contracts as 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 rates 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 into foreign currency forward contracts2018 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 and swap 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 valued 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 equity warrants to purchase preferred and common stock of technology and life sciences companies as part of the loan origination process.it provides loans to. As of September 30, 2017,2019 and December 31, 2018, 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 equity warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on a duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The 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 judgment, measurement uncertainty is a direct correlation between changesinherent in the valuation of private companies’ equity warrants. Given that the Company holds long positions in all equity 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 themeasurement. A higher liquidity discount assumption and thewould result in a decrease in fair value measurement of warrants from private companies.measurement. 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’s 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. AlthoughSeptember 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of September 30, 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 |
| Available-for-sale investment securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 426,113 |
| | $ | — |
| | $ | — |
| | $ | 426,113 |
|
| U.S. government agency and U.S. government sponsored enterprise debt securities | | — |
| | 691,368 |
| | — |
| | 691,368 |
|
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | |
|
|
| Commercial mortgage-backed securities | | — |
| | 549,793 |
| | — |
| | 549,793 |
|
| Residential mortgage-backed securities | | — |
| | 925,387 |
| | — |
| | 925,387 |
|
| Municipal securities | | — |
| | 78,159 |
| | — |
| | 78,159 |
|
| Non-agency mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | — |
| | 70,243 |
| | — |
| | 70,243 |
|
| Residential mortgage-backed securities | | — |
| | 31,495 |
| | — |
| | 31,495 |
|
| Corporate debt securities | | — |
| | 11,022 |
| | — |
| | 11,022 |
|
| Foreign bonds | | — |
| | 453,179 |
| | — |
| | 453,179 |
|
| Asset-backed securities | | — |
| | 47,275 |
| | — |
| | 47,275 |
|
| Total available-for-sale investment securities | | $ | 426,113 |
| | $ | 2,857,921 |
| | $ | — |
| | $ | 3,284,034 |
|
| | | | | | | | | |
| Investments in tax credit and other investments: | | | | | | | | |
Equity securities (1) | | $ | 21,737 |
| | $ | 9,987 |
| | $ | — |
| | $ | 31,724 |
|
| Total investments in tax credit and other investments | | $ | 21,737 |
| | $ | 9,987 |
| | $ | — |
| | $ | 31,724 |
|
| | | | | | | | | |
| Derivative assets: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 264,603 |
| | $ | — |
| | $ | 264,603 |
|
| Foreign exchange contracts | | — |
| | 59,512 |
| | — |
| | 59,512 |
|
| Credit contracts | | — |
| | 4 |
| | — |
| | 4 |
|
| Equity contracts | | — |
| | 1,140 |
| | 402 |
| | 1,542 |
|
| Commodity contracts | | — |
| | 32,978 |
| | — |
| | 32,978 |
|
| Gross derivative assets | | $ | — |
| | $ | 358,237 |
| | $ | 402 |
| | $ | 358,639 |
|
Netting adjustments (2) | | $ | — |
| | $ | (69,328 | ) | | $ | — |
| | $ | (69,328 | ) |
| Net derivative assets | | $ | — |
| | $ | 288,909 |
| | $ | 402 |
| | $ | 289,311 |
|
| | | | | | | | | |
| Derivative liabilities: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 170,917 |
| | $ | — |
| | $ | 170,917 |
|
| Foreign exchange contracts | | — |
| | 50,828 |
| | — |
| | 50,828 |
|
| Credit contracts | | — |
| | 122 |
| | — |
| | 122 |
|
| Commodity contracts | | — |
| | 41,867 |
| | — |
| | 41,867 |
|
| Gross derivative liabilities | | $ | — |
| | $ | 263,734 |
| | $ | — |
| | $ | 263,734 |
|
Netting adjustments (2) | | $ | — |
| | $ | (110,720 | ) | | $ | — |
| | $ | (110,720 | ) |
| Net derivative liabilities | | $ | — |
| | $ | 153,014 |
| | $ | — |
| | $ | 153,014 |
|
| |
| |
| (1) | Equity securities were comprised 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 7 — 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, 2018 |
| | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
| Available-for-sale investment securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 564,815 |
| | $ | — |
| | $ | — |
| | $ | 564,815 |
|
| U.S. government agency and U.S. government sponsored enterprise debt securities | | — |
| | 217,173 |
| | — |
| | 217,173 |
|
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | — |
| | 408,603 |
| | — |
| | 408,603 |
|
| Residential mortgage-backed securities | | — |
| | 946,693 |
| | — |
| | 946,693 |
|
| Municipal securities | | — |
| | 82,020 |
| | — |
| | 82,020 |
|
| Non-agency mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | — |
| | 26,052 |
| | — |
| | 26,052 |
|
| Residential mortgage-backed securities | | �� |
| | 9,931 |
| | — |
| | 9,931 |
|
| Corporate debt securities | | — |
| | 10,869 |
| | — |
| | 10,869 |
|
| Foreign bonds | | — |
| | 463,048 |
| | — |
| | 463,048 |
|
| Asset-backed securities | | — |
| | 12,643 |
| | — |
| | 12,643 |
|
| Total available-for-sale investment securities | | $ | 564,815 |
| | $ | 2,177,032 |
| | $ | — |
| | $ | 2,741,847 |
|
| | | | | | | | | |
| Investment in tax credit and other investments: | | | | | | | | |
Equity securities (1) | | $ | 20,678 |
| | $ | 10,531 |
| | $ | — |
| | $ | 31,209 |
|
| Total investments in tax credit and other investments | | $ | 20,678 |
| | $ | 10,531 |
| | $ | — |
| | $ | 31,209 |
|
| | | | | | | | | |
| Derivative assets: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 69,818 |
| | $ | — |
| | $ | 69,818 |
|
| Foreign exchange contracts | | — |
| | 21,624 |
| | — |
| | 21,624 |
|
| Credit contracts | | — |
| | 1 |
| | — |
| | 1 |
|
| Equity contracts | | — |
| | 1,278 |
| | 673 |
| | 1,951 |
|
| Commodity contracts | | — |
| | 14,422 |
| | — |
| | 14,422 |
|
| Gross derivative assets | | $ | — |
| | $ | 107,143 |
| | $ | 673 |
| | $ | 107,816 |
|
Netting adjustments (2) | | $ | — |
| | $ | (45,146 | ) | | $ | — |
| | $ | (45,146 | ) |
| Net derivative assets | | $ | — |
| | $ | 61,997 |
| | $ | 673 |
| | $ | 62,670 |
|
| | | | | | | | | |
| Derivative liabilities: | | | | | | | | |
| Interest rate contracts | | $ | — |
| | $ | 75,133 |
| | $ | — |
| | $ | 75,133 |
|
| Foreign exchange contracts | | — |
| | 19,940 |
| | — |
| | 19,940 |
|
| Credit contracts | | — |
| | 164 |
| | — |
| | 164 |
|
| Commodity contracts | | — |
| | 23,068 |
| | — |
| | 23,068 |
|
| Gross derivative liabilities | | $ | — |
| | $ | 118,305 |
| | $ | — |
| | $ | 118,305 |
|
Netting adjustments (2) | | $ | — |
| | $ | (38,402 | ) | | $ | — |
| | $ | (38,402 | ) |
| Net derivative liabilities | | $ | — |
| | $ | 79,903 |
| | $ | — |
| | $ | 79,903 |
|
| |
| |
| (1) | Equity securities were comprised 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 7 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information. |
As of September 30, 2019 and December 31, 2018, Level 3 fair value measurements that were measured on a recurring basis consists of equity warrants issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity warrants for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Equity warrants | | | | | | | | |
| Beginning balance | | $ | 392 |
| | $ | 648 |
| | $ | 673 |
| | $ | 679 |
|
Total gains (losses) included in earnings (1) | | 10 |
| | (7 | ) | | 548 |
| | 161 |
|
| Issuances | | — |
| | 31 |
| | 28 |
| | 65 |
|
| Settlements | | — |
| | — |
| | (847 | ) | | (233 | ) |
| Ending balance | | $ | 402 |
|
| $ | 672 |
|
| $ | 402 |
| | $ | 672 |
|
| |
| |
| (1) | Includes unrealized gains (losses) of $10 thousand and $(7) thousand for the three months ended September 30, 2019 and 2018, respectively, and $(225) thousand and $224 thousand for the nine months ended September 30, 2019 and 2018, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income. |
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of September 30, 2019. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Fair Value Measurements (Level 3) | | Valuation Technique | | Unobservable Inputs | | Range of Inputs | | Weighted- Average (1) |
| September 30, 2019 | | | | | | | | | | |
| Derivative assets: | | | | | | | | | | |
| Equity warrants | | $ | 402 |
| | Black-Scholes option pricing model | | Equity volatility | | 45% — 56% | | 54% |
| | | | | | | Liquidity discount | | 47% | | 47% |
| December 31, 2018 | | | | | | | | | | |
| Derivative assets: | | | | | | | | | | |
| Equity warrants | | $ | 673 |
| | Black-Scholes option pricing model | | Equity volatility | | 49% — 52% | | 51% |
| | | | | | | Liquidity discount | | 47% | | 47% |
| | | | | | | | | | | |
| |
| (1) | Weighted-average is calculated based on fair value of equity warrants as of September 30, 2019 and December 31, 2018. |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis include certain non-PCI 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 non-PCI 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.
Non-PCI 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 other-than-temporary impairment (“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 since that date, and therefore, current estimatesforeclosure or at the lower of cost or estimated fair value may differ significantly fromless the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.
The following tables present the carrying amounts presented herein.of assets that were still held and had fair value changes measured on a nonrecurring basis as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Assets Measured at Fair Value on a Nonrecurring Basis
as of September 30, 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: | | | | | | | | |
| Commercial and industrial (“C&I”) | | $ | — |
| | $ | — |
| | $ | 43,087 |
| | $ | 43,087 |
|
| Commercial real estate (“CRE”) | | — |
| | — |
| | 764 |
| | 764 |
|
| Total non-PCI impaired loans | | $ | — |
| | $ | — |
| | $ | 43,851 |
| | $ | 43,851 |
|
OREO (1) | | $ | — |
| | $ | — |
| | $ | 590 |
| | $ | 590 |
|
| Investments in tax credit and other investments, net | | $ | — |
| | $ | — |
| | $ | 830 |
| | $ | 830 |
|
| |
| |
| (1) | Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO. |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2018 |
| | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value
Measurements |
| Non-PCI impaired loans: | | | | | | | | |
| Commercial: | | | | | | | | |
| C&I | | $ | — |
| | $ | — |
| | $ | 26,873 |
| | $ | 26,873 |
|
| CRE | | — |
| | — |
| | 3,434 |
| | 3,434 |
|
| Consumer: | | | | | | | | |
| Single-family residential | | — |
| | — |
| | 2,551 |
| | 2,551 |
|
| Total non-PCI impaired loans | | $ | — |
| | $ | — |
| | $ | 32,858 |
| | $ | 32,858 |
|
| |
The following table presents the increase (decrease) in value of assets for which a fair value adjustment has been recognized for the three and nine months ended September 30, 2019 and 2018, related to assets that were still held at those dates:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Non-PCI impaired loans: | | | | | | | | |
| Commercial: | | | | | | | | |
| C&I | | $ | (20,484 | ) | | $ | (8,508 | ) | | $ | (43,109 | ) | | $ | (7,204 | ) |
| CRE | | 2 |
| | 50 |
| | 6 |
| | 61 |
|
| Consumer: | | | | | | | | |
| Single-family residential | | — |
| | — |
| | — |
| | 15 |
|
| Home equity lines of credit (“HELOCs”) | | — |
| | (188 | ) | | — |
| | (262 | ) |
| Total non-PCI impaired loans | | $ | (20,482 | ) | | $ | (8,646 | ) | | $ | (43,103 | ) | | $ | (7,390 | ) |
OREO (1) | | $ | (1,020 | ) | | $ | — |
| | $ | (1,023 | ) | | $ | — |
|
| Investments in tax credit and other investments, net | | $ | (1,703 | ) | | $ | — |
| | $ | (11,573 | ) | | $ | — |
|
| |
| |
| (1) | Includes losses recorded within the first 90 days after transferring a loan to OREO. |
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 September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Fair Value
Measurements
(Level 3) | | Valuation
Technique(s) | | Unobservable Input(s) | | Range of Input(s) | | Weighted- Average (1) |
| September 30, 2019 | | | | | | | | | | |
| Non-PCI impaired loans | | $ | 4,407 |
| | Discounted cash flows | | Discount | | 4% — 12% | | 7% |
| | | $ | 14,094 |
| | Fair value of collateral | | Discount | | 20% — 50% | | 34% |
| | | $ | 25,350 |
| | Fair value of collateral | | Contract value | | NM | | NM |
| OREO | | $ | 590 |
| | Fair value of property | | Selling cost | | 8% | | 8% |
| Investments in tax credit and other investments, net | | $ | 830 |
| | Individual analysis of each investment | | Expected future tax benefits and distributions | | NM | | NM |
| December 31, 2018 | | | | | | | | | | |
| Non-PCI impaired loans | | $ | 16,921 |
| | Discounted cash flows | | Discount | | 4% — 7% | | 6% |
| | | $ | 2,751 |
| | Fair value of collateral | | Discount | | 15% — 50% | | 21% |
| | | $ | 11,499 |
| | Fair value of collateral | | Contract value | | NM | | NM |
| | | $ | 1,687 |
| | Fair value of property | | Selling cost | | 8% | | 8% |
| |
NM — Not meaningful.
| |
| (1) | Weighted-average is based on the relative fair value of the respective assets as of September 30, 2019 and December 31, 2018. |
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of September 30, 2019 and December 31, 2018, 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) | | September 30, 2019 |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Estimated Fair Value |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 3,042,281 |
| | $ | 3,042,281 |
| | $ | — |
| | $ | — |
| | $ | 3,042,281 |
|
| Interest-bearing deposits with banks | | $ | 160,423 |
| | $ | — |
| | $ | 160,423 |
| | $ | — |
| | $ | 160,423 |
|
Resale agreements (1) | | $ | 860,000 |
| | $ | — |
| | $ | 857,935 |
| | $ | — |
| | $ | 857,935 |
|
| Restricted equity securities, at cost | | $ | 78,334 |
| | $ | — |
| | $ | 78,334 |
| | $ | — |
| | $ | 78,334 |
|
| Loans held-for-sale | | $ | 294 |
| | $ | — |
| | $ | 294 |
| | $ | — |
| | $ | 294 |
|
| Loans held-for-investment, net | | $ | 33,679,400 |
| | $ | — |
| | $ | — |
| | $ | 33,998,189 |
| | $ | 33,998,189 |
|
| Mortgage servicing rights | | $ | 6,380 |
| | $ | — |
| | $ | — |
| | $ | 8,412 |
| | $ | 8,412 |
|
| Accrued interest receivable | | $ | 143,804 |
| | $ | — |
| | $ | 143,804 |
| | $ | — |
| | $ | 143,804 |
|
| Financial liabilities: | | | | | | | | | | |
| Demand, checking, savings and money market deposits | | $ | 26,139,319 |
| | $ | — |
| | $ | 26,139,319 |
| | $ | — |
| | $ | 26,139,319 |
|
| Time deposits | | $ | 10,520,207 |
| | $ | — |
| | $ | 10,519,103 |
| | $ | — |
| | $ | 10,519,103 |
|
| Short-term borrowings | | $ | 47,689 |
| | $ | — |
| | $ | 47,689 |
| | $ | — |
| | $ | 47,689 |
|
| FHLB advances | | $ | 745,494 |
| | $ | — |
| | $ | 754,902 |
| | $ | — |
| | $ | 754,902 |
|
Repurchase agreements (1) | | $ | 50,000 |
| | $ | — |
| | $ | 85,028 |
| | $ | — |
| | $ | 85,028 |
|
| Long-term debt | | $ | 147,033 |
| | $ | — |
| | $ | 145,923 |
| | $ | — |
| | $ | 145,923 |
|
| Accrued interest payable | | $ | 24,573 |
| | $ | — |
| | $ | 24,573 |
| | $ | — |
| | $ | 24,573 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Carrying
Amount | | Level 1 | | Level 2 | | Level 3 | | Estimated
Fair Value |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 3,001,377 |
| | $ | 3,001,377 |
| | $ | — |
| | $ | — |
| | $ | 3,001,377 |
|
| Interest-bearing deposits with banks | | $ | 371,000 |
| | $ | — |
| | $ | 371,000 |
| | $ | — |
| | $ | 371,000 |
|
Resale agreements (1) | | $ | 1,035,000 |
| | $ | — |
| | $ | 1,016,724 |
| | $ | — |
| | $ | 1,016,724 |
|
| Restricted equity securities, at cost | | $ | 74,069 |
| | $ | — |
| | $ | 74,069 |
| | $ | — |
| | $ | 74,069 |
|
| Loans held-for-sale | | $ | 275 |
| | $ | — |
| | $ | 275 |
| | $ | — |
| | $ | 275 |
|
| Loans held-for-investment, net | | $ | 32,073,867 |
| | $ | — |
| | $ | — |
| | $ | 32,273,157 |
| | $ | 32,273,157 |
|
| Mortgage servicing rights | | $ | 7,836 |
| | $ | — |
| | $ | — |
| | $ | 11,427 |
| | $ | 11,427 |
|
| Accrued interest receivable | | $ | 146,262 |
| | $ | — |
| | $ | 146,262 |
| | $ | — |
| | $ | 146,262 |
|
| Financial liabilities: | | | | | | | | | | |
| Demand, checking, savings and money market deposits | | $ | 26,370,562 |
| | $ | — |
| | $ | 26,370,562 |
| | $ | — |
| | $ | 26,370,562 |
|
| Time deposits | | $ | 9,069,066 |
| | $ | — |
| | $ | 9,084,597 |
| | $ | — |
| | $ | 9,084,597 |
|
| Short-term borrowings | | $ | 57,638 |
| | $ | — |
| | $ | 57,638 |
| | $ | — |
| | $ | 57,638 |
|
| FHLB advances | | $ | 326,172 |
| | $ | — |
| | $ | 334,793 |
| | $ | — |
| | $ | 334,793 |
|
Repurchase agreements (1) | | $ | 50,000 |
| | $ | — |
| | $ | 87,668 |
| | $ | — |
| | $ | 87,668 |
|
| Long-term debt | | $ | 146,835 |
| | $ | — |
| | $ | 152,556 |
| | $ | — |
| | $ | 152,556 |
|
| Accrued interest payable | | $ | 22,893 |
| | $ | — |
| | $ | 22,893 |
| | $ | — |
| | $ | 22,893 |
|
| |
| |
| (1) | Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of both September 30, 2019 and December 31, 2018, $400.0 million out of $450.0 million of gross repurchase agreements were eligible for netting against gross resale agreements. |
Note 5 —Securities Purchased under Resale Agreements and Sold under Repurchase Agreements
Resale Agreements
Resale agreements are recorded atas receivables for the balancescash paid based on the values at which the securities wereare acquired. The market values of the underlying securities collateralizing the related receivablereceivables of the resale agreements, including accrued interest, are monitored. Additional collateral may be requested by the Company from the counterpartycounterparties or excess collateral may be returned by the Company to the counterparties when deemed appropriate. Gross resale agreements were $1.65$1.26 billion and $2.10$1.44 billion as of September 30, 20172019 and December 31, 2016,2018, respectively. The weighted average interest ratesweighted-average yields were 2.30%2.57% and 1.84% as of2.63% for the three months ended September 30, 20172019 and December 31, 2016,2018, respectively, and 2.69% and 2.59% for the nine months ended September 30,2019 and 2018, respectively.
Repurchase Agreements
Long-term 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 September 30, 2019, 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 sponsored enterprise debtmortgage-backed securities. The Company may have to provide additional collateral to the counterparties, or the counterparties may return excess collateral to the Company, for the repurchase agreements as necessary.when deemed appropriate. Gross repurchase agreements were $450.0 million as of each ofboth September 30, 20172019 and December 31, 2016.2018. The weighted averageweighted-average interest rates were 3.56%4.68% and 3.15%4.65% for the three months ended September 30, 2019 and 2018, respectively, and 4.87% and 4.36% for the nine months ended September 30,2019 and2018, respectively.
The following table presents the gross repurchase agreements as of September 30, 20172019 that will mature in the next five years and December 31, 2016, respectively.thereafter:
|
| | | | |
| | | |
| ($ in thousands) | | Repurchase Agreements |
| Remainder of 2019 | | $ | — |
|
| 2020 | | — |
|
| 2021 | | — |
|
| 2022 | | 150,000 |
|
| 2023 | | 300,000 |
|
| Thereafter | | — |
|
| Total | | $ | 450,000 |
|
| | | |
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, but 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, 20172019 and December 31, 2016:2018:
| | | | ($ in thousands) | | As of September 30, 2017 | | September 30, 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 | | Financial
Instruments | | Collateral
Pledged | | Net Amount | | Gross Amounts
of Recognized
Assets | | Gross Amounts
Offset on the
Consolidated
Balance Sheet | | Net Amounts of
Assets Presented
on the Consolidated Balance Sheet | | Gross Amounts Not Offset on the
Consolidated Balance Sheet | | Net Amount |
| Assets | | | | Collateral Received | |
| | $ | 1,650,000 |
| | $ | (400,000 | ) | | $ | 1,250,000 |
| | $ | — |
| | $ | (1,240,568 | ) | (2) | $ | 9,432 |
| | $ | 1,260,000 |
| | $ | (400,000 | ) | | $ | 860,000 |
| | $ | (859,396 | ) | (1) | $ | 604 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| | $ | (400,000 | ) | | $ | 50,000 |
| | $ | (50,000 | ) | (2) | $ | — |
|
|
| | | | ($ in thousands) | | As of December 31, 2016 | | December 31, 2018 |
| | | 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 | | Financial
Instruments | | Collateral
Pledged | | Net Amount | | Gross Amounts
of Recognized
Assets | | Gross Amounts
Offset on the
Consolidated
Balance Sheet | | Net Amounts of
Assets Presented
on the Consolidated Balance Sheet | | Gross Amounts Not Offset on the
Consolidated Balance Sheet | | Net Amount |
| Assets | | | | Collateral Received | |
| | $ | 2,100,000 |
| | $ | (100,000 | ) | | $ | 2,000,000 |
| | $ | (150,000 | ) | (1) | $ | (1,839,120 | ) | (2) | $ | 10,880 |
| | $ | 1,435,000 |
| | $ | (400,000 | ) | | $ | 1,035,000 |
| | $ | (1,025,066 | ) | (1) | $ | 9,934 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| | $ | (400,000 | ) | | $ | 50,000 |
| | $ | (50,000 | ) | (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 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
Note 6 — Securities
The following tables present the amortized cost, gross unrealized gains and losses, and fair value by major categories of available-for-sale investment securities which are carried at fair value, and the held-to-maturity investment security, which is carried at amortized cost, as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | |
| |
| | | 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 |
|
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| Available-for-sale investment securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 427,535 |
| | $ | — |
| | $ | (1,422 | ) | | $ | 426,113 |
|
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 688,529 |
| | 2,924 |
| | (85 | ) | | 691,368 |
|
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | 539,957 |
| | 12,500 |
| | (2,664 | ) | | 549,793 |
|
| Residential mortgage-backed securities | | 914,379 |
| | 11,914 |
| | (906 | ) | | 925,387 |
|
| Municipal securities | | 76,948 |
| | 1,218 |
| | (7 | ) | | 78,159 |
|
| Non-agency mortgage-backed securities: | | | | | | | | |
| Commercial mortgage-backed securities | | 67,518 |
| | 2,731 |
| | (6 | ) | | 70,243 |
|
| Residential mortgage-backed securities | | 31,209 |
| | 425 |
| | (139 | ) | | 31,495 |
|
| Corporate debt securities | | 11,250 |
| | — |
| | (228 | ) | | 11,022 |
|
| Foreign bonds | | 454,431 |
| | 607 |
| | (1,859 | ) | | 453,179 |
|
| Asset-backed securities | | 48,028 |
| | — |
| | (753 | ) | | 47,275 |
|
| Total available-for-sale investment securities | | $ | 3,259,784 |
| | $ | 32,319 |
| | $ | (8,069 | ) | | $ | 3,284,034 |
|
| |
| |
(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) | | December 31, 2018 |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| Available-for-sale investment securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 577,561 |
| | $ | 153 |
| | $ | (12,899 | ) | | $ | 564,815 |
|
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 219,485 |
| | 382 |
| | (2,694 | ) | | 217,173 |
|
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | |
|
|
| Commercial mortgage-backed securities | | 420,486 |
| | 811 |
| | (12,694 | ) | | 408,603 |
|
| Residential mortgage-backed securities | | 957,219 |
| | 4,026 |
| | (14,552 | ) | | 946,693 |
|
| Municipal securities | | 82,965 |
| | 87 |
| | (1,032 | ) | | 82,020 |
|
| Non-agency mortgage-backed securities: | | | | | | | |
|
|
| Commercial mortgage-backed securities | | 25,826 |
| | 226 |
| | — |
| | 26,052 |
|
| Residential mortgage-backed securities | | 10,109 |
| | 7 |
| | (185 | ) | | 9,931 |
|
| Corporate debt securities | | 11,250 |
| | — |
| | (381 | ) | | 10,869 |
|
| Foreign bonds | | 489,378 |
| | — |
| | (26,330 | ) | | 463,048 |
|
| Asset-backed securities | | 12,621 |
| | 22 |
| | — |
| | 12,643 |
|
| Total available-for-sale investment securities | | $ | 2,806,900 |
| | $ | 5,714 |
| | $ | (70,767 | ) | | $ | 2,741,847 |
|
| | | | | | | | | |
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses and related fair values of the Company’s available-for-sale investment portfolio,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, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | 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) | | September 30, 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 |
| Available-for-sale investment securities: | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | 199,711 |
| | $ | (76 | ) | | $ | 226,402 |
| | $ | (1,346 | ) | | $ | 426,113 |
| | $ | (1,422 | ) |
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 354,916 |
| | (85 | ) | | — |
| | — |
| | 354,916 |
| | (85 | ) |
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | | | | | | |
| Commercial mortgage-backed securities | | 60,336 |
| | (573 | ) | | 116,139 |
| | (2,091 | ) | | 176,475 |
| | (2,664 | ) |
| Residential mortgage-backed securities | | 87,356 |
| | (553 | ) | | 43,403 |
| | (353 | ) | | 130,759 |
| | (906 | ) |
| Municipal securities | | 979 |
| | (1 | ) | | 5,046 |
| | (6 | ) | | 6,025 |
| | (7 | ) |
| Non-agency mortgage-backed securities: | | | | | | | | | | | | |
| Commercial mortgage-backed securities | | 7,914 |
| | (6 | ) | | — |
| | — |
| | 7,914 |
| | (6 | ) |
| Residential mortgage-backed securities | | 11,145 |
| | (139 | ) | | — |
| | — |
| | 11,145 |
| | (139 | ) |
| Corporate debt securities | | 1,247 |
| | (3 | ) | | 9,775 |
| | (225 | ) | | 11,022 |
| | (228 | ) |
| Foreign bonds | | 14,338 |
| | (101 | ) | | 123,243 |
| | (1,758 | ) | | 137,581 |
| | (1,859 | ) |
| Asset-backed securities | | 47,275 |
| | (753 | ) | | — |
| | — |
| | 47,275 |
| | (753 | ) |
| Total available-for-sale investment securities | | $ | 785,217 |
| | $ | (2,290 | ) | | $ | 524,008 |
| | $ | (5,779 | ) | | $ | 1,309,225 |
| | $ | (8,069 | ) |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Available-for-sale investment securities: | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | — |
| | $ | — |
| | $ | 516,520 |
| | $ | (12,899 | ) | | $ | 516,520 |
| | $ | (12,899 | ) |
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 22,755 |
| | (238 | ) | | 159,814 |
| | (2,456 | ) | | 182,569 |
| | (2,694 | ) |
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | | | | | | |
| Commercial mortgage-backed securities | | 26,886 |
| | (245 | ) | | 274,666 |
| | (12,449 | ) | | 301,552 |
| | (12,694 | ) |
| Residential mortgage-backed securities | | 75,675 |
| | (491 | ) | | 653,660 |
| | (14,061 | ) | | 729,335 |
| | (14,552 | ) |
| Municipal securities | | 9,458 |
| | (104 | ) | | 30,295 |
| | (928 | ) | | 39,753 |
| | (1,032 | ) |
| Non-agency mortgage-backed securities: | | | | | | | | | | | | |
| Residential mortgage-backed securities | | 3,067 |
| | (19 | ) | | 3,949 |
| | (166 | ) | | 7,016 |
| | (185 | ) |
| Corporate debt securities | | 10,869 |
| | (381 | ) | | — |
| | — |
| | 10,869 |
| | (381 | ) |
| Foreign bonds | | 14,418 |
| | (40 | ) | | 448,630 |
| | (26,290 | ) | | 463,048 |
| | (26,330 | ) |
| Total available-for-sale investment securities | | $ | 163,128 |
| | $ | (1,518 | ) | | $ | 2,087,534 |
| | $ | (69,249 | ) | | $ | 2,250,662 |
| | $ | (70,767 | ) |
| |
Other-Than-Temporary Impairment
For each reporting period, the Company examines allassesses individual securities that are in an unrealized loss position for OTTI. For a discussion of the factors and criteria the Company uses in analyzing securities for OTTI, see Note 1 — Summary of Significant Accounting Policies — Available-for-Sale Investment Securitiesto to the Consolidated Financial Statements of the Company’s 20162018 Form 10-K.
The unrealized losses were primarily attributable to the movement in the yield curve, movement, in addition to widened liquidity and credit spreads. 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 asbecause of changes in market interest rates have fluctuated.rates. The Company believes that the gross unrealized losses detailedpresented in the previous tables are temporary and not due to reasons ofno credit quality.losses are expected. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, no impairment loss was recorded onThe Company has the Company’s Consolidated Statementsintent to hold these securities through the anticipated recovery period and it is not more-likely-than-not that the Company will have to sell these securities before recovery of Income for the three and nine months ended September 30, 2017 and 2016.their amortized cost. As of September 30, 2017,2019, the Company had 14670 available-for-sale investment securities in ana gross unrealized loss position with no credit impairment, primarily comprisedconsisting of 7937 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 226 foreign bonds, and 10 U.S. Treasury securities and 14 investment grade foreign bonds.securities. In comparison, as of December 31, 2016,2018, the Company had 170184 available-for-sale investment securities in ana gross unrealized loss position with no credit impairment, primarily comprisedconsisting of 82108 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 2616 foreign bonds, and 19 U.S. Treasury securities and 13 investment grade foreign bonds.
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 $115.6 million from held-to-maturity to available-for-sale. The transfer reflects the Company’s intent to sell the security under active liquidity management.
Other-Than-Temporary Impairment
Nosecurities. There were 0 OTTI credit losses were recognized in earnings for each of the three and nine months ended September 30, 20172019 and 2016.2018.
Realized Gains and Losses
The following table presents the proceeds, gross realized gains and losses, and tax expense related to the sales of available-for-sale investment securities for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Proceeds from sales | | $ | 101,129 |
| | $ | 39,377 |
| | $ | 476,231 |
| | $ | 296,252 |
|
| Gross realized gains | | $ | 58 |
| | $ | 35 |
| | $ | 3,066 |
| | $ | 2,374 |
|
| Related tax expense | | $ | 17 |
| | $ | 11 |
| | $ | 906 |
| | $ | 701 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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 Investment Securities
The following table presents the scheduledcontractual maturities of available-for-sale investment securities as of September 30, 2017:2019:
| | | | ($ in thousands) | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Fair Value |
| Due within one year | | $ | 638,257 |
| | $ | 621,343 |
| | $ | 1,100,414 |
| | $ | 1,099,412 |
|
| Due after one year through five years | | 629,892 |
| | 623,058 |
| | 430,577 |
| | 429,725 |
|
| Due after five years through ten years | | 176,117 |
| | 172,902 |
| | 185,633 |
| | 189,981 |
|
| Due after ten years | | 1,548,497 |
| | 1,539,473 |
| | 1,543,160 |
| | 1,564,916 |
|
| Total available-for-sale investment securities | | $ | 2,992,763 |
| | $ | 2,956,776 |
| | $ | 3,259,784 |
| | $ | 3,284,034 |
|
|
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-saleAs of September 30, 2019 and December 31, 2018, available-for-sale investment securities with fair valuesvalue of $584.9$524.4 million and $767.4$435.8 million, as of September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, repurchase agreements, the Federal Reserve Bank’s discount windowinterest rate contracts, and for other purposes required or permitted by law.
Restricted Equity Securities
Restricted equity securities include stock of the Federal Reserve Bank of San Francisco (“FRB”) and of the FHLB.FHLB stock. Restricted equity securities are carried at cost as these securities do not have a readily determinable fair value. The following table presents the restricted equity securities as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| FRB stock | | $ | 58,084 |
| | $ | 56,819 |
|
| FHLB stock | | 20,250 |
| | 17,250 |
|
| Total restricted equity securities | | $ | 78,334 |
| | $ | 74,069 |
|
| |
|
| | | | | | | | |
| | | | | |
| ($ 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 7 — 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 —Derivatives to the Consolidated Financial Statements of the Company’s 20162018 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, 20172019 and December 31, 2016:2018. 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 September 30, 2019 and December 31, 2018. 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) | | September 30, 2019 | | December 31, 2018 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | Derivative Assets | | Derivative Liabilities | | | Derivative Assets | | Derivative Liabilities |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Fair value hedges: | | | | | | | | | | | | |
| Interest rate contracts | | $ | 31,026 |
| | $ | — |
| | $ | 2,804 |
| | $ | 35,811 |
| | $ | — |
| | $ | 5,866 |
|
| Net investment hedges: | | | | | | | | | | | | |
| Foreign exchange contracts | | 84,831 |
| | — |
| | 431 |
| | 90,245 |
| | — |
| | 611 |
|
| Total derivatives designated as hedging instruments | | $ | 115,857 |
| | $ | — |
| | $ | 3,235 |
| | $ | 126,056 |
| | $ | — |
| | $ | 6,477 |
|
| | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Interest rate contracts | | $ | 14,139,233 |
| | $ | 264,603 |
| | $ | 168,113 |
| | $ | 11,695,499 |
| | $ | 69,818 |
| | $ | 69,267 |
|
| Foreign exchange contracts | | 4,638,136 |
| | 59,512 |
| | 50,397 |
| | 3,407,522 |
| | 21,624 |
| | 19,329 |
|
| Credit contracts | | 211,343 |
| | 4 |
| | 122 |
| | 119,320 |
| | 1 |
| | 164 |
|
| Equity contracts | | — |
| (1) | 1,542 |
| | — |
| | — |
| (1) | 1,951 |
| | — |
|
| Commodity contracts | | — |
| (2) | 32,978 |
| | 41,867 |
| | — |
| (2) | 14,422 |
| | 23,068 |
|
| Total derivatives not designated as hedging instruments | | $ | 18,988,712 |
| | $ | 358,639 |
| | $ | 260,499 |
| | $ | 15,222,341 |
| | $ | 107,816 |
| | $ | 111,828 |
|
| Gross derivative assets/liabilities | | | | $ | 358,639 |
| | $ | 263,734 |
| | | | $ | 107,816 |
| | $ | 118,305 |
|
| Less: Master netting agreements | | | | (62,741 | ) | | (62,741 | ) | | | | (31,569 | ) | | (31,569 | ) |
| Less: Cash collateral received/paid | | | | (6,587 | ) | | (47,979 | ) | | | | (13,577 | ) | | (6,833 | ) |
| Net derivative assets/liabilities | | | | $ | 289,311 |
| | $ | 153,014 |
| | | | $ | 62,670 |
| | $ | 79,903 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 3 public companies and derivative liabilities are included17 private companies as of September 30, 2019. In comparison, the Company held equity contracts in Other assets and Accrued expenses4 public companies and other liabilities, respectively,on the Consolidated Balance Sheets.
18 private companies as of December 31, 2018. |
| |
| (2) | The Company held four warrantsnotional amount of the Company’s commodity contracts entered with its customers totaled 7,166 thousand barrels of crude oil and 33,089 thousand units of natural gas, measured in public companies and 32 warrants in private companiesmillion British thermal units (“MMBTUs”) as of September 30, 2017.2019. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 2,507 thousand barrels of crude oil and 14,722 thousand MMBTUs of natural gas as of December 31, 2018. 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 enters into interest rate swaps, which are 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 $6.0 million as of September 30, 2017 and December 31, 2016, respectively.
The following table presents the net gains (losses) recognized on the Consolidated StatementsStatement of Income related to the derivatives designated as fair value hedges for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Gains (losses) recorded in interest expense: | | | | | | | | |
| Recognized on interest rate swaps | | $ | 202 |
| | $ | (241 | ) | | $ | 3,056 |
| | $ | (2,089 | ) |
| Recognized on certificates of deposit | | $ | (37 | ) | | $ | 520 |
| | $ | (2,732 | ) | | $ | 2,239 |
|
| |
The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that was included in the carrying amount of the hedged certificates of deposit as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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) |
| | September 30, 2019 | | December 31, 2018 | | September 30, 2019 | | December 31, 2018 |
| Certificates of deposit | | $ | (29,276 | ) | | $ | (26,877 | ) | | $ | 1,408 |
| | $ | 4,141 |
|
| |
| |
| (1) | Represents the full carrying amount of the hedged certificates of deposit. |
| |
| (2) | For liabilities, 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. The Company recordedmay de-designate the changes innet investment hedges when the carrying amount of its China subsidiary in the Foreign currency translation adjustment account within AOCI. Simultaneously, the effective portion ofCompany expects the hedge of this exposure was also recorded in the Foreign currency translation adjustment accountwill cease to be highly effective. The notional 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 portionfair value amounts of the net investment hedges, recorded through the pointmade up of dedesignation remained in the Foreign 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, whichforwards, were included as part of the Derivatives Not Designated as Hedging Instruments — “Foreign Exchange Contracts” caption$84.8 million and a $431 thousand liability, respectively, as of September 30, 2017.
As2019. In comparison, the notional and fair value amounts of September 30, 2017, there were no derivative contracts designated asthe net investment hedges. Ashedges, made up of foreign exchange swaps, were $90.2 million and a $611 thousand liability, respectively, 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 $4.3 million asset, respectively. 2018.
The following table presents the gains (losses) recordedrecognized in the Foreign currency translation adjustment account within AOCI related to the effective portion of theon net investment hedges and the ineffective portion recorded on the Consolidated Statements of Income for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Gains recognized in AOCI | | $ | 2,954 |
| | $ | 2,960 |
| | $ | 351 |
| | $ | 6,745 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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 derivatives, and not as collateral against derivatives. Included in the total notional amount of $7.07 billion of interest rates contracts entered into with financial counterparties as of September 30, 2017, the total2019, was a notional amountsamount of $2.25 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 asset fair value of $317 thousand and liability valuation position. Asfair value of $103.3 million, as of September 30, 2019. In comparison, included in the total notional amount of $5.85 billion of interest rates contracts entered into with financial counterparties as of December 31, 2016, the total2018, was a notional amountsamount of $1.66 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 liability valuation position. Thereduction in derivative asset fair value of $16.4 million and liability fair value of $16.0 million as of December 31, 2018.
The following tables present the notional amounts and the gross fair values of interest rate swap and optionderivative contracts with institutional counterparties and the Company’s customers amounted to a $64.8 million asset and a $64.2 million liabilityoutstanding as of September 30, 2017. The fair value of interest rate swap2019 and option contracts with institutional counterparties and the Company’s customers amounted to a $67.6 million asset and a $65.1 million liability as of December 31, 2016.2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | | Assets | | Liabilities | | | | Assets | | Liabilities |
| Written options | | $ | 1,009,823 |
| | $ | — |
| | $ | 59 |
| | Purchased options | | $ | 1,009,823 |
| | $ | 61 |
| | $ | — |
|
| Sold collars and corridors | | 495,511 |
| | 3,592 |
| | 6 |
| | Collars and corridors | | 495,511 |
| | 6 |
| | 3,641 |
|
| Swaps | | 5,560,947 |
| | 260,251 |
| | 975 |
| | Swaps | | 5,567,618 |
| | 693 |
| | 163,432 |
|
| Total | | $ | 7,066,281 |
| | $ | 263,843 |
| | $ | 1,040 |
| | Total | | $ | 7,072,952 |
| | $ | 760 |
| | $ | 167,073 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | | Assets | | Liabilities | | | | Assets | | Liabilities |
| Written options | | $ | 931,601 |
| | $ | — |
| | $ | 492 |
| | Purchased options | | $ | 931,601 |
| | $ | 503 |
| | $ | — |
|
| Sold collars and corridors | | 429,879 |
| | 1,121 |
| | 305 |
| | Collars and corridors | | 429,879 |
| | 308 |
| | 1,140 |
|
| Swaps | | 4,482,881 |
| | 41,457 |
| | 41,545 |
| | Swaps | | 4,489,658 |
| | 26,429 |
| | 25,785 |
|
| Total | | $ | 5,844,361 |
| | $ | 42,578 |
| | $ | 42,342 |
| | Total | | $ | 5,851,138 |
| | $ | 27,240 |
| | $ | 26,925 |
|
| |
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, 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 majorityportion of the foreign exchange transactionscontracts entered into with its customers, the Company either enters into offsetting foreign exchange contracts with institutional counterpartiesthird-party financial institutions or acquires collateral on a portfolio basis primarily in the form of cash to manage its 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 have original maturities of one year or less. As of September 30, 2017 and December 31, 2016, the total notional amounts of the foreign exchange contracts were $1.13 billion and $767.8 million, respectively. The fair values of the foreign exchange contracts recorded were a $14.2 million asset and a $20.1 million liabilityless as of September 30, 2017. 2019 and December 31, 2018.
The following tables present the notional amounts and the gross fair values of the foreign exchange derivative contracts recorded were an $11.9 million asset and an $11.2 million liabilityoutstanding as of September 30, 2019 and December 31, 2016.2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional
Amount | | Fair Value |
| | | Assets | | Liabilities | | | | Assets | | Liabilities |
| Forwards and spot | | $ | 3,205,662 |
| | $ | 46,233 |
| | $ | 34,023 |
| | Forwards and spot | | $ | 321,044 |
| | $ | 2,538 |
| | $ | 5,171 |
|
| Swaps | | 10,091 |
| | 77 |
| | 217 |
| | Swaps | | 760,748 |
| | 7,239 |
| | 7,554 |
|
| Written options | | 85,379 |
| | 640 |
| | — |
| | Purchased options | | 85,379 |
| | — |
| | 640 |
|
| Collars | | 5,344 |
| | 30 |
| | 209 |
| | Collars | | 164,489 |
| | 2,755 |
| | 2,583 |
|
| Total | | $ | 3,306,476 |
| | $ | 46,980 |
| | $ | 34,449 |
| | Total | | $ | 1,331,660 |
| | $ | 12,532 |
| | $ | 15,948 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| | Notional Amount | | Fair Value | | | Notional
Amount | | Fair Value |
| | | Assets | | Liabilities | | | | Assets | | Liabilities |
| Forwards and spot | | $ | 2,023,425 |
| | $ | 11,719 |
| | $ | 13,079 |
| | Forwards and spot | | $ | 506,342 |
| | $ | 3,407 |
| | $ | 2,285 |
|
| Swaps | | 21,108 |
| | 348 |
| | 243 |
| | Swaps | | 687,845 |
| | 5,764 |
| | 3,336 |
|
| Written options | | 537 |
| | 16 |
| | — |
| | Purchased options | | 537 |
| | — |
| | 16 |
|
| Collars | | 83,864 |
| | — |
| | 370 |
| | Collars | | 83,864 |
| | 370 |
| | — |
|
| Total | | $ | 2,128,934 |
| | $ | 12,083 |
| | $ | 13,692 |
| | Total | | $ | 1,278,588 |
| | $ | 9,541 |
| | $ | 5,637 |
|
| |
Credit Risk Participation AgreementsContracts — The Company has entered into RPAs under which the Company assumed its pro-rata share of the credit exposure associated with the borrower’s performance related to interest rate derivative contracts. The Company may or may not be a partyperiodically enter into RPA contracts to themanage its credit exposure on interest rate derivative contract and enterscontracts associated with syndicated loans. The Company may enter into suchprotection sold or protection purchased RPAs in instances wherewith institutional counterparties. Under the RPA, 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 Company’s normal credit review process. The referenced entities of the RPAs were investment grade as of both September 30, 2019 and December 31, 2018. The notional amount of the RPAs reflectreflects the Company’s pro-rata share of the derivative instrument. AsThe following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of September 30, 2017, the notional amount2019 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 $3 thousand asset, respectively. 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | Assets | | Liabilities | | | Assets | | Liabilities |
| RPAs - protection sold | | $ | 200,629 |
| | $ | — |
| | $ | 122 |
| | $ | 108,606 |
| | $ | — |
| | $ | 164 |
|
| RPAs - protection purchased | | 10,714 |
| | 4 |
| | — |
| | 10,714 |
| | 1 |
| | — |
|
| Total RPAs | | $ | 211,343 |
| | $ | 4 |
| | $ | 122 |
| | $ | 119,320 |
| | $ | 1 |
| | $ | 164 |
|
| |
Assuming all underlying borrowers referenced in the interest rate derivative contracts defaulted as of September 30, 20172019 and December 31, 2016,2018, the exposuresexposure from the RPAs purchasedwith protections sold would be $92$117 thousand and $179$125 thousand, respectively. As of September 30, 20172019 and December 31, 2016,2018, the weighted averageweighted-average remaining maturities of the outstanding RPAs were 3.02.4 years and 3.76.6 years, respectively.
Warrants Equity Contracts — TheAs part of the Company’s loan origination process, from time to time, the Company obtainedobtains equity warrants to purchase preferred and common stock of technology and life sciences companies as partit provides loans to. Equity warrants grant the Company the right to buy a certain class of the loan origination process. Asunderlying company’s equity at a certain price before expiration. The Company held warrants in 3 public companies and 17 private companies as of September 30, 2017, the Company2019, and held four warrants in 4 public companies and 32 warrants in18 private companies.companies as of December 31, 2018. The total fair valuesvalue of the warrants forheld in both public and private companies were an $856 thousandwas a $1.5 million asset and $2.0 million asset as of September 30, 2019 and December 31, 2018, respectively.
Commodity Contracts — In 2018, the Company entered 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 entered 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. The notional quantities that cleared through CME totaled 2,160 thousand barrels of crude oil and 3,980 thousand MMBTUs of natural gas as of September 30, 2019. Applying variation margin payments as settlement to CME-cleared derivative transactions resulted in a $599 thousandreduction in gross derivative asset respectively, totaling $1.5fair value of $13.2 million as of September 30, 2017.2019, for a net liability fair value of $3.0 million. In comparison, the notional quantities that cleared through CME totaled 778 thousand barrels of crude oil and 6,290 thousand MMBTUs of natural gas as of December 31, 2018. Applying variation margin payments as settlement to CME-cleared derivative transactions resulted in a reduction in gross derivative asset fair value of $10.4 million and liability fair value of $582 thousand as of December 31, 2018, for a net asset fair value of $622 thousand.
The following tables present the notional amounts and fair values of the commodity derivative positions outstanding as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
($ and units in thousands) | | September 30, 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 | | 148 |
| | Barrels | | $ | — |
| | $ | 305 |
| | Purchased options | | 148 |
| | Barrels | | $ | 225 |
| | $ | — |
|
| Collars | | 2,838 |
| | Barrels | | 19 |
| | 5,523 |
| | Collars | | 3,384 |
| | Barrels | | 6,141 |
| | 713 |
|
| Swaps | | 4,180 |
| | Barrels | | 1,454 |
| | 22,806 |
| | Swaps | | 4,299 |
| | Barrels | | 14,922 |
| | 1,939 |
|
| Total | | 7,166 |
| |
| | $ | 1,473 |
| | $ | 28,634 |
| | Total | | 7,831 |
| |
| | $ | 21,288 |
| | $ | 2,652 |
|
| | | | | | | | | | | | | | | | | | | |
| Natural gas: | | | | | | | | | | Natural gas: | | | | | | | | |
| Written options | | 570 |
| | MMBTUs | | $ | — |
| | $ | 42 |
| | Purchased Options | | 560 |
| | MMBTUs | | $ | 35 |
| | $ | — |
|
| Collars | | 10,742 |
| | MMBTUs | | $ | 228 |
| | $ | 447 |
| | Collars | | 10,672 |
| | MMBTUs | | $ | 387 |
| | $ | 183 |
|
| Swaps | | 21,777 |
| | MMBTUs | | 2,588 |
| | 7,024 |
| | Swaps | | 22,938 |
| | MMBTUs | | 6,979 |
| | 2,885 |
|
| Total | | 33,089 |
| |
| | $ | 2,816 |
| | $ | 7,513 |
| | Total | | 34,170 |
| |
| | $ | 7,401 |
| | $ | 3,068 |
|
| Total | | | |
| | $ | 4,289 |
| | $ | 36,147 |
| | Total | | | |
| | $ | 28,689 |
| | $ | 5,720 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
($ and units
in thousands) | | December 31, 2018 |
| | 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 | | 524 |
| | Barrels | | $ | — |
| | $ | 2,628 |
| | Purchased options | | 524 |
| | Barrels | | $ | 2,251 |
| | $ | — |
|
| Collars | | 872 |
| | Barrels | | — |
| | 3,772 |
| | Collars | | 872 |
| | Barrels | | 3,225 |
| | — |
|
| Swaps | | 1,111 |
| | Barrels | | — |
| | 14,278 |
| | Swaps | | 1,111 |
| | Barrels | | 5,799 |
| | — |
|
| Total | | 2,507 |
| |
| | $ | — |
| | $ | 20,678 |
| | Total | | 2,507 |
| |
| | $ | 11,275 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | |
| Natural gas: | | | | | | | | | | Natural gas: | | | | | | | | |
| Collars | | 3,063 |
| | MMBTUs | | $ | 78 |
| | $ | 152 |
| | Collars | | 3,063 |
| | MMBTUs | | $ | 151 |
| | $ | 64 |
|
| Swaps | | 11,659 |
| | MMBTUs | | 1,049 |
| | 1,857 |
| | Swaps | | 11,659 |
| | MMBTUs | | 1,869 |
| | 317 |
|
| Total | | 14,722 |
| |
| | $ | 1,127 |
| | $ | 2,009 |
| | Total | | 14,722 |
| |
| | $ | 2,020 |
| | $ | 381 |
|
| Total | | | | | | $ | 1,127 |
| | $ | 22,687 |
| | Total | | | | | | $ | 13,295 |
| | $ | 381 |
|
| |
The following table presents the net 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, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Classification on Consolidated Statement of Income | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Interest rate contracts | | Interest rate contracts and other derivative income | | $ | (2,738 | ) | | $ | 653 |
| | $ | (5,876 | ) | | $ | 1,847 |
|
| Foreign exchange contracts | | Foreign exchange income | | 5,306 |
| | 4,612 |
| | 15,127 |
| | 11,115 |
|
| Credit contracts | | Interest rate contracts and other derivative income | | (3 | ) | | 20 |
| | 44 |
| | (49 | ) |
| Equity contracts | | Lending fees | | (442 | ) | | 531 |
| | 725 |
| | 970 |
|
| Commodity contracts | | Interest rate contracts and other derivative income | | 14 |
| | (45 | ) | | (4 | ) | | (5 | ) |
| Net gains | | | | $ | 2,137 |
| | $ | 5,771 |
| | $ | 10,016 |
| | $ | 13,878 |
|
| |
|
| | | | | | | | | | | | | | | | | | |
| |
| ($ 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 Contingent Features— Certain over-the-counter derivative contracts of the Company contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit-risk-related event. These events, which are defined by the existing derivative contracts, primarily relate to a downgrade in the credit rating of East West Bank to below investment grade. As of September 30, 2019, the net fair value of all derivative instruments with such credit-risk-related contingent features was a $71.3 million net liability position, comprising $538 thousand in derivative assets and $71.9 million in derivative liabilities; the associated posted collateral was $71.1 million. As of December 31, 2018, the net fair value of all derivative instruments with such credit-risk-related contingent features was an $11.4 million net liability position, comprising $2.8 million in derivative assets and $14.2 million in derivative liabilities; the associated posted collateral was $9.4 million. In the event that the credit rating of East West Bank’s credit rating isBank had been downgraded to below investment grade, nominimal additional collateral would behave been required to be posted since the liabilities related to such contracts were fully collateralized as of both September 30, 20172019 and December 31, 2016.2018.
Offsetting of Derivatives
The Company has entered into agreements with certain counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The following tables present the gross derivativesderivative fair values, the balance sheet netting adjustments and the resulting net fair values recorded on the Consolidated Balance SheetsSheet, as well as the cash and non-cash collateral associated with master netting arrangements. The gross amounts of derivative assets and liabilities are presented after the respective collateral received or pledged in the formapplication of other financial instruments, which are generally marketable securities and/or cash.variation margin payments as settlements with centrally cleared organizations, where applicable. The collateral amounts in thesethe following tables are limited to the outstanding balances of the related asset or liability, (after netting is applied); thusafter the application of netting; therefore, instances of overcollateralization are not shown:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | As of September 30, 2017 |
| ($ 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) | | September 30, 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 | | $ | 358,639 |
| | $ | (62,741 | ) | | $ | (6,587 | ) | | $ | 289,311 |
| | $ | — |
| | $ | 289,311 |
|
| | | | | | | | | | | | | |
| | | 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 | | $ | 263,734 |
| | $ | (62,741 | ) | | $ | (47,979 | ) | | $ | 153,014 |
| | $ | (113,365 | ) | | $ | 39,649 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | 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) | | December 31, 2018 |
| | | | | | | | | | | |
| | | 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 | | $ | 107,816 |
| | $ | (31,569 | ) | | $ | (13,577 | ) | | $ | 62,670 |
| | $ | (13,975 | ) | | $ | 48,695 |
|
| | | | | | | | | | | | | |
| | | 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 | | $ | 118,305 |
| | $ | (31,569 | ) | | $ | (6,833 | ) | | $ | 79,903 |
| | $ | (11,231 | ) | | $ | 68,672 |
|
| |
| |
| (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 $357.0 million and $105.9 million, respectively, as of September 30, 2019 and December 31, 2018, and amounts with counterparties not subject to net.enforceable master netting arrangements or similar agreements of $1.6 million and $2.0 million, respectively, as of September 30, 2019 and December 31, 2018. |
| |
| (2) | RepresentsGross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $263.7 million and $118.2 million, respectively, as of September 30, 2019 and December 31, 2018, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $67 thousand and $102 thousand, respectively, as of September 30, 2019 and December 31, 2018. |
| |
| (3) | Gross cash collateral received under master netting arrangements or similar agreements were $7.2 million and securities$15.8 million, respectively, as of September 30, 2019 and December 31, 2018. Of the gross cash collateral received, $6.6 million and $13.6 million were used to offset against derivative assets, withrespectively, as of September 30, 2019 and December 31, 2018. |
| |
| (4) | Gross cash collateral pledged under master netting arrangements or similar agreements were $50.9 million and $8.4 million, respectively, as of September 30, 2019 and December 31, 2018. Of the same counterpartygross cash collateral pledged, $48.0 million and $6.8 million were used to offset against derivative liabilities, respectively, as of September 30, 2019 and December 31, 2018. |
| |
| (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 $170 thousand of cash collateral posted as of September 30, 2017 and December 31, 2016, respectively.such amounts. |
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to the resale and repurchase agreements, referagreements. Refer to Note 5 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements in this Form 10-Q for additional information. Refer toNote 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for fair value measurement disclosures on derivatives.
Note 8 — Loans Receivable and Allowance for Credit Losses
The Company’s held-for-investment loan portfolio includes originated and purchased loans. Originated and purchased loans with no evidence of credit deterioration at their acquisition date are referred to collectively as non-PCI loans. PCI loans are loans acquired with evidence of credit deterioration since their origination and for which it is probable at the acquisition date that the Company would be unable to collect all contractually required payments. PCI loans are accounted for under ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company has elected to account for PCI loans on a pool level basis under ASC 310-30 at the time of acquisition.
The following table presents the composition of the Company’s non-PCI and PCI loans as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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) | | September 30, 2019 | | December 31, 2018 |
| | Non-PCI Loans (1) | | PCI Loans (2) | | Total (1)(2) | | Non-PCI Loans (1) | | PCI Loans (2) | | Total (1)(2) |
| Commercial: | | | | | | | | | | | | |
| C&I | | $ | 12,299,163 |
| | $ | 1,839 |
| | $ | 12,301,002 |
| | $ | 12,054,818 |
| | $ | 2,152 |
| | $ | 12,056,970 |
|
| CRE | | 9,627,330 |
| | 122,253 |
| | 9,749,583 |
| | 9,097,165 |
| | 163,034 |
| | 9,260,199 |
|
| Multifamily residential | | 2,564,758 |
| | 24,445 |
| | 2,589,203 |
| | 2,433,924 |
| | 36,744 |
| | 2,470,668 |
|
| Construction and land | | 719,859 |
| | 41 |
| | 719,900 |
| | 538,752 |
| | 42 |
| | 538,794 |
|
| Total commercial | | 25,211,110 |
| | 148,578 |
| | 25,359,688 |
| | 24,124,659 |
| | 201,972 |
| | 24,326,631 |
|
| Consumer: | | | | | | | | | | | | |
| Single-family residential | | 6,725,574 |
| | 85,440 |
| | 6,811,014 |
| | 5,939,258 |
| | 97,196 |
| | 6,036,454 |
|
| HELOCs | | 1,533,433 |
| | 6,688 |
| | 1,540,121 |
| | 1,681,979 |
| | 8,855 |
| | 1,690,834 |
|
| Other consumer | | 314,153 |
| | — |
| | 314,153 |
| | 331,270 |
| | — |
| | 331,270 |
|
| Total consumer | | 8,573,160 |
| | 92,128 |
| | 8,665,288 |
| | 7,952,507 |
| | 106,051 |
| | 8,058,558 |
|
| Total loans held-for-investment | | $ | 33,784,270 |
| | $ | 240,706 |
| | $ | 34,024,976 |
| | $ | 32,077,166 |
| | $ | 308,023 |
| | $ | 32,385,189 |
|
| Allowance for loan losses | | (345,576 | ) | | — |
| | (345,576 | ) | | (311,300 | ) | | (22 | ) | | (311,322 | ) |
| Loans held-for-investment, net | | $ | 33,438,694 |
| | $ | 240,706 |
| | $ | 33,679,400 |
| | $ | 31,765,866 |
| | $ | 308,001 |
| | $ | 32,073,867 |
|
| |
| |
| (1) | Includes $(29.2)net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(39.8) million and $1.2$(48.9) million as of September 30, 20172019 and December 31, 2016, respectively, of net deferred loan fees, unearned income, unamortized premiums and unaccreted discounts.2018, respectively. |
| |
| (2) | Loans net ofIncludes ASC 310-30 discount.discount of $16.7 million and $22.2 million as of September 30, 2019 and December 31, 2018, 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. Commercialother consumer loans.
The C&I loan portfolio, which is comprised of commercial business and trade finance in the C&I segment provideloans, provides financing to businesses in a wide spectrum of industries.
Residential The CRE loan portfolio consists of income producing real estate loans that are comprised of single-family and multifamily loans. The Company offers first lien mortgage loans secured by one-to-four unit residential properties located in its primary lending areas. The Company offers a variety of first lien mortgage loan programs, including fixed rate conforming 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 componenteither owner occupied, or non-owner occupied where 50% or more of the consumerdebt service for the loan portfolio, and were securedis primarily provided by one-to-four unitunaffiliated rental income from a third party. The multifamily residential properties located in its primary lending areas. The HELOCs loan portfolio is largely comprised of loans secured by residential properties with 5 or more units in the Bank’s primary lending areas. Construction loans mainly provide construction financing for hotels, offices and industrial projects.
In the consumer portfolio, the Company offers single-family residential loans and HELOCs through a variety of mortgage loan programs. A substantial number of these loans are originated through a reduced documentation loan program, wherein which a substantial down payment is required, resulting in a low loan-to-value ratio at origination, typically 60% or less at origination.less. The Company is in a first lien position for many of these reduced documentation single-family residential loans and HELOCs. These loans have historically experienced low delinquency and default rates. Other consumer loans are mainly comprised of insurance premium financing loans.
All loans originated are subject to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks associated with these products. The Company conducts a variety of quality control procedures and periodic audits, including the review of lending and legal requirements to ensure that it is in compliance with these requirements.
As of September 30, 20172019 and December 31, 2016,2018, loans totaling $18.18of $21.83 billion and $16.44$20.59 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, current financial and liquidity status, and all other relevant information. 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 ratings are the overall credit quality indicator for the Company and the credit quality indicator is utilized for estimating the appropriate allowance for loan losses. The Company utilizes a risk rating system which can be classifiedclassifies loans within the following categories: 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 toloans that 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 that have potential weaknesses that warrant closer attention by management. Special Mention is considered a transitory grade. If the potential weaknesses are resolved, thea loan is upgraded to a Pass or Watch grade. If negative trends in the borrower’s financial status or other information indicate that the sources of repayment sources may become inadequate, thea loan is downgraded to a Substandard grade. Substandard loans are considered to have well-defined weaknesses that may jeopardize the full and timely repayment of the loan. Substandard loans have athe distinct possibility of loss, if the deficiencies are not corrected. Additionally, whenWhen management has assessed athat there is potential for loss, but a distinct possibility of loss is not yet recognizable, the loan is stillremains classified as Substandard.Substandard grade. Doubtful loans are loans that have insufficient sources of repayment and a high probability of loss. Loss loans are considered to beloans that are uncollectible and of such little value that they are no longer considered bankable assets. These internal risk ratings are reviewed routinely and adjusted based on changes in the borrowers’ financial status and the loans’ collectability.
The following tables present the credit risk ratings for non-PCI loans by portfolio segmentloan type as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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) | | September 30, 2019 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Total Non-PCI Loans |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 11,632,851 |
| | $ | 390,052 |
| | $ | 262,387 |
| | $ | 13,873 |
| | $ | 12,299,163 |
|
| CRE | | 9,454,709 |
| | 90,583 |
| | 82,038 |
| | — |
| | 9,627,330 |
|
| Multifamily residential | | 2,535,702 |
| | 20,393 |
| | 8,663 |
| | — |
| | 2,564,758 |
|
| Construction and land | | 666,597 |
| | — |
| | 53,262 |
| | — |
| | 719,859 |
|
| Total commercial | | 24,289,859 |
| | 501,028 |
| | 406,350 |
| | 13,873 |
| | 25,211,110 |
|
| Consumer: | | | | | | | | | | |
| Single-family residential | | 6,708,317 |
| | 7,773 |
| | 9,484 |
| | — |
| | 6,725,574 |
|
| HELOCs | | 1,518,542 |
| | 4,966 |
| | 9,925 |
| | — |
| | 1,533,433 |
|
| Other consumer | | 299,659 |
| | 11,999 |
| | 2,495 |
| | — |
| | 314,153 |
|
| Total consumer | | 8,526,518 |
| | 24,738 |
| | 21,904 |
| | — |
| | 8,573,160 |
|
| Total | | $ | 32,816,377 |
| | $ | 525,766 |
| | $ | 428,254 |
| | $ | 13,873 |
| | $ | 33,784,270 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Total Non-PCI Loans |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 11,644,470 |
| | $ | 260,089 |
| | $ | 139,844 |
| | $ | 10,415 |
| | $ | 12,054,818 |
|
| CRE | | 8,957,228 |
| | 49,705 |
| | 90,232 |
| | — |
| | 9,097,165 |
|
| Multifamily residential | | 2,402,991 |
| | 20,551 |
| | 10,382 |
| | — |
| | 2,433,924 |
|
| Construction and land | | 485,217 |
| | 19,838 |
| | 33,697 |
| | — |
| | 538,752 |
|
| Total commercial | | 23,489,906 |
| | 350,183 |
| | 274,155 |
| | 10,415 |
| | 24,124,659 |
|
| Consumer: | | | | | | | | | | |
| Single-family residential | | 5,925,584 |
| | 6,376 |
| | 7,298 |
| | — |
| | 5,939,258 |
|
| HELOCs | | 1,669,300 |
| | 1,576 |
| | 11,103 |
| | — |
| | 1,681,979 |
|
| Other consumer | | 328,767 |
| | 1 |
| | 2,502 |
| | — |
| | 331,270 |
|
| Total consumer | | 7,923,651 |
| | 7,953 |
| | 20,903 |
| | — |
| | 7,952,507 |
|
| Total | | $ | 31,413,557 |
| | $ | 358,136 |
| | $ | 295,058 |
| | $ | 10,415 |
| | $ | 32,077,166 |
|
| |
The following tables present the credit risk ratings for PCI loans by portfolio segmentloan type as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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) | | September 30, 2019 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Total PCI Loans |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 1,839 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,839 |
|
| CRE | | 106,164 |
| | — |
| | 16,089 |
| | — |
| | 122,253 |
|
| Multifamily residential | | 23,870 |
| | — |
| | 575 |
| | — |
| | 24,445 |
|
| Construction and land | | 41 |
| | — |
| | — |
| | — |
| | 41 |
|
| Total commercial | | 131,914 |
| | — |
| | 16,664 |
| | — |
| | 148,578 |
|
| Consumer: | | | | | | | | | | |
| Single-family residential | | 85,338 |
| | — |
| | 102 |
| | — |
| | 85,440 |
|
| HELOCs | | 6,265 |
| | — |
| | 423 |
| | — |
| | 6,688 |
|
| Total consumer | | 91,603 |
| | — |
| | 525 |
| | — |
| | 92,128 |
|
Total (1) | | $ | 223,517 |
| | $ | — |
| | $ | 17,189 |
| | $ | — |
| | $ | 240,706 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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, 2018 |
| | Pass/Watch | | Special Mention | | Substandard | | Doubtful | | Total PCI Loans |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 1,996 |
| | $ | — |
| | $ | 156 |
| | $ | — |
| | $ | 2,152 |
|
| CRE | | 143,839 |
| | — |
| | 19,195 |
| | — |
| | 163,034 |
|
| Multifamily residential | | 35,221 |
| | — |
| | 1,523 |
| | — |
| | 36,744 |
|
| Construction and land | | 42 |
| | — |
| | — |
| | — |
| | 42 |
|
| Total commercial | | 181,098 |
| | — |
| | 20,874 |
| | — |
| | 201,972 |
|
| Consumer: | | | | | | | | | | |
| Single-family residential | | 95,789 |
| | 1,021 |
| | 386 |
| | — |
| | 97,196 |
|
| HELOCs | | 8,314 |
| | 256 |
| | 285 |
| | — |
| | 8,855 |
|
| Total consumer | | 104,103 |
| | 1,277 |
| | 671 |
| | — |
| | 106,051 |
|
Total (1) | | $ | 285,201 |
| | $ | 1,277 |
| | $ | 21,545 |
| | $ | — |
| | $ | 308,023 |
|
| |
| |
| (1) | Loans net of ASC 310-30 discount. |
Nonaccrual and Past Due Loans
Non-PCI loans that are 90 or more days past due are generally placed on nonaccrual status. Additionally, non-PCIstatus, unless the loan is well-collateralized or guaranteed by government agencies, and in the process of collection. Non-PCI 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 present the aging analysis on non-PCI loans as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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) | | September 30, 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 | | $ | 4,105 |
| | $ | 6,889 |
| | $ | 10,994 |
| | $ | 38,049 |
| | $ | 52,781 |
| | $ | 90,830 |
| | $ | 12,197,339 |
| | $ | 12,299,163 |
|
| CRE | | 2,828 |
| | — |
| | 2,828 |
| | 1,879 |
| | 17,063 |
| | 18,942 |
| | 9,605,560 |
| | 9,627,330 |
|
| Multifamily residential | | 689 |
| | 289 |
| | 978 |
| | 551 |
| | — |
| | 551 |
| | 2,563,229 |
| | 2,564,758 |
|
| Construction and land | | 19,687 |
| | — |
| | 19,687 |
| | — |
| | — |
| | — |
| | 700,172 |
| | 719,859 |
|
| Total commercial | | 27,309 |
| | 7,178 |
| | 34,487 |
| | 40,479 |
| | 69,844 |
| | 110,323 |
| | 25,066,300 |
| | 25,211,110 |
|
| Consumer: | | | | | | | | | | | | | | | | |
| Single-family residential | | 13,503 |
| | 8,374 |
| | 21,877 |
| | 1,122 |
| | 8,362 |
| | 9,484 |
| | 6,694,213 |
| | 6,725,574 |
|
| HELOCs | | 8,372 |
| | 4,967 |
| | 13,339 |
| | 195 |
| | 9,729 |
| | 9,924 |
| | 1,510,170 |
| | 1,533,433 |
|
| Other consumer | | 49 |
| | 21 |
| | 70 |
| | — |
| | 2,495 |
| | 2,495 |
| | 311,588 |
| | 314,153 |
|
| Total consumer | | 21,924 |
| | 13,362 |
| | 35,286 |
| | 1,317 |
| | 20,586 |
| | 21,903 |
| | 8,515,971 |
| | 8,573,160 |
|
| Total | | $ | 49,233 |
| | $ | 20,540 |
| | $ | 69,773 |
| | $ | 41,796 |
| | $ | 90,430 |
| | $ | 132,226 |
| | $ | 33,582,271 |
| | $ | 33,784,270 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 |
|
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | 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 | | $ | 21,032 |
| | $ | 19,170 |
| | $ | 40,202 |
| | $ | 17,097 |
| | $ | 26,743 |
| | $ | 43,840 |
| | $ | 11,970,776 |
| | $ | 12,054,818 |
|
| CRE | | 7,740 |
| | — |
| | 7,740 |
| | 3,704 |
| | 20,514 |
| | 24,218 |
| | 9,065,207 |
| | 9,097,165 |
|
| Multifamily residential | | 4,174 |
| | — |
| | 4,174 |
| | 1,067 |
| | 193 |
| | 1,260 |
| | 2,428,490 |
| | 2,433,924 |
|
| Construction and land | | 207 |
| | — |
| | 207 |
| | — |
| | — |
| | — |
| | 538,545 |
| | 538,752 |
|
| Total commercial | | 33,153 |
| | 19,170 |
| | 52,323 |
| | 21,868 |
| | 47,450 |
| | 69,318 |
| | 24,003,018 |
| | 24,124,659 |
|
| Consumer: | | | | | | | | | | | | | | | | |
| Single-family residential | | 14,645 |
| | 7,850 |
| | 22,495 |
| | 509 |
| | 4,750 |
| | 5,259 |
| | 5,911,504 |
| | 5,939,258 |
|
| HELOCs | | 2,573 |
| | 1,816 |
| | 4,389 |
| | 1,423 |
| | 7,191 |
| | 8,614 |
| | 1,668,976 |
| | 1,681,979 |
|
| Other consumer | | 11 |
| | 12 |
| | 23 |
| | — |
| | 2,502 |
| | 2,502 |
| | 328,745 |
| | 331,270 |
|
| Total consumer | | 17,229 |
| | 9,678 |
| | 26,907 |
| | 1,932 |
| | 14,443 |
| | 16,375 |
| | 7,909,225 |
| | 7,952,507 |
|
| Total | | $ | 50,382 |
| | $ | 28,848 |
| | $ | 79,230 |
| | $ | 23,800 |
| | $ | 61,893 |
| | $ | 85,693 |
| | $ | 31,912,243 |
| | $ | 32,077,166 |
|
| |
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— Loans Held-for-Investment to the Consolidated Financial Statements of the Company’s 20162018 Form 10-K.
PCI loans are excluded from the above aging analysis tables 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 noteNote for additional details on interest income recognition. As of September 30, 20172019 and December 31, 2016,2018, PCI loans on nonaccrual status totaled $5.7 million$531 thousand and $11.7$4.0 million, respectively.
Loans in Process of Foreclosure
The Company commences the foreclosure process on consumer mortgage loans when a borrower becomes 120 days delinquent in accordance with Consumer Finance Protection Bureau guidelines. As of September 30, 20172019 and December 31, 2016, the Company had $6.32018, consumer mortgage loans of $6.7 million and $3.1$3.0 million, respectively, of recorded investments in residential and consumer mortgage loanswere secured by residential real estate properties, for which formal foreclosure proceedings were in process according toin accordance with local requirements of the applicable jurisdictions, which were not included in OREO. Ajurisdictions. As of both September 30, 2019 and December 31, 2018, 0 foreclosed residential real estate property with a carrying amount of $391 thousand was included in total net OREO of $2.3$1.1 million as of September 30, 2017. In comparison, foreclosed residential real estate properties with a carrying amount of $401and $133 thousand, were included in total net OREO of $6.7 million as of December 31, 2016.respectively.
Troubled Debt Restructurings
Potential troubled debt restructurings (“TDRs”) are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty in order to maximize the Company’s recovery.difficulty. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered.
The following tables present the additions to non-PCI TDRs for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Loans Modified as TDRs During the Three Months Ended September 30, |
| ($ 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 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Loans Modified as TDRs During the Three Months Ended September 30, |
| | 2019 | | 2018 |
| | 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 | | 1 | | $ | 7,933 |
| | $ | 6,000 |
| | $ | 2,396 |
| | 4 | | $ | 7,992 |
| | $ | 8,006 |
| | $ | 3,619 |
|
| CRE | | — | | $ | — |
| | $ | — |
| | $ | — |
| | — | | $ | — |
| | $ | — |
| | $ | — |
|
| Consumer: | | | | | | | | | | | | | | | | |
| Single-family residential | | 1 | | $ | 903 |
| | $ | 893 |
| | $ | — |
| | — | | $ | — |
| | $ | — |
| | $ | — |
|
| HELOCs | | 1 | | $ | 139 |
| | $ | 136 |
| | $ | — |
| | — | | $ | — |
| | $ | — |
| | $ | — |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | 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 Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | 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 | | 9 | | $ | 85,073 |
| | $ | 81,038 |
| | $ | 9,231 |
| | 4 | | $ | 7,992 |
| | $ | 8,006 |
| | $ | 3,727 |
|
| CRE | | — | | $ | — |
| | $ | — |
| | $ | — |
| | 1 | | $ | 750 |
| | $ | 798 |
| | $ | — |
|
| Consumer: | | | | | | | | | | | | | | | | |
| Single-family residential | | 2 | | $ | 1,123 |
| | $ | 1,109 |
| | $ | 2 |
| | 2 | | $ | 404 |
| | $ | 395 |
| | $ | (28 | ) |
| HELOCs | | 1 | | $ | 139 |
| | $ | 136 |
| | $ | — |
| | 2 | | $ | 1,546 |
| | $ | 1,467 |
| | $ | — |
|
| |
| |
| (1) | Includes subsequent payments after modification and reflects the balance as of September 30, 20172019 and 2016.2018. |
| |
| (2) | The financial impact includes charge-offs and specific reserves recorded atsince the modification date. |
The following tables present the non-PCI TDR modificationspost-modification outstanding balances for the three and nine months ended September 30, 20172019 and 20162018 by modification type:
| | | | ($ in thousands) | | Modification Type During the Three Months Ended September 30, 2017 | | Modification Type During the Three Months Ended September 30, |
| | Principal (1) | | Principal and Interest (2) | | Interest Rate Reduction | | Interest Deferments | | Other | | Total | | 2019 | | 2018 |
| CRE | | $ | 172 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 172 |
| |
| ($ in thousands) | | | Principal (1) | | Interest
Rate
Reduction | | Interest
Deferments | | Other | | Total | | Principal (1) | | Interest
Rate
Reduction | | Interest
Deferments | | Other | | Total |
| | | | | | | | | | | | | | | | | | | | |
| | 14,903 |
| | 24 |
| | — |
| | — |
| | — |
| | 14,927 |
| | $ | 6,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,000 |
| | $ | 8,006 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,006 |
|
| Total commercial | | | 6,000 |
| | — |
| | — |
| | — |
| | 6,000 |
|
| 8,006 |
| | — |
| | — |
| | — |
| | 8,006 |
|
| Consumer: | | | | | | | | | | | | | | | | | | | | | |
| Single-family residential | | | — |
| | — |
| | 893 |
| | — |
| | 893 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| HELOCs | | | — |
| | — |
| | — |
| | 136 |
| | 136 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total consumer | | | — |
| | — |
| | 893 |
| | 136 |
| | 1,029 |
| | — |
|
| — |
| | — |
| | — |
| | — |
|
| Total | | $ | 15,075 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15,099 |
| | $ | 6,000 |
| | $ | — |
| | $ | 893 |
| | $ | 136 |
| | $ | 7,029 |
| | $ | 8,006 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,006 |
|
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 Nine Months Ended September 30, |
| | Principal (1) | | Principal
and
Interest (2) | | Interest
Rate
Reduction | | Interest
Deferments | | Other | | Total | | 2019 | | 2018 |
| ($ in thousands) | | | Principal (1) | | Interest
Rate
Reduction | | Interest
Deferments | | Other (2) | | Total | | Principal (1) | | Interest
Rate
Reduction | | Interest
Deferments | | Other | | Total |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 44,271 |
| | $ | — |
| | $ | — |
| | $ | 36,767 |
| | $ | 81,038 |
| | $ | 8,006 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,006 |
|
| CRE | | $ | 19,812 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,151 |
| | $ | 20,963 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 798 |
| | — |
| | — |
| | 798 |
|
| C&I | | 10,218 |
| | — |
| | 1,288 |
| | 32 |
| | 600 |
| | 12,138 |
| |
| Residential | | 266 |
| | — |
| | 799 |
| | — |
| | — |
| | 1,065 |
| |
| Consumer | | 337 |
| | — |
| | — |
| | — |
| | — |
| | 337 |
| |
| Total commercial | | | 44,271 |
| | — |
| | — |
| | 36,767 |
| | 81,038 |
| | 8,006 |
| | 798 |
| | — |
| | — |
| | 8,804 |
|
| Consumer: | | | | | | | | | | | | | | | | | | | | | |
| Single-family residential | | | — |
| | — |
| | 1,109 |
| | — |
| | 1,109 |
| | 64 |
| | — |
| | — |
| | 331 |
| | 395 |
|
| HELOCs | | | — |
| | — |
| | — |
| | 136 |
| | 136 |
| | 1,400 |
| | — |
| | — |
| | 67 |
| | 1,467 |
|
| Total consumer | | | — |
| | — |
| | 1,109 |
| | 136 |
| | 1,245 |
| | 1,464 |
|
| — |
| | — |
| | 398 |
| | 1,862 |
|
| Total | | $ | 30,633 |
| | $ | — |
| | $ | 2,087 |
| | $ | 32 |
| | $ | 1,751 |
| | $ | 34,503 |
| | $ | 44,271 |
| | $ | — |
| | $ | 1,109 |
| | $ | 36,903 |
| | $ | 82,283 |
| | $ | 9,470 |
| | $ | 798 |
| | $ | — |
| | $ | 398 |
| | $ | 10,666 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| (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 principalprimarily funding to secure additional collateral and interest deferments or reductions.provides liquidity to collateral-dependent C&I loans. |
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, subsequent defaults do not generally have a significant additional impact on the allowance for loan losses. The following tables present information on loans for loans modified as TDRs within the previous 12 months that have subsequently defaultedwhich a subsequent default occurred during the three and nine months ended September 30, 20172019 and 2016,2018 that had been modified as a TDR within 12 months or less of its default, and were still in default at the respective period end:
|
| | | | | | | | | | | | | | |
| |
| ($ 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 Three Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of
Loans | | Recorded
Investment | | Number of
Loans | | Recorded
Investment |
| Commercial: | | | | | | | | |
| C&I | | 4 |
| | $ | 27,040 |
| | — |
| | $ | — |
|
| CRE | | — |
| | $ | — |
| | 1 |
| | $ | 186 |
|
| |
|
| | | | | | | | | | | | | | |
| |
| ($ 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 |
| | — |
| | $ | — |
|
| |
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Loans Modified as TDRs that Subsequently Defaulted During the Nine Months Ended September 30, |
| | 2019 | | 2018 |
| | Number of
Loans | | Recorded
Investment | | Number of
Loans | | Recorded
Investment |
| Commercial: | | | | | | | | |
| C&I | | 5 |
| | $ | 28,415 |
| | — |
| | $ | — |
|
| CRE | | — |
| | $ | — |
| | 1 |
| | $ | 186 |
|
| |
The amount of additional funds committed to lend to borrowers whose terms have been modified as TDRs was $612 thousand$2.1 million and $9.9$3.9 million as of September 30, 20172019 and December 31, 2016,2018, respectively.
Impaired Loans
The Company’s loans are grouped into heterogeneous and homogeneous (mostly consumer loans) categories. Classified loans in the heterogeneous category are identified and evaluated for impairment on an individual basis. A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all scheduled payments of principal or interest due in accordance with the original contractual terms. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent, less costs to sell. When the value of an impaired loan is less than the recorded investment and the loan is classified as nonperforming and uncollectible, the deficiency is charged-off against the allowance for loan losses. Impaired loans exclude the homogeneous consumer loan portfolio, which is evaluated collectively for impairment. The Company’s impaired loans include predominantly non-PCI loans held-for-investment on nonaccrual status and any non-PCI loans modified in a TDR, which may be on accrual or nonaccrual status.
The following tables present information on the non-PCI impaired loans as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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) | | September 30, 2019 |
| | Unpaid Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 154,618 |
| | $ | 82,798 |
| | $ | 38,305 |
| | $ | 121,103 |
| | $ | 13,783 |
|
| CRE | | 30,573 |
| | 23,653 |
| | 1,223 |
| | 24,876 |
| | 98 |
|
| Multifamily residential | | 5,190 |
| | 1,891 |
| | 2,848 |
| | 4,739 |
| | 44 |
|
| Total commercial | | 190,381 |
| | 108,342 |
| | 42,376 |
| | 150,718 |
| | 13,925 |
|
| Consumer: | | | | | | | | | | |
| Single-family residential | | 18,299 |
| | 4,311 |
| | 12,689 |
| | 17,000 |
| | 34 |
|
| HELOCs | | 12,569 |
| | 7,992 |
| | 4,506 |
| | 12,498 |
| | 4 |
|
| Other consumer | | 2,495 |
| | — |
| | 2,495 |
| | 2,495 |
| | 2,491 |
|
| Total consumer | | 33,363 |
| | 12,303 |
| | 19,690 |
| | 31,993 |
| | 2,529 |
|
| Total non-PCI impaired loans | | $ | 223,744 |
| | $ | 120,645 |
| | $ | 62,066 |
| | $ | 182,711 |
| | $ | 16,454 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Unpaid Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance |
| Commercial: | | | | | | | | | | |
| C&I | | $ | 82,963 |
| | $ | 48,479 |
| | $ | 8,609 |
| | $ | 57,088 |
| | $ | 1,219 |
|
| CRE | | 36,426 |
| | 28,285 |
| | 2,067 |
| | 30,352 |
| | 208 |
|
| Multifamily residential | | 6,031 |
| | 2,949 |
| | 2,611 |
| | 5,560 |
| | 75 |
|
| Total commercial | | 125,420 |
| | 79,713 |
| | 13,287 |
| | 93,000 |
| | 1,502 |
|
| Consumer: | | | | | | | | | | |
| Single-family residential | | 14,670 |
| | 2,552 |
| | 10,908 |
| | 13,460 |
| | 34 |
|
| HELOCs | | 10,035 |
| | 5,547 |
| | 4,409 |
| | 9,956 |
| | 5 |
|
| Other consumer | | 2,502 |
| | — |
| | 2,502 |
| | 2,502 |
| | 2,491 |
|
| Total consumer | | 27,207 |
| | 8,099 |
| | 17,819 |
| | 25,918 |
| | 2,530 |
|
| Total non-PCI impaired loans | | $ | 152,627 |
| | $ | 87,812 |
| | $ | 31,106 |
| | $ | 118,918 |
| | $ | 4,032 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | 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) |
| Commercial: | | | | | | | | | | | | | | | | |
| C&I | | $ | 150,063 |
| | $ | 340 |
| | $ | 94,095 |
| | $ | 328 |
| | $ | 198,024 |
| | $ | 2,156 |
| | $ | 142,259 |
| | $ | 685 |
|
| CRE | | 28,846 |
| | 114 |
| | 31,891 |
| | 116 |
| | 33,329 |
| | 363 |
| | 35,311 |
| | 375 |
|
| Multifamily residential | | 5,226 |
| | 58 |
| | 6,740 |
| | 56 |
| | 5,856 |
| | 179 |
| | 11,776 |
| | 190 |
|
| Construction and land | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,973 |
| | — |
|
| Total commercial | | 184,135 |
| | 512 |
| | 132,726 |
| | 500 |
| | 237,209 |
| | 2,698 |
| | 193,319 |
| | 1,250 |
|
| Consumer: | | | | | | | | | | | | | | | | |
| Single-family residential | | 23,779 |
| | 124 |
| | 18,423 |
| | 119 |
| | 27,758 |
| | 382 |
| | 21,208 |
| | 347 |
|
| HELOCs | | 15,382 |
| | 37 |
| | 10,474 |
| | 18 |
| | 19,529 |
| | 93 |
| | 11,897 |
| | 51 |
|
| Other consumer | | 2,504 |
| | — |
| | 2,491 |
| | — |
| | 2,526 |
| | — |
| | 2,491 |
| | — |
|
| Total consumer | | 41,665 |
| | 161 |
| | 31,388 |
| | 137 |
| | 49,813 |
| | 475 |
| | 35,596 |
| | 398 |
|
| Total non-PCI impaired loans | | $ | 225,800 |
| | $ | 673 |
| | $ | 164,114 |
| | $ | 637 |
| | $ | 287,022 |
| | $ | 3,173 |
| | $ | 228,915 |
| | $ | 1,648 |
|
| |
| |
| (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. |
For information on the policy and factors considered for impaired loans, see Note 1 — Summary of Significant Accounting Policies — Impaired Loans to the Consolidated Financial Statements of the Company’s 2018 Form 10-K.
Allowance for Credit Losses
The following tables presenttable presents a summary of activities in the allowance for loan losses by portfolio segmentloan type for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Non-PCI Loans | | | | | | | | |
| Allowance for non-PCI loans, beginning of period | | $ | 330,620 |
| | $ | 301,511 |
| | $ | 311,300 |
| | $ | 287,070 |
|
| Provision for loan losses on non-PCI loans | | 37,884 |
| | 12,650 |
| | 79,272 |
| | 47,722 |
|
| Gross charge-offs: | | | | | | | | |
| Commercial: | | | | | | | | |
| C&I | | (25,098 | ) | | (4,462 | ) | | (54,087 | ) | | (36,441 | ) |
| CRE | | (1,021 | ) | | — |
| | (1,021 | ) | | — |
|
| Consumer: | | | | | | | | |
| Single-family residential | | (11 | ) | | — |
| | (11 | ) | | (1 | ) |
| Other consumer | | (12 | ) | | (6 | ) | | (40 | ) | | (185 | ) |
| Total gross charge-offs | | (26,142 | ) | | (4,468 | ) | | (55,159 | ) | | (36,627 | ) |
| Gross recoveries: | | | | | | | | |
| Commercial: | | | | | | | | |
| C&I | | 1,648 |
| | 411 |
| | 5,612 |
| | 8,841 |
|
| CRE | | 1,896 |
| | 2 |
| | 3,955 |
| | 431 |
|
| Multifamily residential | | 42 |
| | 77 |
| | 376 |
| | 1,471 |
|
| Construction and land | | 21 |
| | 23 |
| | 523 |
| | 716 |
|
| Consumer: | | | | | | | | |
| Single-family residential | | 60 |
| | 295 |
| | 134 |
| | 1,108 |
|
| HELOCs | | 5 |
| | — |
| | 7 |
| | — |
|
| Other consumer | | 7 |
| | 1 |
| | 14 |
| | 2 |
|
| Total gross recoveries | | 3,679 |
| | 809 |
| | 10,621 |
| | 12,569 |
|
| Net charge-offs | | (22,463 | ) | | (3,659 | ) | | (44,538 | ) | | (24,058 | ) |
| Foreign currency translation adjustments | | (465 | ) | | (492 | ) | | (458 | ) | | (724 | ) |
| Allowance for non-PCI loans, end of period | | 345,576 |
| | 310,010 |
| | 345,576 |
| | 310,010 |
|
| PCI Loans | | | | | | | | |
| Allowance for PCI loans, beginning of period | | 5 |
| | 39 |
| | 22 |
| | 58 |
|
| Reversal of loan losses on PCI loans | | (5 | ) | | (8 | ) | | (22 | ) | | (27 | ) |
| Allowance for PCI loans, end of period | | — |
| | 31 |
| | — |
| | 31 |
|
| Allowance for loan losses | | $ | 345,576 |
| | $ | 310,041 |
| | $ | 345,576 |
| | $ | 310,041 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 — Allowance for Credit Losses to the Consolidated Financial Statements of the Company’s 20162018 Form 10-K.
The following table presents a summary of activities in the allowance for unfunded credit reserves for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Allowance for unfunded credit reserves, beginning of period | | $ | 13,019 |
| | $ | 14,019 |
| | $ | 12,566 |
| | $ | 13,318 |
|
| Provision for (reversal of) unfunded credit reserves | | 405 |
| | (2,100 | ) | | 858 |
| | (1,399 | ) |
| Allowance for unfunded credit reserves, end of period | | $ | 13,424 |
| | $ | 11,919 |
| | $ | 13,424 |
| | $ | 11,919 |
|
| |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| ($ 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 |
|
| | | | | | | | | |
The allowance for unfunded credit reserves is maintained at a level, which management believes to be sufficient to absorb estimated probable losses related to unfunded credit facilities. The allowance for unfunded credit reserves is included in Accrued expenseexpenses and other liabilitieson the Consolidated Balance Sheets.Sheet. SeeNote 1112 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q for additional information related to unfunded credit reserves.
The following tables present the Company’s allowance for loan losses and recorded investments by portfolio segmentloan type and impairment methodology as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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) | | | September 30, 2019 |
| | December 31, 2016 | | Commercial | | Consumer | | Total |
| | CRE | | C&I | | Residential | | Consumer | | Total | | C&I | | CRE | | Multifamily Residential | | Construction and Land | | Single- Family Residential | | HELOCs | | Other Consumer | |
| Allowance for loan losses | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 1,326 |
| | $ | 10,477 |
| | $ | 867 |
| | $ | 31 |
| | $ | 12,701 |
| | $ | 13,783 |
| | $ | 98 |
| | $ | 44 |
| | $ | — |
| | $ | 34 |
| | $ | 4 |
| | $ | 2,491 |
| | $ | 16,454 |
|
| Collectively evaluated for impairment | | 71,478 |
| | 131,689 |
| | 36,466 |
| | 8,068 |
| | 247,701 |
| | 205,086 |
| | 37,375 |
| | 20,263 |
| | 29,171 |
| | 29,901 |
| | 5,852 |
| | 1,474 |
| | 329,122 |
|
| Acquired with deteriorated credit quality | | 112 |
| | 1 |
| | 5 |
| | — |
| | 118 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ending balance | | $ | 72,916 |
| | $ | 142,167 |
| | $ | 37,338 |
| | $ | 8,099 |
| | $ | 260,520 |
| |
| Total | | | $ | 218,869 |
| | $ | 37,473 |
| | $ | 20,307 |
| | $ | 29,171 |
| | $ | 29,935 |
| | $ | 5,856 |
| | $ | 3,965 |
| | $ | 345,576 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded investment in loans | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 52,378 |
| | $ | 125,619 |
| | $ | 24,376 |
| | $ | 3,682 |
| | $ | 206,055 |
| | $ | 121,103 |
| | $ | 24,876 |
| | $ | 4,739 |
| | $ | — |
| | $ | 17,000 |
| | $ | 12,498 |
| | $ | 2,495 |
| | $ | 182,711 |
|
| Collectively evaluated for impairment | | 8,288,119 |
| | 9,476,557 |
| | 4,836,578 |
| | 2,053,385 |
| | 24,654,639 |
| | 12,178,060 |
| | 9,602,454 |
| | 2,560,019 |
| | 719,859 |
| | 6,708,574 |
| | 1,520,935 |
| | 311,658 |
| | 33,601,559 |
|
Acquired with deteriorated credit quality (1) | | 350,366 |
| | 38,387 |
| | 234,764 |
| | 18,928 |
| | 642,445 |
| | 1,839 |
| | 122,253 |
| | 24,445 |
| | 41 |
| | 85,440 |
| | 6,688 |
| | — |
| | 240,706 |
|
Ending balance (1) | | $ | 8,690,863 |
| | $ | 9,640,563 |
| | $ | 5,095,718 |
| | $ | 2,075,995 |
| | $ | 25,503,139 |
| |
Total (1) | | | $ | 12,301,002 |
| | $ | 9,749,583 |
| | $ | 2,589,203 |
| | $ | 719,900 |
| | $ | 6,811,014 |
| | $ | 1,540,121 |
| | $ | 314,153 |
| | $ | 34,024,976 |
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Multifamily Residential | | Construction and Land | | Single- Family Residential | | HELOCs | | Other Consumer | |
| Allowance for loan losses | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 1,219 |
| | $ | 208 |
| | $ | 75 |
| | $ | — |
| | $ | 34 |
| | $ | 5 |
| | $ | 2,491 |
| | $ | 4,032 |
|
| Collectively evaluated for impairment | | 187,898 |
| | 40,436 |
| | 19,810 |
| | 20,290 |
| | 31,306 |
| | 5,769 |
| | 1,759 |
| | 307,268 |
|
| Acquired with deteriorated credit quality | | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 22 |
|
| Total | | $ | 189,117 |
| | $ | 40,666 |
| | $ | 19,885 |
| | $ | 20,290 |
| | $ | 31,340 |
| | $ | 5,774 |
| | $ | 4,250 |
| | $ | 311,322 |
|
| | | | | | | | | | | | | | | | | |
| Recorded investment in loans | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 57,088 |
| | $ | 30,352 |
| | $ | 5,560 |
| | $ | — |
| | $ | 13,460 |
| | $ | 9,956 |
| | $ | 2,502 |
| | $ | 118,918 |
|
| Collectively evaluated for impairment | | 11,997,730 |
| | 9,066,813 |
| | 2,428,364 |
| | 538,752 |
| | 5,925,798 |
| | 1,672,023 |
| | 328,768 |
| | 31,958,248 |
|
Acquired with deteriorated credit quality (1) | | 2,152 |
| | 163,034 |
| | 36,744 |
| | 42 |
| | 97,196 |
| | 8,855 |
| | — |
| | 308,023 |
|
Total (1) | | $ | 12,056,970 |
| | $ | 9,260,199 |
| | $ | 2,470,668 |
| | $ | 538,794 |
| | $ | 6,036,454 |
| | $ | 1,690,834 |
| | $ | 331,270 |
| | $ | 32,385,189 |
|
| |
| |
| (1) | Loans net of ASC 310-30 discount. |
Purchased Credit ImpairedCredit-Impaired Loans
At the date of acquisition, PCI loans are pooled and accounted for at fair value, which represents the discounted value of the expected cash flows of the loan portfolio. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flowflows expectation. The cash flows expected over the life of the pools are estimated by an internal cash flowflows 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 investment in the loan represents the “accretable yield,” which is recognized as interest income on a level yield basis over the life of the loan. PrepaymentsProjected loss rates and prepayment speeds 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 receivedcollected at originationacquisition, considering the impact of prepayments, is deemedreferred to beas the “nonaccretable difference.”
The following table presents the changes in accretable yield for PCI loans for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Accretable yield for PCI loans, beginning of period | | $ | 64,053 |
| | $ | 85,052 |
| | $ | 74,870 |
| | $ | 101,977 |
|
| Accretion | | (6,198 | ) | | (7,357 | ) | | (18,205 | ) | | (27,575 | ) |
| Changes in expected cash flows | | (934 | ) | | 1,638 |
| | 256 |
| | 4,931 |
|
| Accretable yield for PCI loans, end of period | | $ | 56,921 |
| | $ | 79,333 |
| | $ | 56,921 |
| | $ | 79,333 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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 atAt the time of commitment to originate or purchase loans as held-for-investment,a loan, the 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/liability and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value.
As of September 30, 2017,2019 and December 31, 2018, loans held-for-sale amounted to $178of $294 thousand which were comprisedand $275 thousand consisted of single-family residential loans. In comparison, as of December 31, 2016, 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 million
Loan Purchases, Transfers 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-downs 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.Sales
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 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.
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 carrying value of loans purchased for the held-for-investment portfolio, loans sold and loans transferred from held-for-investment to held-for-sale at lower of cost or fair value during the three and nine months ended September 30, 2017, the Company sold loans of $57.4 million2019 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 $69 thousand in net gains recorded for the three and nine months ended September 30, 2016, respectively.2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 2019 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Multifamily
Residential | | Construction
and Land | | Single-Family
Residential | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 34,071 |
| | $ | 14,969 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 49,040 |
|
Sales (2)(3)(4) | | $ | 37,986 |
| | $ | 14,969 |
| | $ | — |
| | $ | — |
| | $ | 2,708 |
| | $ | 55,663 |
|
Purchases (5) | | $ | 38,047 |
| | $ | — |
| | $ | 1,350 |
| | $ | — |
| | $ | 29,568 |
| | $ | 68,965 |
|
| |
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 $2.4 million, respectively, in valuation adjustments.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 2018 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Multifamily
Residential | | Construction
and Land | | Single-Family
Residential | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 53,149 |
| | $ | 9,830 |
| | $ | — |
| | $ | — |
| | $ | 14,981 |
| | $ | 77,960 |
|
| Loans transferred from held-for-sale to held-for-investment | | $ | 2,306 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,306 |
|
Sales (2)(3)(4) | | $ | 62,744 |
| | $ | 9,830 |
| | $ | — |
| | $ | — |
| | $ | 20,844 |
| | $ | 93,418 |
|
Purchases (5) | | $ | 47,809 |
| | $ | — |
| | $ | 2,518 |
| | $ | — |
| | $ | 10,759 |
| | $ | 61,086 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2019 |
| | Commercial | | Consumer | | Total |
| | C&I | | CRE | | Multifamily
Residential | | Construction
and Land | | Single-Family
Residential | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 189,237 |
| | $ | 31,624 |
| | $ | — |
| | $ | 1,573 |
| | $ | — |
| | $ | 222,434 |
|
Sales (2)(3)(4) | | $ | 189,663 |
| | $ | 31,624 |
| | $ | — |
| | $ | 1,573 |
| | $ | 6,322 |
| | $ | 229,182 |
|
Purchases (5) | | $ | 304,341 |
| | $ | — |
| | $ | 7,302 |
| | $ | — |
| | $ | 83,607 |
| | $ | 395,250 |
|
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2018 |
| | Commercial | | Consumer | Total |
| | C&I | | CRE | | Multifamily
Residential | | Construction
and Land | | Single-Family
Residential | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 298,989 |
| | $ | 49,621 |
| | $ | — |
| | $ | — |
| | $ | 14,981 |
| | $ | 363,591 |
|
| Loans transferred from held-for-sale to held-for-investment | | $ | 2,306 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,306 |
|
Sales (2)(3)(4) | | $ | 305,435 |
| | $ | 49,621 |
| | $ | — |
| | $ | — |
| | $ | 31,565 |
| | $ | 386,621 |
|
Purchases (5) | | $ | 398,171 |
| | $ | — |
| | $ | 5,953 |
| | $ | — |
| | $ | 46,784 |
| | $ | 450,908 |
|
| |
| |
| (1) | The Company recorded $36 thousand and $426 thousand in write-downs to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale and subsequently sold during the three and nine months ended September 30, 2019, respectively, and $110 thousand and $13.5 million during the same periods in 2018, respectively. |
| |
| (2) | Includes originated loans sold of $47.8 million and $180.0 million for the three and nine months ended September 30, 2019, respectively, and $58.9 million and $252.1 million during the same periods in 2018, respectively. Originated loans sold during the three and nine months ended September 30, 2019 were primarily C&I loans. In comparison, originated loans sold during the three months ended September 30, 2018 were primarily C&I loans and single-family residential loans. Originated loans sold during the nine months ended September 30, 2018 were primarily C&I loans. |
| |
| (3) | Includes purchased loans sold in the secondary market of $7.9 million and $49.2 million for the three and nine months ended September 30, 2019, respectively, and $34.5 million and $134.5 million during the same periods in 2018, respectively. |
| |
| (4) | Net gains on sales of loans were $2.0 million and $3.0 million for the three and nine months ended September 30, 2019, respectively, and $1.1 million and $5.1 million during the same periods in 2018, respectively. |
| |
| (5) | C&I loan purchases for each of the three and nine months ended September 30, 2019 and 2018 were comprised of broadly syndicated C&I term loans. |
Note 9 — 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-and 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:September 30, 2019 and December 31, 2018:
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| Investments in qualified affordable housing partnerships, net | | $ | 190,000 |
| | $ | 184,873 |
|
| Accrued expenses and other liabilities — Unfunded commitments | | $ | 66,213 |
| | $ | 80,764 |
|
| |
|
| | | | | | | | |
| |
| ($ 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 and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Tax credits and other tax benefits recognized | | $ | 11,539 |
| | $ | 9,425 |
| | $ | 34,871 |
| | $ | 27,520 |
|
| Amortization expense included in income tax expense | | $ | 8,452 |
| | $ | 7,236 |
| | $ | 27,006 |
| | $ | 21,009 |
|
| |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| ($ 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 $117.0 million as of September 30, 20172019 and December 31, 2016, respectively, and are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. 2018:
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| Investments in tax credit and other investments, net | | $ | 211,603 |
| | $ | 231,635 |
|
| Accrued expenses and other liabilities — Unfunded commitments | | $ | 69,649 |
| | $ | 80,228 |
|
| |
Amortization of tax credit and other investments was $23.8$16.8 million and $32.6$58.5 million, respectively, for the three and nine months ended September 30, 2019, as compared with $20.8 million and $58.7 million, respectively, for the same periods in 2018.
Included in Investments in tax credit and other investments, net, on the Consolidated Balance Sheet were equity securities with readily determinable fair values of $31.7 million and $31.2 million, as of September 30, 2019 and December 31, 2018, 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 $188 thousand and $955 thousand during the three and nine months ended September 30, 2019, respectively, and unrealized losses of $185 thousand and $798 thousand, respectively, for the same periods in 2018.
The Company invested in 4 solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. These investments were recorded in Investments in tax credit and other investments, net on the Consolidated Balance Sheet and were accounted for under the equity method of accounting. For reasons that were not known or knowable to the Company, DC Solar had its assets frozen in December 2018. DC Solar filed for bankruptcy protection in February 2019. In February 2019, an affidavit from a Federal Bureau of Investigation special agent stated that DC Solar was operating a fraudulent “Ponzi-like scheme” and that the majority of the mobile solar generators sold to investors and managed by DC Solar, as well as the majority of the related lease revenues claimed to had been received by DC Solar might not have existed.
Tax credit investments are evaluated for possible OTTI on an annual basis or when events or changes in circumstances suggest that the carrying amount of the tax credit investments may not be realizable. Refer to Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for a discussion on the Company’s impairment evaluation and monitoring process of tax credit investments. Investments in tax credit and other investments, net related to DC Solar tax credit investments was $7.0 million out of the $231.6 million as of December 31, 2018. 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 OTTI charge within Amortization of tax credit and other 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 of the fact that DC Solar has ceased operations and its bankruptcy case had been converted from Chapter 11 to Chapter 7 on March 22, 2019. There are 0 balances recorded in Accrued expenses and other liabilities — Unfunded commitments related to DC Solar as of September 30, 2019 and December 31, 2018. Refer to Note 14 — Income Taxes to the Consolidated Financial Statements in this Form 10-Q for a further discussion related to the impacts on the Company’s income tax expense related to the DC solar tax credit investments.
During the three months ended September 30, 2017 and 2016, respectively. 2019, the Company recorded an OTTI charge of $1.7 million related to 2 historic tax credit investments within Amortization of tax credit and other investments on the Consolidated Statement of Income. Total OTTI charge was $66.1$1.7 million and $60.8$11.6 million for the three and nine months ended September 30, 20172019, respectively. In comparison, there was 0 OTTI charge recorded for the three and 2016, respectively.nine months ended September 30, 2018.
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 partner’s ability to manage the entity, which is indicative of power in them. The Company’s maximum exposure to loss in connection with these partnerships consists 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 the first quarter of 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.
Note 10—Goodwill and Other Intangible Assets
Goodwill
Total goodwill of $469.4was $465.7 million remained unchangedand $465.5 million as of September 30, 2017 compared to2019 and December 31, 2016.2018, respectively. Goodwill is testedrepresents the excess of the purchase price over the fair value of net assets acquired in an acquisition. The Company assesses goodwill for impairment at the reporting unit level (at the same level as the Company’s business segment) on an annual basis as of December 31st,of each year, or more frequently asif events occur or circumstances, change that would more likely than not reducesuch as adverse changes in the fair value of aeconomic or business environment, indicate there may be impairment. The Company organizes its operation into 3 reporting unit below its carrying amount. The Company’s three operating segments, Retail Banking,segments: (1) Consumer and Business Banking; (2) Commercial BankingBanking; and Other,(3) Other. For information on how the reporting units are equivalent to the Company’s reporting units. For complete discussionidentified and disclosure,components are aggregated, see Note 1518 — Business Segmentsto the Consolidated Financial Statements.Statements in this Form 10-Q.
There were 0 changes in the carrying amount of goodwill during the three months ended September 30, 2019 and 2018. The following table presents changes in the carrying amount of goodwill by reporting unit during the nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Consumer
and
Business Banking | | Commercial
Banking | | Total |
| Balance, January 1, 2018 | | $ | 357,207 |
| | $ | 112,226 |
| | $ | 469,433 |
|
| Disposition of the DCB branches | | (3,886 | ) | | — |
| | (3,886 | ) |
| Balance, September 30, 2018 | | $ | 353,321 |
| | $ | 112,226 |
| | $ | 465,547 |
|
| | | | | | | |
| Balance, January 1, 2019 | | $ | 353,321 |
| | $ | 112,226 |
| | $ | 465,547 |
|
| Acquisition of Enstream Capital Markets, LLC | | — |
| | 150 |
| | 150 |
|
| Balance, September 30, 2019 | | $ | 353,321 |
| | $ | 112,376 |
| | $ | 465,697 |
|
| |
Impairment Analysis
The Company performed its annual impairment analysis as of December 31, 20162018, and concluded that there was no0 goodwill impairment as the fair valuesvalue of all reporting units exceeded the carrying amountsamount of goodwill.their respective reporting unit. There were no triggering events during the three and nine months ended September 30, 2017,2019, and therefore, no additional goodwill impairment analysis was performed. No assurance can be given that goodwill will not be written down in future periods. Refer to Note 9 — Goodwill and Other Intangible Assets to the Consolidated Financial Statements of the Company’s 20162018 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 three and nine months ended September 30, 20172019 and 2016.2018. Core deposit intangibles associated with the sale of the Bank’s DCB branches, which had a net carrying amount of $1.0 million were written off in the first quarter of 2018.
The following table presents the gross carrying valueamount of core deposit intangible assets and accumulated amortization as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
Gross balance (1) | | $ | 86,099 |
| | $ | 86,099 |
|
Accumulated amortization (1) | | (75,044 | ) | | (71,570 | ) |
Net carrying balance (1) | | $ | 11,055 |
| | $ | 14,529 |
|
| |
| |
| (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$1.2 million and $2.0$1.3 million for the three months ended September 30, 20172019 and 2016,2018, respectively, and $5.3$3.5 million and $6.2$4.2 million for the nine months ended September 30, 20172019 and 2016, respectively.2018, respectively.
The following table presents the estimated future amortization expense of core deposit intangibles:intangibles as of September 30, 2019:
|
| | | | |
| |
| ($ in thousands) | | Amount |
| Remainder of 2019 | | $ | 1,044 |
|
| 2020 | | 3,634 |
|
| 2021 | | 2,749 |
|
| 2022 | | 1,865 |
|
| 2023 | | 1,199 |
|
| Thereafter | | 564 |
|
| Total | | $ | 11,055 |
|
| |
|
| | | | |
| |
| 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 11— Leases
On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) and subsequent related ASUs using the alternative transition method with a cumulative-effect adjustment to retained earnings without revising comparable prior periods’ financial information. As both a lessee and lessor, the Company elected the package of practical expedients available for leases that commenced before the adoption date. As such, the Company need not reassess: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) the initial direct costs for any expired or existing leases, such as costs that would qualify for capitalization. The Company also elected the hindsight practical expedient to determine the lease term and to assess impairment on the Company’s right-of-use assets, and the practical expedient to not separate lease and non-lease components, consistently across all leases.
Lessee Arrangements
The Company determines if an arrangement is a lease or contains a lease at inception. As of September 30, 2019, the Company was obligated under a number of non-cancellable leases, predominantly operating leases for certain retail banking branches and office spaces in the U.S. and Greater China. These operating leases expire in the years ranging from 2019 to 2030, exclusive of renewal and termination options. Some of these leases include options to extend the leases for up to 15 years, while certain leases include lessee termination options. The Company's measurement of the operating lease liability and right-of-use asset does not include payments associated with the options to extend or terminate the lease since it is not reasonably certain that the Company will exercise the options. A portion of the operating leases includes variable lease payments, primarily based on the usage of the asset or the consumer price index as specified in the lease agreements. The Company does not remeasure lease liabilities as a result of changes to variable lease payments. The Company also has equipment and air rights finance leases which expire in the years ranging from 2021 to 2047.
The right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate based on the information available at the later of the adoption date or the lease commencement date is used to determine the present value of future payments. This approximates a collateralized borrowing rate over a similar term for an amount equal to the lease payments in a similar economic environment.
The following table presents the lease related assets and liabilities recorded on the Consolidated Balance Sheet as of September 30, 2019:
|
| | | | | | |
| |
| ($ in thousands) | | Classification on the Consolidated Balance Sheet | | September 30, 2019 |
| Assets: | | | | |
| Operating lease assets | | Operating lease right-of use assets | | $ | 103,894 |
|
| Finance lease assets | | Premises and equipment | | 7,932 |
|
| Total lease assets | | | | $ | 111,826 |
|
| Liabilities: | | | | |
| Operating lease liabilities | | Operating lease liabilities | | $ | 112,142 |
|
| Finance lease liabilities | | Long-term debt and finance lease liabilities | | 5,356 |
|
| Total lease liabilities | | | | $ | 117,498 |
|
| |
The following table presents the components of lease expense for operating and finance leases during the three and nine months ended September 30, 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended
September 30, 2019 | | Nine Months Ended
September 30, 2019 |
| Operating lease cost | | $ | 8,596 |
| | $ | 26,346 |
|
| Finance lease cost: | | | | |
| Amortization of right-of-use assets | | 251 |
| | 733 |
|
| Interest on lease liabilities | | 38 |
| | 125 |
|
| Variable lease cost | | 31 |
| | 93 |
|
| Sublease income | | — |
| | (81 | ) |
| Net lease cost | | $ | 8,916 |
| | $ | 27,216 |
|
| |
The following table presents the supplemental cash flow information related to leases during the three and nine months ended September 30, 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended
September 30, 2019 | | Nine Months Ended
September 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 8,798 |
| | $ | 26,779 |
|
| Operating cash flows from finance leases | | $ | 38 |
| | $ | 125 |
|
| Financing cash flows from finance leases | | $ | 222 |
| | $ | 658 |
|
| Right-of-use assets obtained in exchange for new lease liabilities: | | | | |
| Operating leases | | $ | 2,794 |
| | $ | 17,961 |
|
| Financing leases | | $ | 39 |
| | $ | 265 |
|
| |
The following table presents the weighted-average remaining lease terms and discount rates related to leases as of September 30, 2019:
|
| | | |
|
| | September 30, 2019 |
| Weighted-average remaining lease term (in years): | | |
| Operating leases | | 4.8 |
|
| Finance leases | | 16.1 |
|
| Weighted-average discount rate: | | |
| Operating leases | | 3.23 | % |
| Finance leases | | 2.75 | % |
|
The following table presents a maturity analysis of the Company’s operating and finance lease liabilities as of September 30, 2019:
|
| | | | | | | | |
| |
| ($ in thousands) | | Operating Leases | | Finance Leases |
| Remainder of 2019 | | $ | 8,713 |
| | $ | 260 |
|
| 2020 | | 32,177 |
| | 1,037 |
|
| 2021 | | 27,962 |
| | 1,031 |
|
| 2022 | | 18,278 |
| | 691 |
|
| 2023 | | 11,254 |
| | 404 |
|
| Thereafter | | 22,559 |
| | 3,465 |
|
| Total minimum lease payments | | $ | 120,943 |
| | $ | 6,888 |
|
| Less: imputed interest | | (8,801 | ) | | (1,532 | ) |
| Present value of lease liabilities | | $ | 112,142 |
| | $ | 5,356 |
|
| |
Lessor Arrangements
The Company finances equipment under direct financing and sales-type leases to its commercial customers. As of September 30, 2019, the total net investment in direct financing and sales-type leases was $147.2 million with expiration in the years ranging from 2020 to 2027, exclusive of renewal options. Some of the leases include options to extend the leases, while others include early buyout options. As the Company is not reasonably certain at lease commencement that the purchase options will be exercised by the lessees, the lease terms exclude the purchase option.
The unguaranteed residual value is recorded at the present value of the amount the Company expects to derive from the underlying asset following the end of the lease term, which is not guaranteed by the lessee or any third party, discounted using the rate implicit in the lease. In certain cases, the Company obtains residual value insurance from third parties and/or guarantees from the lessee to manage the risk associated with the residual value of the leased assets. The carrying amount of guaranteed residual value, which was included in Loans held-for-investment on the Consolidated Balance Sheet, was $31.4 million as of September 30, 2019.
The following table presents the components of the net investment in direct financing and sales-type leases as of September 30, 2019:
|
| | | | |
| |
| ($ in thousands) | | September 30, 2019 |
| Lease receivables | | $ | 132,431 |
|
| Unguaranteed residual assets | | 14,767 |
|
| Net investment in direct financing and sales-type leases | | $ | 147,198 |
|
| |
The lease income for direct financing and sales-type leases was $1.5 million and $4.5 million for three and nine months ended September 30, 2019, respectively.
The following table presents future minimum lease payments that are expected to be received under the direct financing and sales-type leases as of September 30, 2019:
|
| | | | |
| |
| ($ in thousands) | | Direct Financing and Sales-Type Leases |
| Remainder of 2019 | | $ | 6,884 |
|
| 2020 | | 27,566 |
|
| 2021 | | 25,584 |
|
| 2022 | | 18,190 |
|
| 2023 | | 11,995 |
|
| Thereafter | | 20,342 |
|
| Total minimum lease payments | | $ | 110,561 |
|
| Less: imputed interest | | (10,842 | ) |
| Present value of lease receivables | | $ | 99,719 |
|
| |
Note 12—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 commitments, and outstanding commercial and standby letters of credit (“SBLCs”).
The following table presents the Company’s credit-related commitments as of the periods indicated:September 30, 2019 and December 31, 2018:
|
| | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| Loan commitments | | $ | 5,468,590 |
| | $ | 5,147,821 |
|
| Commercial letters of credit and SBLCs | | $ | 1,912,783 |
| | $ | 1,796,647 |
|
| |
|
| | | | | | | | |
| |
| ($ 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, 2017,2019, total letters of credit which amounted to $1.76of $1.91 billion were comprisedconsisted of SBLCs in the amount of $1.70$1.84 billion and commercial letters of credit in the amount of $59.1$70.6 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, and amounted to $14.0$13.3 million as of September 30, 20172019 and $15.7$12.4 million as of December 31, 2016.2018. These amounts are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.Sheet.
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 guarantees the Company had outstanding as of September 30, 20172019 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 $150.5 million, respectively. 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Maximum Potential
Future Payments | | Carrying Value |
| | September 30, 2019 | | December 31, 2018 | | September 30, 2019 | | December 31, 2018 |
| Single-family residential loans sold or securitized with recourse | | $ | 13,918 |
| | $ | 16,700 |
| | $ | 13,918 |
| | $ | 16,700 |
|
| Multifamily residential loans sold or securitized with recourse | | 15,959 |
| | 17,058 |
| | 47,664 |
| | 69,974 |
|
| Total | | $ | 29,877 |
| | $ | 33,758 |
| | $ | 61,582 |
| | $ | 86,674 |
|
| |
The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit reserves and totaled $256$87 thousand and $373$123 thousand as of September 30, 20172019 and December 31, 2016,2018, respectively. The allowance for unfunded credit reserves 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 — 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, 20172019 and December 31, 2016,2018, these commitments were $166.6$135.9 million and $174.3$161.0 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.Sheet.
Note 1213 — Revenue from Contracts with Customers
The following tables present revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, and other noninterest income, segregated by operating segments for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 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 | | $ | 5,345 |
| | $ | 3,434 |
| | $ | 9 |
| | $ | 8,788 |
|
| Card income | | 985 |
| | 145 |
| | — |
| | 1,130 |
|
| Wealth management fees | | 4,644 |
| | 197 |
| | — |
| | 4,841 |
|
| Total revenue from contracts with customers | | $ | 10,974 |
| | $ | 3,776 |
| | $ | 9 |
| | $ | 14,759 |
|
Other sources of noninterest income (1) | | 4,129 |
| | 29,955 |
| | 2,631 |
| | 36,715 |
|
| Total noninterest income | | $ | 15,103 |
| | $ | 33,731 |
| | $ | 2,640 |
| | $ | 51,474 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, 2018 |
| | 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 | | $ | 5,488 |
| | $ | 3,133 |
| | $ | 6 |
| | $ | 8,627 |
|
| Card income | | 949 |
| | 201 |
| | — |
| | 1,150 |
|
| Wealth management fees | | 3,401 |
| | 134 |
| | — |
| | 3,535 |
|
| Total revenue from contracts with customers | | $ | 9,838 |
| | $ | 3,468 |
| | $ | 6 |
| | $ | 13,312 |
|
Other sources of noninterest income (1) | | 3,299 |
| | 24,393 |
| | 5,498 |
| | 33,190 |
|
| Total noninterest income | | $ | 13,137 |
| | $ | 27,861 |
| | $ | 5,504 |
| | $ | 46,502 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 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 | | $ | 15,975 |
| | $ | 10,007 |
| | $ | 35 |
| | $ | 26,017 |
|
| Card income | | 2,846 |
| | 484 |
| | — |
| | 3,330 |
|
| Wealth management fees | | 11,915 |
| | 538 |
| | — |
| | 12,453 |
|
| Total revenue from contracts with customers | | $ | 30,736 |
| | $ | 11,029 |
| | $ | 35 |
| | $ | 41,800 |
|
Other sources of noninterest income (1) | | 12,642 |
| | 80,902 |
| | 11,020 |
| | 104,564 |
|
| Total noninterest income | | $ | 43,378 |
| | $ | 91,931 |
| | $ | 11,055 |
| | $ | 146,364 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2018 |
| | 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 | | $ | 17,240 |
| | $ | 9,147 |
| | $ | 412 |
| | $ | 26,799 |
|
| Card income | | 2,952 |
| | 596 |
| | — |
| | 3,548 |
|
| Wealth management fees | | 10,698 |
| | 291 |
| | — |
| | 10,989 |
|
| Total revenue from contracts with customers | | $ | 30,890 |
| | $ | 10,034 |
| | $ | 412 |
| | $ | 41,336 |
|
Other sources of noninterest income (1) | | 41,280 |
| | 76,009 |
| | 10,589 |
| | 127,878 |
|
| Total noninterest income | | $ | 72,170 |
| | $ | 86,043 |
| | $ | 11,001 |
| | $ | 169,214 |
|
| |
| |
| (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 September 30, 2019 and December 31, 2018.
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 include 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 in time 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, 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 employs financial consultants to provide 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. This is because the Company’s contracts with customers generally have a term that is less than one year, 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 14 — Income Taxes
The following table presents the income tax expense and the effective tax rate for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
| Income before income taxes | | $ | 206,367 |
| | $ | 204,865 |
| | 1 | % | | $ | 624,635 |
| | $ | 613,641 |
| | 2 | % |
| Income tax expense | | $ | 34,951 |
| | $ | 33,563 |
| | 4 | % | | $ | 138,815 |
| | $ | 82,958 |
| | 67 | % |
| Effective tax rate | | 16.9 | % | | 16.4 | % | |
|
| | 22.2 | % | | 13.5 | % | |
|
|
| |
The effective tax rates were 16.9% and 16.4% for the three months ended September 30, 2019 and 2018, respectively. The effective tax rate and income tax expense for the three months ended September 30, 2019 included a $6.4 million discrete item for the reversal of state income taxes payable. The effective tax rates were 22.2% and 13.5% for the nine months ended September 30, 2019 and 2018, respectively. The year-over-year increase in the nine-month effective tax rate and income tax expense was primarily due to $30.1 million of income tax expense recorded in the second quarter of 2019 to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar. In addition, a year-over-year decrease in tax credits recognized from investments in renewable energy and historic rehabilitation tax credit projects contributed to the higher effective tax rate during the nine months ended September 30, 2019.
Investors in DC Solar funds, including the Company, received tax credits for making these renewable energy investments. The Company had claimed tax credits of approximately $53.9 million in the Consolidated Financial Statements between 2014 and 2018, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact to the Consolidated Financial Statements of $48.2 million. During the second quarter of 2019, the Company reversed $33.6 million out of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax expense.
ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. Under ASC 740, Income Taxes, when evaluating an uncertain tax position as of the balance sheet date, an entity should not consider new information that is received after the balance sheet date. Based on the available information known as of December 31, 2018 and March 31, 2019, the Company reassessed the technical merits of the position taken and concluded, based on initial and ongoing due diligence performed by the Company, it believed that the DC Solar related tax credits the Company had previously claimed continued to meet the more-likely-than-not criterion for recognition as of those dates.
During the first quarter of 2019, the Company, in coordination with other fund investors, engaged an unaffiliated third party inventory firm to report on the actual number of mobile solar generators in existence. As of September 30, 2019, based on the latest inventory report, NaN of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Based on the inventory information available as of the second and third quarters of 2019, as well as management’s best judgments regarding the future settlement of the related tax positions with the Internal Revenue Service, the Company concluded that a portion of the previously claimed tax credits would be recaptured. Accordingly, the Company recorded $30.1 million of income tax expense during the second quarter of 2019.
The Company continues to conduct an ongoing investigation to gather information related to this matter, including tracking asset seizures of DC Solar and ongoing federal investigations. There can be no assurance that the Company will not recognize additional income tax expense as new information becomes available, or due to changes in tax laws, case law and regulations; or that the Company will not ultimately need to reverse the remaining tax credits previously claimed. For further discussion related to the Company’s investment in DC Solar and the Company’s impairment evaluation and monitoring process in tax credit investments, refer to Note 9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q.
Note 15—Stock Compensation Plans
Pursuant to the Company’s 2016 Stock Incentive Plan, as amended, the Company may issue stock, options, restricted stock, awardsrestricted stock units (“RSAs”RSUs”), RSUs,stock options, stock purchase warrants, stock appreciation rights, stock purchase warrants, phantom stock and dividend equivalents to certaineligible employees, and non-employee directors, consultants, and other service providers of the Company and its subsidiaries. There were no0 outstanding stock options or unvested RSAsawards other than RSUs as of both September 30, 20172019 and 2016.December 31, 2018.
The following table presents a summary of the total compensation costs and the related net tax benefits associated with the Company’s various share-based compensation plans for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Stock compensation costs | | $ | 7,487 |
| | $ | 10,986 |
| | $ | 23,012 |
| | $ | 24,201 |
|
| Related net tax benefits for stock compensation plans | | $ | 15 |
| | $ | 187 |
| | $ | 4,723 |
| | $ | 5,062 |
|
| |
RSUs —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. RSUs are authorized to settle predominantly in shares of the Company’s common stock. Certain RSUs will be settled in cash, which subjects these RSUs to variable accounting whereby the compensation cost is adjusted to fair value based on changes in the Company’s stock price up to the settlement date. 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. RSU 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 RSUs.” All RSUs are subject to forfeiture until vested.
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 determine 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 awards and performance-based awards are 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 expenseactivities and the related net tax benefit associated withshare price information 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 2016:2019. 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, 2019 | | 1,121,391 |
| | $ | 51.22 |
| | 411,290 |
| | $ | 49.93 |
|
| Granted | | 495,191 |
| | 52.53 |
| | 134,600 |
| | 54.64 |
|
| Vested | | (359,242 | ) | | 31.62 |
| | (159,407 | ) | | 29.18 |
|
| Forfeited | | (68,511 | ) | | 57.20 |
| | — |
| | — |
|
| Outstanding, September 30, 2019 | | 1,188,829 |
| | $ | 57.34 |
| | 386,483 |
| | $ | 60.13 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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 nine months ended September 30, 2017 based on the target amount of awards:2019:
|
| | | |
|
| | Shares |
| Outstanding, January 1, 2019 | | — |
|
| Granted | | 12,145 |
|
| Vested | | — |
|
| Forfeited | | (360 | ) |
| Outstanding, September 30, 2019 | | 11,785 |
|
|
|
| | | | | | | | | | | | | | |
| |
| | | 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, 2017,2019, there were $27.6 million and $16.6 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 2.001.89 years and 2.021.98 years, respectively.
Note 1316 — Stockholders’ Equity and Earnings Per Share
Warrant — The Company acquired MetroCorp Bancshares, Inc., (“MetroCorp”) on January 17, 2014. Prior to the acquisition, MetroCorp Bancshares, Inc. had an outstanding warrantwarrants to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holderholders were converted into the rightrights to acquire 230,282 shares of East West’s common stock until January 16, 2019. The warrant has not beenAll warrants were exercised as of September 30, 2017.on January 7, 2019.
Earnings Per Share— Basic EPS is computed by dividing net income available to common stockholders by the weighted averageweighted-average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income available to common stockholders by the weighted averageweighted-average number of common shares outstanding during each period, plus any incremental dilutive common share equivalents calculated for warrants and RSUs outstanding using the treasury stock method. 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 result of applying ASU 2016-09, the Company recorded income tax benefits of $151 thousand or $0 per common share, and $4.6 million or $0.03 per common share for the three and nine months ended September 30, 2017, respectively, related to the vesting of the RSUs. See Note 2 — Current Accounting Developments to the Consolidated Financial Statements for additional information.
The following table presents the EPS calculations for the three and nine months ended September 30, 20172019 and 2016:2018:
| | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| ($ and shares in thousands, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Basic | | | | | | | | | |
| ($ and shares in thousands, except per share data) | | | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| Net income | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
| | $ | 171,416 |
| | $ | 171,302 |
| | $ | 485,820 |
| | $ | 530,683 |
|
| | | | | | | | | | | | | | | | | |
| Basic weighted average number of shares outstanding | | 144,498 |
| | 144,122 |
| | 144,412 |
| | 144,061 |
| |
| Basic weighted-average number of shares outstanding | | | 145,559 |
| | 144,921 |
| | 145,455 |
| | 144,829 |
|
| Basic EPS | | $ | 0.92 |
| | $ | 0.76 |
| | $ | 2.91 |
| | $ | 2.23 |
| | $ | 1.18 |
| | $ | 1.18 |
| | $ | 3.34 |
| | $ | 3.66 |
|
| | | | | | | | | | | | | | | | | |
| Diluted | | | | | | | | | |
| Diluted: | | | | | | | | | |
| Net income | | $ | 132,660 |
| | $ | 110,143 |
| | $ | 420,726 |
| | $ | 320,943 |
| | $ | 171,416 |
| | $ | 171,302 |
| | $ | 485,820 |
| | $ | 530,683 |
|
| | | | | | | | | | | | | | | | | |
| Basic weighted average number of shares outstanding | | 144,498 |
| | 144,122 |
| | 144,412 |
| | 144,061 |
| |
| Basic weighted-average number of shares outstanding | | | 145,559 |
| | 144,921 |
| | 145,455 |
| | 144,829 |
|
Diluted potential common shares (1) | | 1,384 |
| | 1,116 |
| | 1,437 |
| | 1,025 |
| | 561 |
| | 1,252 |
| | 633 |
| | 1,329 |
|
| Diluted weighted average number of shares outstanding | | 145,882 |
| | 145,238 |
| | 145,849 |
| | 145,086 |
| |
Diluted weighted-average number of shares outstanding (1) | | | 146,120 |
| | 146,173 |
| | 146,088 |
| | 146,158 |
|
| Diluted EPS | | $ | 0.91 |
| | $ | 0.76 |
| | $ | 2.88 |
| | $ | 2.21 |
| | $ | 1.17 |
| | $ | 1.17 |
| | $ | 3.33 |
| | $ | 3.63 |
|
|
| |
| (1) | Includes dilutive shares from RSUs for the three and nine months ended September 30, 2019, and from RSUs and warrants for the three and nine months ended September 30, 2017 and 2016.2018. |
For the three and nine months ended September 30, 2017, 42019, 564 thousand and 6277 thousand weighted averageweighted-average shares of anti-dilutive shares from RSUs, respectively, were excluded from the diluted EPS computation. ForIn comparison, 7,344 and 6,371 weighted-average shares of anti-dilutive 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.2018.
Note 1417 — Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in the components of AOCI balances for the three and nine months ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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
Investment
Securities | | Foreign
Currency
Translation
Adjustments, Net of Hedges (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, July 1, 2018 | | | $ | (64,822 | ) | | $ | (6,645 | ) | | $ | (71,467 | ) |
| Net unrealized (losses) arising during the period | | | (13,584 | ) | | (4,761 | ) | | (18,345 | ) |
| Amounts reclassified from AOCI | | | (24 | ) | | — |
| | (24 | ) |
| Changes, net of tax | | | (13,608 | ) | | (4,761 | ) | | (18,369 | ) |
| Balance, September 30, 2018 | | | $ | (78,430 | ) | | $ | (11,406 | ) | | $ | (89,836 | ) |
| Balance, July 1, 2019 | | | $ | 5,217 |
| | $ | (15,189 | ) | | $ | (9,972 | ) |
| Net unrealized gains (losses) arising during the period | | 11,818 |
| | 8,013 |
| | 19,831 |
| | 17,901 |
| | (5,226 | ) | | 12,675 |
| | 11,904 |
| | (2,858 | ) | | 9,046 |
|
| Amounts reclassified from AOCI | | (3,902 | ) | | — |
| | (3,902 | ) | | (4,908 | ) | | — |
| | (4,908 | ) | | (41 | ) | | — |
| | (41 | ) |
| 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 | | | 11,863 |
| | (2,858 | ) | | 9,005 |
|
| Balance, September 30, 2019 | | | $ | 17,080 |
| | $ | (18,047 | ) | | $ | (967 | ) |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| |
| ($ in thousands) | | Available-
for-Sale
Investment
Securities | | Foreign
Currency
Translation
Adjustments, Net of Hedges (1) | | Total |
| Balance, January 1, 2018 | | $ | (30,898 | ) | | $ | (6,621 | ) | | $ | (37,519 | ) |
Cumulative effect of change in accounting principle related to marketable equity securities (2) | | 385 |
| | — |
| | 385 |
|
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (3) | | (6,656 | ) | | — |
| | (6,656 | ) |
| Balance, January 1, 2018, Adjusted | | (37,169 | ) | | (6,621 | ) | | (43,790 | ) |
| Net unrealized (losses) arising during the period | | (39,588 | ) | | (4,785 | ) | | (44,373 | ) |
| Amounts reclassified from AOCI | | (1,673 | ) | | — |
| | (1,673 | ) |
| Changes, net of tax | | (41,261 | ) | | (4,785 | ) | | (46,046 | ) |
| Balance, September 30, 2018 | | $ | (78,430 | ) | | $ | (11,406 | ) | | $ | (89,836 | ) |
| Balance, January 1, 2019 | | $ | (45,821 | ) | | $ | (12,353 | ) | | $ | (58,174 | ) |
| Net unrealized gains (losses) arising during the period | | 65,061 |
| | (5,694 | ) | | 59,367 |
|
| Amounts reclassified from AOCI | | (2,160 | ) | | — |
| | (2,160 | ) |
| Changes, net of tax | | 62,901 |
| | (5,694 | ) | | 57,207 |
|
| Balance, September 30, 2019 | | $ | 17,080 |
| | $ | (18,047 | ) | | $ | (967 | ) |
| |
| |
| (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 Renminbi and USD, respectively. |
| |
| (2) | Represents the impact of the adoption of ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of 2018. |
| |
| (3) | Represents amounts reclassified from AOCI to retained earnings due to early adoption of ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2018. |
The following tables present 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, 20172019 and 2016:2018:
| | | | ($ in thousands) | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | 2017 | | 2016 | | 2019 | | 2018 |
| | 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: | | |
| | |
| | |
| | |
| | |
| | |
| | | | | | | | | | | | |
| Net unrealized losses arising during the period | | $ | (1,749 | ) | | $ | 735 |
| | $ | (1,014 | ) | | $ | (6,677 | ) | | $ | 2,808 |
| | $ | (3,869 | ) | |
| Net unrealized gains (losses) arising during the period | | | $ | 16,900 |
| | $ | (4,996 | ) | | $ | 11,904 |
| | $ | (19,319 | ) | | $ | 5,735 |
| | $ | (13,584 | ) |
Net realized gains reclassified into net income (1) | | (1,539 | ) | | 647 |
| | (892 | ) | | (1,790 | ) | | 752 |
| | (1,038 | ) | | (58 | ) | | 17 |
| | (41 | ) | | (35 | ) | | 11 |
| | (24 | ) |
| Net change | | (3,288 | ) | | 1,382 |
| | (1,906 | ) | | (8,467 | ) | | 3,560 |
| | (4,907 | ) | | 16,842 |
| | (4,979 | ) | | 11,863 |
| | (19,354 | ) | | 5,746 |
| | (13,608 | ) |
| | | | | | | | | | | | | | |
| Foreign currency translation adjustments: | | | | | | | | | | | | | |
| Net unrealized gains (losses) arising during period | | 3,870 |
| | — |
| | 3,870 |
| | (555 | ) | | — |
| | (555 | ) | |
| Foreign currency translation adjustments, net of hedges: | | | | | | | | | | | | | |
Net unrealized (losses) arising during the period (2) | | | (1,618 | ) | | (1,240 | ) | | (2,858 | ) | | (4,761 | ) | | — |
| | (4,761 | ) |
| Net change | | 3,870 |
| | — |
| | 3,870 |
| | (555 | ) | | — |
| | (555 | ) | | (1,618 | ) | | (1,240 | ) | | (2,858 | ) | | (4,761 | ) | | — |
| | (4,761 | ) |
| Other comprehensive income (loss) | | $ | 582 |
| | $ | 1,382 |
| | $ | 1,964 |
| | $ | (9,022 | ) | | $ | 3,560 |
| | $ | (5,462 | ) | | $ | 15,224 |
| | $ | (6,219 | ) | | $ | 9,005 |
| | $ | (24,115 | ) | | $ | 5,746 |
| | $ | (18,369 | ) |
|
| | | | ($ in thousands) | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2019 | | 2018 |
| | 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: | | |
| | |
| | |
| | |
| | |
| | |
| | | | | | | | | | | | |
| Net unrealized gains arising during the period | | $ | 20,392 |
| | $ | (8,574 | ) | | $ | 11,818 |
| | $ | 30,888 |
| | $ | (12,987 | ) | | $ | 17,901 |
| |
| Net unrealized gains (losses) arising during the period | | | $ | 92,369 |
| | $ | (27,308 | ) | | $ | 65,061 |
| | $ | (56,238 | ) | | $ | 16,650 |
| | $ | (39,588 | ) |
Net realized gains reclassified into net income (1) | | (6,733 | ) | | 2,831 |
| | (3,902 | ) | | (8,468 | ) | | 3,560 |
| | (4,908 | ) | | (3,066 | ) | | 906 |
| | (2,160 | ) | | (2,374 | ) | | 701 |
| | (1,673 | ) |
| Net change | | 13,659 |
| | (5,743 | ) | | 7,916 |
| | 22,420 |
| | (9,427 | ) | | 12,993 |
| | 89,303 |
| | (26,402 | ) | | 62,901 |
| | (58,612 | ) | | 17,351 |
| | (41,261 | ) |
| Foreign currency translation adjustments, net of hedges: | | | | | | | | | | | | | |
Net unrealized (losses) arising during the period (2) | | | (1,427 | ) | | (4,267 | ) | | (5,694 | ) | | (4,785 | ) | | — |
| | (4,785 | ) |
| Net change | | | (1,427 | ) | | (4,267 | ) | | (5,694 | ) | | (4,785 | ) | | — |
| | (4,785 | ) |
| Other comprehensive income (loss) | | | $ | 87,876 |
| | $ | (30,669 | ) | | $ | 57,207 |
| | $ | (63,397 | ) | | $ | 17,351 |
| | $ | (46,046 | ) |
| | | | | | | | | | | | | | |
| 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, 20172019 and 2016, pre-tax2018, before-tax amounts were reported in Net gains on sales of available-for-sale investment securitieson the Consolidated StatementsStatement of Income. |
| |
| (2) | The tax effects on foreign currency translation adjustments represent the cumulative net deferred tax liabilities since inception on net investment hedges that were recorded during the three and nine months ended September 30, 2019. |
Note 1518 —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 and the segmentsrelated products and assess its performance;services provided, 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, cash 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 lending, affordable housing loans and letters of credit, asset-based lending, and equipment financings. Commercial deposit products and other financial services include cash 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, 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 its business segments’ net interest margins and profitability. The FTP process charges a cost to fund loans (“FTP charges for loans”) and allocates credits for funds provided from deposits (“FTP credits for deposits”) using internal FTP rates, which are based on the market interest rates of terms tied to those of the underlying loans or deposits and adjusted for other factors. The internal FTP rates increase as the market interest rates increase, and vice versa. Therefore, the net spread between the total internal FTP charges and credits is recorded as part of net interest income in the Other segment.
The Company’s businessinternal FTP assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions. During the first quarter of 2019, the Company enhanced its segment cost allocation methodology related to stock compensation expense and bonus accrual. Effective first quarter of 2019, stock compensation expense is allocated to all 3 segments, whereas it was previously recorded in the Other segment as a corporate expense. In addition, bonus expense is now allocated at a more granular level at the segment level at the time of accrual. For comparability, segment information for the three and nine months ended September 30, 2018 have been restated to conform to the current presentation. 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 by the Other segment to the Consumer and Business Banking, as well as the Commercial Banking segments in consideration of the flattened and inverted yield curve. For consistency in the application of this change, the Company adjusted the segment reporting results for the three months ended March 31 and June 30, 2019, which increased segment net income for the Consumer and Business Banking, as well as the Commercial Banking segments, and, productcorrespondingly, reduced net interest margins.
Changesincome for Other segment. This change in the Company’s management structure or reporting methodologies may result in changes in the measurement of operatingFTP methodology related to deposits had no impact on 2018 segment results. 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 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, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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) | | Consumer
and
Business
Banking | | Commercial Banking | | Other | | Total |
| Three Months Ended September 30, 2019 | | | | | | | | |
| Net interest income before provision for credit losses | | $ | 170,183 |
| | $ | 166,106 |
| | $ | 33,518 |
| | $ | 369,807 |
|
| Provision for credit losses | | 4,251 |
| | 34,033 |
| | — |
| | 38,284 |
|
| Noninterest income | | 15,103 |
| | 33,731 |
| | 2,640 |
| | 51,474 |
|
| Noninterest expense | | 86,489 |
| | 62,246 |
| | 27,895 |
| | 176,630 |
|
| Segment income before income taxes | | 94,546 |
| | 103,558 |
| | 8,263 |
| | 206,367 |
|
| Segment net income | | $ | 67,592 |
| | $ | 74,111 |
| | $ | 29,713 |
| | $ | 171,416 |
|
| As of September 30, 2019 | | | | | | | |
|
|
| Segment assets | | $ | 11,277,171 |
| | $ | 24,885,849 |
| | $ | 7,111,639 |
| | $ | 43,274,659 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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 September 30, 2018 | | | | | | | | |
| Net interest income before provision for credit losses | | $ | 182,272 |
| | $ | 149,770 |
| | $ | 16,678 |
| | $ | 348,720 |
|
| Provision for credit losses | | 705 |
| | 9,837 |
| | — |
| | 10,542 |
|
| Noninterest Income | | 13,137 |
| | 27,861 |
| | 5,504 |
| | 46,502 |
|
| Noninterest expense | | 87,640 |
| | 57,376 |
| | 34,799 |
| | 179,815 |
|
| Segment income (loss) before income taxes | | 107,064 |
| | 110,418 |
| | (12,617 | ) | | 204,865 |
|
| Segment net income | | $ | 76,711 |
| | $ | 79,344 |
| | $ | 15,247 |
| | $ | 171,302 |
|
| As of September 30, 2018 | | | | | | | |
|
|
| Segment assets | | $ | 10,194,291 |
| | $ | 22,930,768 |
| | $ | 5,917,654 |
| | $ | 39,042,713 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, 2017 |
| | Retail Banking | | Commercial Banking | | Other | | Total |
| Interest income | | $ | 263,491 |
| | $ | 616,689 |
| | $ | 85,174 |
| | $ | 965,354 |
|
| 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 |
|
| Interest expense | | (54,650 | ) | | (16,225 | ) | | (29,111 | ) | | (99,986 | ) |
| Credit on funds provided | | 320,452 |
| | 37,436 |
| | 20,571 |
| | 378,459 |
|
| Interest spread on funds provided (used) | | 265,802 |
| | 21,211 |
| | (8,540 | ) | | 278,473 |
|
| Net interest income before provision for credit losses | | $ | 430,437 |
| | $ | 408,570 |
| | $ | 26,361 |
| | $ | 865,368 |
|
| Provision for credit losses | | $ | 1,772 |
| | $ | 28,977 |
| | $ | — |
| | $ | 30,749 |
|
| Depreciation, amortization and (accretion), net | | $ | 6,741 |
| | $ | (14,609 | ) | | $ | 111,639 |
| | $ | 103,771 |
|
| Segment income before income taxes | | $ | 204,601 |
| | $ | 284,195 |
| | $ | 72,177 |
| | $ | 560,973 |
|
| 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) | | Consumer
and
Business
Banking | | Commercial
Banking | | Other | | Total |
| Nine Months Ended September 30, 2019 | | | | | | | | |
| Net interest income before provision for credit losses | | $ | 536,153 |
| | $ | 477,755 |
| | $ | 85,686 |
| | $ | 1,099,594 |
|
| Provision for credit losses | | 8,880 |
| | 71,228 |
| | — |
| | 80,108 |
|
| Noninterest Income | | 43,378 |
| | 91,931 |
| | 11,055 |
| | 146,364 |
|
| Noninterest expense | | 258,051 |
| | 200,093 |
| | 83,071 |
| | 541,215 |
|
| Segment income before income taxes | | 312,600 |
| | 298,365 |
| | 13,670 |
| | 624,635 |
|
| Segment net income | | $ | 223,478 |
| | $ | 213,331 |
| | $ | 49,011 |
| | $ | 485,820 |
|
| As of September 30, 2019 | | | | | | | | |
| Segment assets | | $ | 11,277,171 |
| | $ | 24,885,849 |
| | $ | 7,111,639 |
| | $ | 43,274,659 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Consumer
and
Business
Banking | | Commercial
Banking | | Other | | Total |
| Nine Months Ended September 30, 2018 | | | | | | | | |
| Net interest income before provision for credit losses | | $ | 538,568 |
| | $ | 448,128 |
| | $ | 30,396 |
| | $ | 1,017,092 |
|
| Provision for credit losses | | 7,212 |
| | 39,084 |
| | — |
| | 46,296 |
|
| Noninterest income | | 72,170 |
| | 86,043 |
| | 11,001 |
| | 169,214 |
|
| Noninterest expense | | 259,416 |
| | 179,251 |
| | 87,702 |
| | 526,369 |
|
| Segment income (loss) before income taxes | | 344,110 |
| | 315,836 |
| | (46,305 | ) | | 613,641 |
|
| Segment net income | | $ | 246,555 |
| | $ | 226,798 |
| | $ | 57,330 |
| | $ | 530,683 |
|
| As of September 30, 2018 | | | | | | | | |
| Segment assets | | $ | 10,194,291 |
| | $ | 22,930,768 |
| | $ | 5,917,654 |
| | $ | 39,042,713 |
|
| |
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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 |
|
| |
Note 1619 — Subsequent Events
On October 19, 2017,17, 2019, the Company’s Board of Directors declared fourth quarter 20172019 cash dividends for the Company’s common stock. The common stock cash dividend of $0.20$0.275 per share is payable on November 15, 20172019 to stockholders of record as of November 1, 2017.2019.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | Page |
| | |
| | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | |
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” 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, 20162018, filed with the U.S.United States Securities and Exchange Commission on February 27, 20172019 (the “Company’s 20162018 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 130 locations in the United States (“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 investment securities and interest paid on deposits and other funding sources. As of September 30, 2019, the Company continueshad $43.27 billion in assets and approximately 3,300 full-time equivalent employees. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services of the Company’s 2018 Form 10-K.
Corporate Strategy
We are committed to seek attractive opportunities for growth in pursuing its cross-border business banking strategy.
Inenhancing long-term stockholder value by executing our strategic vision, we remain focused on the fundamentals of growing loans, deposits and revenue, and improving profitability, whileand investing for the future andwhile managing risk,risks, expenses and capital. Our business model is built on customer loyalty and engagement, understanding of our customers’ financial goals, and meeting theirour customers’ financial needs through our offering of diverse products and services. The Company’s approach is concentrated on organically growingseeking out and deepening client relationships that meet our risk/return measures. This focus guides our decision-making across every aspect of our operations: the products we develop, the expertise we cultivate and the infrastructure we build to help our customers conduct business. We expect our relationship-focused business model to continue to generate organic growth and to expand our targeted customer bases. On an ongoing basis, we invest in technology related to critical business infrastructure and streamlining core processes, in the context of maintaining appropriate expense management. Our risk management activities are focused on ensuring that the Company identifies and manages risks to maintain safety and soundness while maximizing profitability.
Selected Financial Data
|
| | | | | | | | | | | | | | | | | | | | | |
| | |
| ($ and shares in thousands, except per share, ratio and headcount data) | | Three Months Ended | | Nine Months Ended | |
| | September 30,
2019 | | June 30,
2019 | | September 30,
2018 | | September 30,
2019 | | September 30,
2018 | |
| Summary of operations: | | | | | | | | | | | |
| Interest and dividend income | | $ | 476,912 |
| | $ | 474,844 |
| | $ | 422,185 |
| | $ | 1,415,067 |
| | $ | 1,194,369 |
| |
| Interest expense | | 107,105 |
| | 107,518 |
| | 73,465 |
| | 315,473 |
| | 177,277 |
| |
| Net interest income before provision for credit losses | | 369,807 |
| | 367,326 |
| | 348,720 |
| | 1,099,594 |
| | 1,017,092 |
| |
| Provision for credit losses | | 38,284 |
| | 19,245 |
| | 10,542 |
| | 80,108 |
| | 46,296 |
| |
| Net interest income after provision for credit losses | | 331,523 |
| | 348,081 |
| | 338,178 |
| | 1,019,486 |
| | 970,796 |
| |
| Noninterest income | | 51,474 |
| | 52,759 |
| | 46,502 |
| | 146,364 |
| | 169,214 |
| (1) |
| Noninterest expense | | 176,630 |
| | 177,663 |
| | 179,815 |
| | 541,215 |
| | 526,369 |
| |
| Income before income taxes | | 206,367 |
| | 223,177 |
| | 204,865 |
| | 624,635 |
| | 613,641 |
| |
| Income tax expense | | 34,951 |
| | 72,797 |
| (2) | 33,563 |
| | 138,815 |
| (2) | 82,958 |
| |
| Net income | | $ | 171,416 |
| | $ | 150,380 |
| | $ | 171,302 |
| | $ | 485,820 |
| | $ | 530,683 |
| |
| Per common share: | | | | | | | | | | | |
| Basic earnings | | $ | 1.18 |
| | $ | 1.03 |
| | $ | 1.18 |
| | $ | 3.34 |
| | $ | 3.66 |
| |
| Diluted earnings | | $ | 1.17 |
| | $ | 1.03 |
| | $ | 1.17 |
| | $ | 3.33 |
| | $ | 3.63 |
| |
| Dividends declared | | $ | 0.275 |
| | $ | 0.275 |
| | $ | 0.230 |
| | $ | 0.780 |
| | $ | 0.630 |
| |
| Book value | | $ | 33.54 |
| | $ | 32.53 |
| | $ | 29.29 |
| | $ | 33.54 |
| | $ | 29.29 |
| |
Non-United States generally accepted accounting principles (“GAAP”) tangible common equity per share (3) | | $ | 30.22 |
| | $ | 29.20 |
| | $ | 25.91 |
| | $ | 30.22 |
| | $ | 25.91 |
| |
| Weighted-average number of shares outstanding: | | | | | | | | | | | |
| Basic | | 145,559 |
| | 145,546 |
| | 144,921 |
| | 145,455 |
| | 144,829 |
| |
| Diluted | | 146,120 |
| | 146,052 |
| | 146,173 |
| | 146,088 |
| | 146,158 |
| |
| Common shares outstanding at period-end | | 145,568 |
| | 145,547 |
| | 144,929 |
| | 145,568 |
| | 144,929 |
| |
| At period end: | | | | | | | | | | | |
Total assets (4) | | $ | 43,274,659 |
| | $ | 42,892,358 |
| | $ | 39,042,713 |
| | $ | 43,274,659 |
| | $ | 39,042,713 |
| |
Total loans (4) | | $ | 34,025,270 |
| | $ | 33,734,256 |
| | $ | 31,213,299 |
| | $ | 34,025,270 |
| | $ | 31,213,299 |
| |
| Available-for-sale investment securities | | $ | 3,284,034 |
| | $ | 2,592,913 |
| | $ | 2,676,510 |
| | $ | 3,284,034 |
| | $ | 2,676,510 |
| |
| Total deposits | | $ | 36,659,526 |
| | $ | 36,477,542 |
| | $ | 33,629,124 |
| | $ | 36,659,526 |
| | $ | 33,629,124 |
| |
| Long-term debt and finance lease liabilities | | $ | 152,390 |
| | $ | 152,506 |
| | $ | 156,770 |
| | $ | 152,390 |
| | $ | 156,770 |
| |
| Federal Home Loan Bank (“FHLB”) advances | | $ | 745,494 |
| | $ | 745,074 |
| | $ | 325,596 |
| | $ | 745,494 |
| | $ | 325,596 |
| |
| Stockholders’ equity | | $ | 4,882,664 |
| | $ | 4,734,593 |
| | $ | 4,244,850 |
| | $ | 4,882,664 |
| | $ | 4,244,850 |
| |
Non-GAAP tangible common equity (3) | | $ | 4,399,532 |
| | $ | 4,249,944 |
| | $ | 3,755,647 |
| | $ | 4,399,532 |
| | $ | 3,755,647 |
| |
| Head count (full-time equivalent) | | 3,282 |
| | 3,261 |
| | 2,930 |
| | 3,282 |
| | 2,930 |
| |
| Performance metrics: | | | | | | | | | | | |
| Return on average assets (“ROA”) | | 1.58 | % | | 1.45 | % | | 1.76 | % | | 1.55 | % | | 1.87 | % | |
| Return on average equity (“ROE”) | | 14.06 | % | | 12.88 | % | | 16.19 | % | | 13.86 | % | | 17.47 | % | |
| Net interest margin | | 3.59 | % | | 3.73 | % | | 3.76 | % | | 3.70 | % | | 3.77 | % | |
Efficiency ratio (5) | | 41.93 | % | | 42.29 | % | | 45.50 | % | | 43.44 | % | | 44.37 | % | |
Non-GAAP efficiency ratio (3) | | 37.66 | % | | 38.03 | % | | 39.89 | % | | 38.47 | % | | 40.13 | % | |
| Credit quality metrics: | | | | | | | | | | | |
| Allowance for loan losses | | $ | 345,576 |
| | $ | 330,625 |
| | $ | 310,041 |
| | $ | 345,576 |
| | $ | 310,041 |
| |
Allowance for loan losses to loans held-for-investment (4) | | 1.02 | % | | 0.98 | % | | 0.99 | % | | 1.02 | % | | 0.99 | % | |
Non-purchased credit-impaired (“PCI”) nonperforming assets to total assets (4) | | 0.31 | % | | 0.28 | % | | 0.29 | % | | 0.31 | % | | 0.29 | % | |
| Annualized net charge-offs to average loans held-for-investment | | 0.26 | % | | 0.09 | % | | 0.05 | % | | 0.18 | % | | 0.11 | % | |
| Selected metrics: | | | | | | | | | | | |
| Total average equity to total average assets | | 11.22 | % | | 11.28 | % | | 10.86 | % | | 11.21 | % | | 10.72 | % | |
| Common dividend payout ratio | | 23.62 | % | | 26.95 | % | | 19.68 | % | | 23.63 | % | | 17.39 | % | |
Loan-to-deposit ratio (4) | | 92.81 | % | | 92.48 | % | | 92.82 | % | | 92.81 | % | | 92.82 | % | |
| EWBC capital ratios: | | | | | | | | | | | |
| Common Equity Tier 1 (“CET1”) capital | | 12.8 | % | | 12.5 | % | | 12.3 | % | | 12.8 | % | | 12.3 | % | |
| Tier 1 capital | | 12.8 | % | | 12.5 | % | | 12.3 | % | | 12.8 | % | | 12.3 | % | |
| Total capital | | 14.2 | % | | 13.9 | % | | 13.8 | % | | 14.2 | % | | 13.8 | % | |
| Tier 1 leverage capital | | 10.3 | % | | 10.4 | % | | 10.0 | % | | 10.3 | % | | 10.0 | % | |
| | | | | | |
| |
| (1) | Includes $31.5 million of pretax gain recognized from the sale of the Desert Community Bank (“DCB”) branches during the first nine months of 2018. |
| |
| (2) | Includes $30.1 million of additional tax expense to reverse certain previously claimed tax credits related to the DC Solar tax credit investments during the second quarter of 2019. |
| |
| (3) | 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. |
| |
| (4) | Total assets and loans held-for-investment include PCI loans of $240.7 million, $270.9 million and $345.0 million as of September 30, 2019, June 30, 2019 and September 30, 2018, respectively. |
| |
| (5) | 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
Noteworthy items about the Company’s performance infor the third quarter and first nine months 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.2019 included:
| |
| • | Earnings: Third quarter2019 net income was $171.4 million or $1.17 in diluted earnings per share (“EPS”), compared with third quarter 2018 net income of $171.3 million or $1.17 in diluted EPS. This slight increase in net income was primarily due to net interest income growth, partially offset by increased provision for credit losses. Net income for the first nine months of 2019 was $485.8 million or $3.33 in diluted EPS, compared with net income of $530.7 million or $3.63 in diluted EPS for the same period in 2018, a decrease of 8%. The year-over-year decrease primarily reflected the $30.1 million of additional income tax expense recorded in the second quarter of 2019 to reverse certain previously claimed tax credits related to DC Solar. Pre-tax income of $624.6 million for the first nine months of 2019 increased $11.0 million or 2% compared with the same period a year ago. |
| |
| • | Adjusted Earnings: There were no adjustments for non-recurring items in the third quarters of 2019 and 2018 that affected non-GAAP net income and diluted EPS. Non-GAAP net income and non-GAAP diluted EPS for the first nine months of 2019 were $520.8 million and $3.57, respectively, compared with $508.5 million and $3.48 for the first nine months of 2018, respectively, a year-over-year increase of 2%. During the second quarter of 2019, the Company recorded $30.1 million in additional income tax expense to reverse certain previously claimed tax credits related to DC Solar. During the first quarter of 2019, the Company recorded a $7.0 million pre-tax impairment charge related to DC Solar or $4.9 million after tax (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). During the first quarter of 2018, the Company recognized a $31.5 million pre-tax gain from the sale of its DCB branches or $22.2 million after tax. (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.) |
| |
| • | Revenue: Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $421.3 million for the third quarter of 2019, compared with $395.2 million for the third quarter of 2018, an increase of $26.1 million or 7%. This increase was primarily due to increased net interest income. Revenue for the first nine months of 2019 was $1.25 billion, compared with $1.19 billion for the first nine months of 2018, an increase of $59.7 million or 5%. This increase was primarily due to increased net interest income, partially offset by a decrease in noninterest income. Noninterest income for the first nine months of 2018 included a $31.5 million pre-tax gain from the sale of DCB branches. |
| |
| • | Net Interest Income and Net Interest Margin: Thirdquarter 2019 net interest income was $369.8 million, compared with third quarter 2018 net interest income of $348.7 million, an increase of $21.1 million or 6%. Third quarter 2019 net interest margin was 3.59%, a decrease of 17 basis points from 3.76% for the third quarter of 2018. Net interest income for the first nine months of 2019 was $1.10 billion, compared with $1.02 billion for the first nine months of 2018, an increase of $82.5 million or 8%. Net interest margin was 3.70% for the first nine months of 2019, a decrease of seven basis points from 3.77% for the first nine months of 2018. |
| |
| • | Operating Efficiency: Efficiency ratio, calculated as noninterest expense divided by revenue, was 41.93% and 45.50% for the third quarters of 2019 and 2018, respectively. The efficiency ratio was 43.44% and 44.37% for the first nine months of 2019 and 2018, respectively. Adjusting for non-recurring items, amortization of tax credit and other investments, and the amortization of core deposit intangibles, the non-GAAP efficiency ratio for the third quarter 2019 was 37.66%, a 223 basis point improvement from 39.89% for the third quarter of 2018. Adjusting for the amortization of tax credit and other investments, the amortization of core deposit intangibles in both the first nine months of 2019 and 2018, and the $31.5 million pre-tax gain from the sale of the Company’s DCB branches in the first nine months of 2018, the non-GAAP efficiency ratio was 38.47% for the first nine months of 2019, a 166 basis point improvement from 40.13% for the first nine months of 2018. (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.) |
| |
| • | Tax: Theeffective tax rates were 16.9% and 16.4% for the third quarters of 2019 and 2018, respectively, and 22.2% and 13.5% for the first nine months of 2019 and 2018, respectively. The higher effective tax rate during the first nine months of 2019 was primarily due to the $30.1 million reversal of certain previously claimed tax credits related to DC Solar in the second quarter of 2019. |
| |
| • | Profitability: ROA for the third quarters of 2019 and 2018 were 1.58% and 1.76%, respectively. ROA for the first nine months of 2019 and 2018 were 1.55% and 1.87%, respectively. Third quarters 2019 and 2018 ROE were 14.06% and 16.19%, respectively. ROE for the first nine months of 2019 and 2018 were 13.86% and 17.47%, respectively. Adjusting for non-recurring items that only affected year-to-date calculations, non-GAAP ROA was 1.67% for the first nine months of 2019, compared with 1.80% for the first nine months of 2018. For the first nine months of 2019, non-GAAP ROE was 14.85%, compared with 16.74% for the first nine months of 2018. (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.) |
| |
| • | Loans: Total loans were $34.03 billion as of September 30, 2019, an increase of $1.64 billion or 5% from $32.39 billion as of December 31, 2018. Growth was well-diversified across single-family residential, commercial real estate (“CRE”), and commercial and industrial (“C&I”) loans. |
| |
| • | Deposits: Total deposits were $36.66 billion as of September 30, 2019, an increase of $1.22 billion or 3% from $35.44 billion as of December 31, 2018. This increase was primarily due to the $1.45 billion or 16% increase in time deposits. |
| |
| • | Asset Quality Metrics: The allowance for loan losses was $345.6 million or 1.02% of loans held-for-investment as of September 30, 2019, compared with $311.3 million or 0.96% of loans held-for-investment as of December 31, 2018. Non-PCI nonperforming assets were $134.5 million or 0.31% of total assets as of September 30, 2019, an increase from $93.0 million or 0.23% of total assets as of December 31, 2018. Third quarter 2019 net charge-offs were $22.5 million or annualized 0.26% of average loans held-for-investment, an increase from $3.7 million or annualized 0.05% of average loans held-for-investment for the third quarter of 2018. For the first nine months of 2019, net charge-offs were $44.5 million or annualized 0.18% of average loans held-for-investment, compared with $24.1 million or annualized 0.11% of average loans held-for-investment for the first nine months of 2018. |
Financial Performance
| |
| • | Capital Levels: Our capital levels are strong. As of September 30, 2019, all of the Company’s and the Bank’s regulatory capital ratios were well above the required well-capitalized levels. See Item 2. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-Q for more information regarding capital. |
| |
| • | Cash Dividend Increase: The quarterly cash common stock dividend for the third quarter of 2019 was $0.275 per share, an increase of $0.045 or 20% from $0.23 per share for the third quarter of 2018. The Company returned $40.5 million and $114.8 million in cash dividends to stockholders during the third quarter and the first nine months of 2019, respectively, compared with $33.7 million and $92.3 million during the same periods in 2018. |
Noteworthy items on 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 2017 and a $2.2 million after-tax net gain recognized from the sale of East West Insurance Services, Inc.’s (“EWIS”) business during the third quarter 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 reflected an increase of $0.15 or 20%. Diluted EPS was $2.88 and $2.21 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.
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.
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.
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 $23.78 as of December 31, 2016.
From a capital management perspective, the Company continued to maintain a strong capital position with its Common Equity Tier 1 (“CET1”) capital ratio at 11.4% as of September 30, 2017, compared to 10.9% as of December 31, 2016. The total risk-based capital ratio was 12.9% and 12.4% as of September 30, 2017 and December 31, 2016, respectively. The Tier 1 leverage capital ratio was 9.4% as of September 30, 2017, compared to 8.7% as of December 31, 2016.
Results of Operations
Components of Net Income
|
| | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ 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 lessand 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 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
Third quarter 2019 net interest income for the three months ended September 30, 2017 was $303.2$369.8 million, an increase of $49.0$21.1 million or 19%6%, compared to $254.1with $348.7 million for the same period in 2016. Netthird quarter of 2018. For the first nine months of 2019, net interest income for the nine months ended September 30, 2017 was $865.4 million,$1.10 billion, an increase of $105.4$82.5 million or 14%8%, compared to $759.9 millionwith $1.02 billion for the same period in 2016. The notable increases infirst nine months of 2018. Year-over-year, net interest income for the three and nine months ended September 30, 2017, compared to the same periods in 2016, weregrowth was primarily due to increased interest income resulting fromdriven by loan growth, and higher yields on interest-earning assets, partially offset by a 16 and 12higher cost of funds. Third quarter 2019 net interest margin was 3.59%, a 17 basis point decrease from 3.76% for the third quarter of 2018. For the first nine months of 2019, net interest margin was 3.70%, a seven basis point decrease from 3.77% for the first nine months of 2018.
The average loan yield for the third quarter of 2019 was 5.11%, a nine basis point increase infrom 5.02% for the costthird quarter of interest-bearing deposits during2018. For the three andfirst nine months ended September 30, 2017, respectively. The cost of interest-bearing deposits2019, the average loan yield was 0.60% and 0.55%5.23%, a 34 basis point increase from 4.89% for the three andfirst 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, net interest margin increased to 3.52%, compared to 3.26% for the same period in 2016. For the nine months ended September 30, 2017, net interest margin increased to 3.45%, compared to 3.29% for the same period in 2016.of 2018. The increases in net interest margin for the three 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, 2017both periods, compared to the same prior year period, and primarily due to increases in yields 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 a year ago, were driven by the upward repricing of the Company’s loan portfolio in 2016.
response to higher short-term interest rates during the periods. Approximately 70% and 69% of loans were variable-rate or hybrid that were in their adjustable rate periods as of September 30, 2019 and 2018, respectively. Third quarter 2019 average loans were $33.66 billion, an increase of $3.16 billion or 10% from $30.50 billion for the third quarter of 2018. For the threefirst nine months ended September 30, 2017,of 2019, average loans were $33.02 billion, an increase of $3.23 billion or 11% from $29.79 billion for the first nine months of 2018. Average loan growth was broad-based across single-family residential, C&I and CRE loans.
Third quarter 2019 average interest-earning assets increased $3.15were $40.92 billion, an increase of $4.10 billion or 10% to $34.21 billion11% from $31.06$36.82 billion for the same period in 2016.third quarter of 2018. This increase was primarily due to increases of $3.22$3.16 billion or 13% in average loans and $751.0 million or 47%$1.03 billion 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.banks. For the first nine months ended September 30, 2017,of 2019, average interest-earning assets increased $2.73were $39.72 billion, an increase of $3.68 billion or 9% to $33.54 billion10% from $30.81$36.04 billion for the same period in 2016.first nine months of 2018. This increase was primarily due to increases of $2.78$3.23 billion or 12% in average loans and $305.1$608.6 million or 17% in average interest-bearing cash and deposits with banks, partially offset by a $228.3decrease of $156.8 million or 7% decrease in average available-for-sale investment securities. The yield on average interest-earning assets for the third quarter of 2019 was 4.62%, a seven basis point increase from 4.55% for the third quarter of 2018. For the first nine months of 2019, the average earning asset yield was 4.76%, a 33 basis point increase from 4.43% for the first nine months of 2018.
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 $10.71 billion for the three months ended September 30, 2017,third quarter of 2019, compared to $28.28with $10.64 billion for the same period in 2016. The ratiothird quarter of average2018, an increase of $73.1 million or 1%. Average noninterest-bearing demand deposits to total deposits increased to 34% for the three months ended September 30, 2017, from 33% for the three months ended September 30, 2016. Average deposits increased $2.27 billion or 8% to $30.33were $10.34 billion for the first nine months ended September 30, 2017,of 2019, compared to $28.06with $10.97 billion for the same period in 2016. The ratiofirst nine months of average2018, a decrease of $626.0 million or 6%. Average noninterest-bearing demand deposits tocomprised 29% and 32% of average total deposits increased to 34% for the third quarters of 2019 and 2018, respectively; and 29% and 34% of average total deposits for the first nine months ended September 30, 2017, from 32%of 2019 and 2018, respectively. Average interest-bearing deposits of $25.79 billion for the third quarter of 2019 increased $3.18 billion or 14% from $22.60 billion for the third quarter of 2018. Average interest-bearing deposits of $25.25 billion for the first nine months ended September 30, 2016. The average loans to average deposits ratioof 2019 increased to 89%$3.58 billion or 16% from $21.67 billion for the three months ended September 30, 2017, from 86% for the three months ended September 30, 2016. The average loans to average deposits ratio increased to 88% for thefirst nine months ended September 30, 2017, from 86% for the nine months ended September 30, 2016. In addition,of 2018.
The average cost of funds was 1.13% for the third quarter of 2019, an increase of 27 basis points from 0.86% for the third quarter of 2018. For the first nine months of 2019, the average cost of funds was 1.16%, an increase of 45 basis points from 0.71% for the first nine months of 2018. The increases in the average cost of funds were primarily due to an increase in the average cost of interest-bearing deposits. The average cost of interest-bearing deposits increased 1035 basis points to 0.46%1.49% for the three months ended September 30, 2017third quarter of 2019, up from 0.36%1.14% for the same period in 2016. Costthird quarter of funds2018. The average cost of interest-bearing deposits increased eight56 basis points to 0.43%1.52% for the first nine months ended September 30, 2017of 2019, up from 0.35%0.96% for the same periodfirst nine months of 2018. Other sources of funding included in 2016.the calculation of the average cost of funds consist of FHLB advances, long-term debt and securities sold under repurchase agreements (“repurchase agreements”).
The Company utilizes various tools to manage interest rate risk. Refer to the “Interest Rate Risk Management” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Item 2. MD&A”) &A — Asset Liability and Market Risk Management for details. —Interest Rate Risk Management in this Form 10-Q.
The following table presents the interest rate spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the three months ended September 30, 2017third quarters of 2019 and 2016:2018:
| | | | ($ in thousands) | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | 2017 | | 2016 | | 2019 | | 2018 |
| | 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 | % | | $ | 3,547,626 |
| | $ | 19,772 |
| | 2.21 | % | | $ | 2,521,002 |
| | $ | 13,353 |
| | 2.10 | % |
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) | | | 981,196 |
| | 6,881 |
| | 2.78 | % | | 1,002,500 |
| | 7,393 |
| | 2.93 | % |
Available-for-sale investment securities (3)(4) | | | 2,651,069 |
| | 15,945 |
| | 2.39 | % | | 2,727,219 |
| | 15,180 |
| | 2.21 | % |
Loans (5)(6) | | 27,529,779 |
| | 306,939 |
| (6) | 4.42 | % | | 24,309,313 |
| | 255,316 |
| (6) | 4.18 | % | | 33,661,282 |
| | 433,658 |
| | 5.11 | % | | 30,498,037 |
| | 385,538 |
| | 5.02 | % |
| Restricted equity securities | | 73,245 |
| | 612 |
| | 3.31 | % | | 72,625 |
| | 611 |
| | 3.35 | % | | 78,213 |
| | 656 |
| | 3.33 | % | | 73,535 |
| | 721 |
| | 3.89 | % |
| Total interest-earning assets | | 34,208,533 |
| | 339,910 |
| | 3.94 | % | | 31,055,354 |
| | 280,317 |
| | 3.59 | % | | $ | 40,919,386 |
| | $ | 476,912 |
| | 4.62 | % | | $ | 36,822,293 |
| | $ | 422,185 |
| | 4.55 | % |
| Noninterest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | 387,705 |
| | | | | | 354,053 |
| | | | | | 441,898 |
| | | | | | 424,350 |
| | | | |
| Allowance for loan losses | | (276,467 | ) | | | | | | (266,763 | ) | | | | | | (328,523 | ) | | | | | | (301,557 | ) | | | | |
| Other assets | | 1,617,796 |
| | | | | | 1,763,889 |
| | | | | | 2,103,512 |
| | | | | | 1,714,176 |
| | | | |
| Total assets | | $ | 35,937,567 |
| | | | | | $ | 32,906,533 |
| | | | | | $ | 43,136,273 |
| | | | | | $ | 38,659,262 |
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Interest-bearing liabilities: | Interest-bearing liabilities: | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | |
| Checking deposits | | $ | 4,014,290 |
| | $ | 4,768 |
| | 0.47 | % | | $ | 3,553,477 |
| | $ | 3,253 |
| | 0.36 | % | | $ | 4,947,511 |
| | $ | 14,488 |
| | 1.16 | % | | $ | 4,515,256 |
| | $ | 9,551 |
| | 0.84 | % |
| Money market deposits | | 7,997,648 |
| | 11,828 |
| | 0.59 | % | | 7,548,835 |
| | 6,663 |
| | 0.35 | % | | 8,344,993 |
| | 26,943 |
| | 1.28 | % | | 7,613,030 |
| | 21,411 |
| | 1.12 | % |
| Savings deposits | | 2,423,312 |
| | 1,810 |
| | 0.30 | % | | 2,133,036 |
| | 1,160 |
| | 0.22 | % | | 2,154,592 |
| | 2,656 |
| | 0.49 | % | | 2,194,792 |
| | 2,308 |
| | 0.42 | % |
| Time deposits | | 5,974,793 |
| | 12,680 |
| | 0.84 | % | | 5,627,084 |
| | 9,973 |
| | 0.71 | % | | 10,337,990 |
| | 52,733 |
| | 2.02 | % | | 8,277,129 |
| | 31,762 |
| | 1.52 | % |
| Federal funds purchased and other short-term borrowings | | 29,661 |
| | 212 |
| | 2.84 | % | | 32,137 |
| | 212 |
| | 2.62 | % | | 40,433 |
| | 382 |
| | 3.75 | % | | 58,218 |
| | 643 |
| | 4.38 | % |
| Federal Home Loan Bank (“FHLB”) advances | | 322,973 |
| | 1,947 |
| | 2.39 | % | | 320,743 |
| | 1,361 |
| | 1.69 | % | |
| FHLB advances | | | 745,263 |
| | 5,021 |
| | 2.67 | % | | 325,246 |
| | 2,732 |
| | 3.33 | % |
Repurchase agreements (2) | | 50,000 |
| | 2,122 |
| | 16.84 | % | | 200,000 |
| | 2,319 |
| | 4.61 | % | | 50,000 |
| | 3,239 |
| | 25.70 | % | | 50,000 |
| | 3,366 |
| | 26.71 | % |
| Long-term debt | | 176,472 |
| | 1,388 |
| | 3.12 | % | | 196,170 |
| | 1,228 |
| | 2.49 | % | |
| Long-term debt and finance lease liabilities | | | 152,471 |
| | 1,643 |
| | 4.28 | % | | 156,794 |
| | 1,692 |
| | 4.28 | % |
| Total interest-bearing liabilities | | 20,989,149 |
| | 36,755 |
| | 0.69 | % | | 19,611,482 |
| | 26,169 |
| | 0.53 | % | | $ | 26,773,253 |
| | $ | 107,105 |
| | 1.59 | % | | $ | 23,190,465 |
| | $ | 73,465 |
| | 1.26 | % |
| Noninterest-bearing liabilities and stockholders’ equity: | Noninterest-bearing liabilities and stockholders’ equity: | | | | | | | | | | | Noninterest-bearing liabilities and stockholders’ equity: | | | | | | | | | | |
| Demand deposits | | 10,655,860 |
| | | | | | 9,413,031 |
| | | | | | 10,712,612 |
| | | | | | 10,639,554 |
| | | | |
| Accrued expenses and other liabilities | | 536,351 |
| | | | | | 532,779 |
| | | | | | 812,127 |
| | | | | | 631,568 |
| | | | |
| Stockholders’ equity | | 3,756,207 |
| | | | | | 3,349,241 |
| | | | | | 4,838,281 |
| | | | | | 4,197,675 |
| | | | |
| Total liabilities and stockholders’ equity | | $ | 35,937,567 |
| | | | | | $ | 32,906,533 |
| | | | | | $ | 43,136,273 |
| | | | | | $ | 38,659,262 |
| | | | |
| Interest rate spread | | |
| | | | 3.25 | % | | | | | | 3.06 | % | | | | | | 3.03 | % | | | | | | 3.29 | % |
| Net interest income and net interest margin | | |
| | $ | 303,155 |
| | 3.52 | % | | | | $ | 254,148 |
| | 3.26 | % | | | | $ | 369,807 |
| | 3.59 | % | | | | $ | 348,720 |
| | 3.76 | % |
|
| |
| (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 2.57% and 2.63% for the third quarters of 2019 and 2018, respectively. The weighted-average interest rates of gross repurchase agreements were 4.68% and 4.65% for the third quarters of 2019 and 2018, respectively. |
| |
| (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 $5.2$3.0 million and $5.4$3.4 million for the three months ended September 30, 2017third quarters of 2019 and 2016,2018, respectively. |
| |
| (5) | Average balance includesbalances include nonperforming loans.loans and loans held-for-sale. |
| |
| (6) | Interest income on loans includesIncludes the accretion of net deferred loan fees, accretion ofunearned fees and ASC 310-30 discounts, and amortization of premiums, which totaled $6.5$7.8 million and $8.5$8.6 million for the three months ended September 30, 2017third quarters of 2019 and 2016,2018, respectively. |
The following table presents the interest rate spread, net interest margin, average balances, interest income and expense, and the average yield/ratesrate by asset and liability component for the first nine months ended September 30, 2017of 2019 and 2016:2018:
| | | | | | | | | | | | | | | | |
| ($ in thousands) | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2019 | | 2018 |
| | 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 | | $ | 2,073,322 |
| | $ | 22,298 |
| | 1.44 | % | | $ | 1,768,252 |
| | $ | 10,245 |
| | 0.77 | % | | $ | 2,996,340 |
| | $ | 52,103 |
| | 2.32 | % | | $ | 2,387,712 |
| | $ | 36,013 |
| | 2.02 | % |
Resale agreements (2) | | 1,552,198 |
| | 25,222 |
| | 2.17 | % | | 1,672,993 |
| | 22,479 |
| | 1.79 | % | | 1,005,147 |
| | 22,070 |
| | 2.94 | % | | 1,016,044 |
| | 21,509 |
| | 2.83 | % |
Investment securities (3) | | 3,060,688 |
| | 43,936 |
| (4) | 1.92 | % | | 3,289,014 |
| | 37,433 |
| (4) | 1.52 | % | |
Available-for-sale investment securities (3)(4) | | | 2,614,949 |
| | 47,378 |
| | 2.42 | % | | 2,771,727 |
| | 45,695 |
| | 2.20 | % |
Loans (5)(6) | | 26,783,082 |
| | 872,039 |
| (6) | 4.35 | % | | 24,006,926 |
| | 763,189 |
| (6) | 4.25 | % | | 33,023,713 |
| | 1,291,642 |
| | 5.23 | % | | 29,790,281 |
| | 1,088,997 |
| | 4.89 | % |
| Restricted equity securities | | 73,651 |
| | 1,859 |
| | 3.37 | % | | 76,122 |
| | 2,008 |
| | 3.52 | % | | 76,313 |
| | 1,874 |
| | 3.28 | % | | 73,618 |
| | 2,155 |
| | 3.91 | % |
| Total interest-earning assets | | 33,542,941 |
| | 965,354 |
| | 3.85 | % | | 30,813,307 |
| | 835,354 |
| | 3.62 | % | | $ | 39,716,462 |
| | $ | 1,415,067 |
| | 4.76 | % | | $ | 36,039,382 |
| | $ | 1,194,369 |
| | 4.43 | % |
| Noninterest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | 387,440 |
| | | | | | 349,721 |
| | | | | | 449,739 |
| | | | | | 433,299 |
| | | | |
| Allowance for loan losses | | (268,477 | ) | | | | | | (264,088 | ) | | | | | | (321,486 | ) | | | | | | (293,403 | ) | | | | |
| Other assets | | 1,628,638 |
| | | | | | 1,763,505 |
| | | | | | 1,970,775 |
| | | | | | 1,695,156 |
| | | | |
| Total assets | | $ | 35,290,542 |
| | | | | | $ | 32,662,445 |
| | | | | | $ | 41,815,490 |
| | | | | | $ | 37,874,434 |
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Interest-bearing liabilities: | Interest-bearing liabilities: | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | |
| Checking deposits | | $ | 3,830,004 |
| | $ | 12,538 |
| | 0.44 | % | | $ | 3,445,996 |
| | $ | 9,058 |
| | 0.35 | % | | $ | 5,145,308 |
| | $ | 44,579 |
| | 1.16 | % | | $ | 4,487,314 |
| | $ | 24,694 |
| | 0.74 | % |
| Money market deposits | | 7,968,457 |
| | 30,409 |
| | 0.51 | % | | 7,519,261 |
| | 19,295 |
| | 0.34 | % | | 8,094,933 |
| | 85,858 |
| | 1.42 | % | | 7,919,845 |
| | 56,056 |
| | 0.95 | % |
| Saving deposits | | 2,334,752 |
| | 4,525 |
| | 0.26 | % | | 2,043,547 |
| | 3,207 |
| | 0.21 | % | |
| Savings deposits | | | 2,117,773 |
| | 7,360 |
| | 0.46 | % | | 2,286,402 |
| | 6,364 |
| | 0.37 | % |
| Time deposits | | 5,873,217 |
| | 34,331 |
| | 0.78 | % | | 5,941,760 |
| | 29,148 |
| | 0.66 | % | | 9,887,274 |
| | 148,992 |
| | 2.01 | % | | 6,976,359 |
| | 68,319 |
| | 1.31 | % |
| Federal funds purchased and other short-term borrowings | | 40,772 |
| | 877 |
| | 2.88 | % | | 19,384 |
| | 390 |
| | 2.69 | % | | 45,410 |
| | 1,359 |
| | 4.00 | % | | 23,805 |
| | 774 |
| | 4.35 | % |
| FHLB advances | | 414,355 |
| | 5,738 |
| | 1.85 | % | | 400,850 |
| | 4,153 |
| | 1.38 | % | | 540,535 |
| | 12,011 |
| | 2.97 | % | | 327,978 |
| | 7,544 |
| | 3.08 | % |
Repurchase agreements (2) | | 170,330 |
| | 7,538 |
| | 5.92 | % | | 182,482 |
| | 6,441 |
| | 4.71 | % | | 50,000 |
| | 10,200 |
| | 27.27 | % | | 50,000 |
| | 8,714 |
| | 23.30 | % |
| Long-term debt | | 181,337 |
| | 4,030 |
| | 2.97 | % | | 201,060 |
| | 3,726 |
| | 2.48 | % | |
| Long-term debt and finance lease liabilities | | | 152,480 |
| | 5,114 |
| | 4.48 | % | | 161,691 |
| | 4,812 |
| | 3.98 | % |
| Total interest-bearing liabilities | | 20,813,224 |
| | 99,986 |
| | 0.64 | % | | 19,754,340 |
| | 75,418 |
| | 0.51 | % | | $ | 26,033,713 |
| | $ | 315,473 |
| | 1.62 | % | | $ | 22,233,394 |
| | $ | 177,277 |
| | 1.07 | % |
| Noninterest-bearing liabilities and stockholders’ equity: | Noninterest-bearing liabilities and stockholders’ equity: | | | | | | | | | | | Noninterest-bearing liabilities and stockholders’ equity: | | | | | | | | | | |
| Demand deposits | | 10,323,254 |
| | | | | | 9,107,051 |
| | | | | | 10,342,966 |
| | | | | | 10,968,958 |
| | | | |
| Accrued expenses and other liabilities | | 524,002 |
| | | | | | 534,569 |
| | | | | | 751,065 |
| | | | | | 610,105 |
| | | | |
| Stockholders’ equity | | 3,630,062 |
| | | | | | 3,266,485 |
| | | | | | 4,687,746 |
| | | | | | 4,061,977 |
| | | | |
| Total liabilities and stockholders’ equity | | $ | 35,290,542 |
| | | | | | $ | 32,662,445 |
| | | | | | $ | 41,815,490 |
| | | | | | $ | 37,874,434 |
| | | | |
| Interest rate spread | | | | | | 3.21 | % | | | | | | 3.11 | % | | | | | | 3.14 | % | | | | | | 3.36 | % |
| Net interest income and net interest margin | | | | $ | 865,368 |
| | 3.45 | % | | | | $ | 759,936 |
| | 3.29 | % | | | | $ | 1,099,594 |
| | 3.70 | % | | | | $ | 1,017,092 |
| | 3.77 | % |
| | | | | | | | | | | | | | |
| |
| (2) | Average balances of resale and repurchase agreements arehave been reported net, pursuant to ASC 210-20-45, 210-20-45-11, Balance Sheet OffsettingOffsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 2.69% and 2.59% for the first nine months of 2019 and 2018, respectively. The weighted-average interest rates of gross repurchase agreements were 4.87% and 4.36% for the first nine months of 2019 and 2018, respectively. |
| |
| (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$9.0 million and $18.2$11.6 million for the first nine months ended September 30, 2017of 2019 and 2016,2018, respectively. |
| |
| (5) | Average balance includesbalances include nonperforming loans.loans and loans held-for-sale. |
| |
| (6) | Interest income on loans includesIncludes the accretion of net deferred loan fees, accretion ofunearned fees and ASC 310-30 discounts, and amortization of premiums, which totaled $21.1$24.6 million and $39.7$28.0 million for the first nine months ended September 30, 2017of 2019 and 2016,2018, respectively. |
The following table summarizes the extent to which changes in (1) interest ratesrates; and changes in(2) average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into the changechanges attributable to variations in volume and the change attributable to variations in interest rates.rate. Changes that are not solely due to either volume or rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Nonaccrual loans are included in average loans used to compute the table below:
| | | | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 vs. 2016 | | 2017 vs. 2016 | | 2019 vs. 2018 | | 2019 vs. 2018 |
| | Total Change | | Changes Due to | | Total Change | | Changes Due to | | Total Change | | Changes Due to | | Total Change | | Changes Due to |
| | | Volume | | Yield/Rate | | 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 |
| | $ | 6,419 |
| | $ | 5,689 |
| | $ | 730 |
| | $ | 16,090 |
| | $ | 10,057 |
| | $ | 6,033 |
|
| Resale agreements | | 67 |
| | (2,566 | ) | | 2,633 |
| | 2,743 |
| | (1,714 | ) | | 4,457 |
| | (512 | ) | | (155 | ) | | (357 | ) | | 561 |
| | (233 | ) | | 794 |
|
| Investment securities | | 1,440 |
| | (1,348 | ) | | 2,788 |
| | 6,503 |
| | (2,746 | ) | | 9,249 |
| |
| Available-for-sale investment securities | | | 765 |
| | (433 | ) | | 1,198 |
| | 1,683 |
| | (2,678 | ) | | 4,361 |
|
| Loans | | 51,623 |
| | 35,780 |
| | 15,843 |
| | 108,850 |
| | 89,417 |
| | 19,433 |
| | 48,120 |
| | 40,633 |
| | 7,487 |
| | 202,645 |
| | 123,227 |
| | 79,418 |
|
| Restricted equity securities | | 1 |
| | 6 |
| | (5 | ) | | (149 | ) | | (65 | ) | | (84 | ) | | (65 | ) | | 44 |
| | (109 | ) | | (281 | ) | | 77 |
| | (358 | ) |
| Total interest and dividend income | | $ | 59,593 |
| | $ | 33,860 |
| | $ | 25,733 |
| | $ | 130,000 |
| | $ | 86,910 |
| | $ | 43,090 |
| | $ | 54,727 |
| | $ | 45,778 |
| | $ | 8,949 |
| | $ | 220,698 |
| | $ | 130,450 |
| | $ | 90,248 |
|
| Interest-bearing liabilities: | | |
| | | | | | |
| | |
| | |
| | | | | | | | | | | | |
| Checking deposits | | $ | 1,515 |
| | $ | 464 |
| | $ | 1,051 |
| | $ | 3,480 |
| | $ | 1,083 |
| | $ | 2,397 |
| | $ | 4,937 |
| | $ | 984 |
| | $ | 3,953 |
| | $ | 19,885 |
| | $ | 4,044 |
| | $ | 15,841 |
|
| Money market deposits | | 5,165 |
| | 420 |
| | 4,745 |
| | 11,114 |
| | 1,211 |
| | 9,903 |
| | 5,532 |
| | 2,179 |
| | 3,353 |
| | 29,802 |
| | 1,265 |
| | 28,537 |
|
| Savings deposits | | 650 |
| | 175 |
| | 475 |
| | 1,318 |
| | 496 |
| | 822 |
| | 348 |
| | (43 | ) | | 391 |
| | 996 |
| | (496 | ) | | 1,492 |
|
| Time deposits | | 2,707 |
| | 654 |
| | 2,053 |
| | 5,183 |
| | (341 | ) | | 5,524 |
| | 20,971 |
| | 9,029 |
| | 11,942 |
| | 80,673 |
| | 35,210 |
| | 45,463 |
|
| Federal funds purchased and other short-term borrowings | | — |
| | (17 | ) | | 17 |
| | 487 |
| | 458 |
| | 29 |
| | (261 | ) | | (177 | ) | | (84 | ) | | 585 |
| | 651 |
| | (66 | ) |
| FHLB advances | | 586 |
| | 10 |
| | 576 |
| | 1,585 |
| | 144 |
| | 1,441 |
| | 2,289 |
| | 2,923 |
| | (634 | ) | | 4,467 |
| | 4,731 |
| | (264 | ) |
| Repurchase agreements | | (197 | ) | | (2,762 | ) | | 2,565 |
| | 1,097 |
| | (452 | ) | | 1,549 |
| | (127 | ) | | — |
| | (127 | ) | | 1,486 |
| | — |
| | 1,486 |
|
| Long-term debt | | 160 |
| | (132 | ) | | 292 |
| | 304 |
| | (390 | ) | | 694 |
| |
| Long-term debt and finance lease liabilities | | | (49 | ) | | (47 | ) | | (2 | ) | | 302 |
| | (285 | ) | | 587 |
|
| Total interest expense | | $ | 10,586 |
| | $ | (1,188 | ) | | $ | 11,774 |
| | $ | 24,568 |
| | $ | 2,209 |
| | $ | 22,359 |
| | $ | 33,640 |
| | $ | 14,848 |
| | $ | 18,792 |
| | $ | 138,196 |
| | $ | 45,120 |
| | $ | 93,076 |
|
| Change in net interest income | | $ | 49,007 |
| | $ | 35,048 |
| | $ | 13,959 |
| | $ | 105,432 |
| | $ | 84,701 |
| | $ | 20,731 |
| | $ | 21,087 |
| | $ | 30,930 |
| | $ | (9,843 | ) | | $ | 82,502 |
| | $ | 85,330 |
| | $ | (2,828 | ) |
|
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 $4.5 million decrease in other fees and operating income. Noninterest income represented 14% and 20% of revenue for the three and nine months ended September 30, 2017, respectively, compared to 16% and 15%, respectively, for the same periods in 2016.
The following table presents the components of noninterest income for the periods indicated:third quarters and first nine months of 2019 and 2018:
| | | | ($ in thousands) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % 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 | % | |
| Lending fees | | | $ | 14,846 |
| | $ | 15,367 |
| | (3 | )% | | $ | 45,884 |
| | $ | 44,072 |
| | 4 | % |
| Deposit account fees | | | 9,918 |
| | 9,777 |
| | 1 | % | | 29,347 |
| | 30,347 |
| | (3 | )% |
| Foreign exchange income | | | 8,065 |
| | 6,077 |
| | 33 | % | | 20,366 |
| | 14,069 |
| | 45 | % |
| Wealth management fees | | 3,615 |
| | 4,033 |
| | (10 | )% | | 11,682 |
| | 9,862 |
| | 18 | % | | 4,841 |
| | 3,535 |
| | 37 | % | | 12,453 |
| | 10,989 |
| | 13 | % |
| Derivative fees and other income | | 6,663 |
| | 5,791 |
| | 15 | % | | 12,934 |
| | 9,778 |
| | 32 | % | |
| Interest rate contracts and other derivative income | | | 8,423 |
| | 4,595 |
| | 83 | % | | 22,037 |
| | 17,855 |
| | 23 | % |
| Net gains on sales of loans | | 2,361 |
| | 2,158 |
| | 9 | % | | 6,660 |
| | 6,965 |
| | (4 | )% | | 2,037 |
| | 1,145 |
| | 78 | % | | 2,967 |
| | 5,081 |
| | (42 | )% |
| Net gains on sales of available-for-sale investment securities | | 1,539 |
| | 1,790 |
| | (14 | )% | | 6,733 |
| | 8,468 |
| | (20 | )% | | 58 |
| | 35 |
| | 66 | % | | 3,066 |
| | 2,374 |
| | 29 | % |
| Net gains on sales of fixed assets | | 1,043 |
| | 486 |
| | 115 | % | | 74,092 |
| | 2,916 |
| | NM |
| | 48 |
| | 3,402 |
| | (99 | )% | | 48 |
| | 5,602 |
| | (99 | )% |
| Net gain on sale of business | | 3,807 |
| | — |
| | NM |
| | 3,807 |
| | — |
| | NM |
| | — |
| | — |
| | — | % | | — |
| | 31,470 |
| | (100 | )% |
| Other fees and operating income | | 3,652 |
| | 7,632 |
| | (52 | )% | | 15,255 |
| | 19,745 |
| | (23 | )% | |
| Other income | | | 3,238 |
| | 2,569 |
| | 26 | % | | 10,196 |
| | 7,355 |
| | 39 | % |
| Total noninterest income | | $ | 49,624 |
| | $ | 49,341 |
| | 1 | % | | $ | 213,047 |
| | $ | 134,118 |
| | 59 | % | | $ | 51,474 |
| | $ | 46,502 |
| | 11 | % | | $ | 146,364 |
| | $ | 169,214 |
| | (14 | )% |
|
NM Not Meaningful.
Noninterest income comprised 12% of total revenue for both the third quarter and first nine months of 2019, compared with 12% and 14%, respectively, for the same periods a year ago. Third quarter 2019 noninterest income was $51.5 million, an increase of $5.0 million or 11%, compared with $46.5 million for the same period in 2018. This increase was primarily due to increases in interest rate contracts and other derivative income, foreign exchange income, as well as wealth management fees, partially offset by a decrease in net gains on sales of fixed assets. For the first nine months of 2019, noninterest income was $146.4 million, a decrease of $22.9 million or 14%, compared with $169.2 million for the same period in 2018. This decrease was primarily due to decreases in net gain on sale of business, as well as net gains on sales of fixed assets, partially offset by increases in foreign exchange income, and interest rate contracts and other derivative income. The following discussion provides the composition of the major changes in noninterest income.
Foreign exchange income increased $2.0 million or 33% to $8.1 million for the third quarter of 2019, and increased $6.3 million or 45% to $20.4 million forthe first nine months of 2019. The increases in both periods were primarily driven by an increased volume of foreign exchange transactions and the factors contributingfavorable revaluation of certain foreign currency-denominated balance sheet items.
Wealth management fees increased $1.3 million or 37% to $4.8 million for the third quarter of 2019, and increased $1.5 million or 13% to $12.5 million for the first nine months of 2019. These increases were driven by higher customer activity.
Interest rate contracts and other derivative income increased $3.8 million or 83% to $8.4 million forthe third quarter of 2019, and increased $4.2 million or 23% to $22.0 million forthe first nine months of 2019. These increases reflected strong customer demand for interest rate swaps in response to the changes.overall low level of interest rates. This increase was partially offset by the fair value changes of the interest rate derivative contracts that were primarily driven by the decline in long-term interest rates during the third quarter and first nine months of 2019.
Net gains on sales of fixed assets increased $71.2 milliondecreased to $74.1$48 thousand for both the third quarter and the first nine months of 2019, down from $3.4 million for the nine months ended September 30, 2017, compared to $2.9third quarter of 2018 and $5.6 million for the same period in 2016.first nine months of 2018. This increase was primarily due to the $71.7Company’s adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) on January 1, 2019, under which deferred gains on sale and leaseback transactions were no longer amortized to gain on sales of fixed assets in 2019.
Net gain on sale of business for the first nine months of 2018 reflected the $31.5 million of pre-tax gain recognized from the sale of the commercial propertyBank’s eight DCB branches as discussed in California during the first quarter of 2017. In the first quarter of 2017, East West Bank completed the sale and leaseback of a commercial property in California for cash consideration of $120.6 million and entered into a lease agreement for part of the property, consisting of a retail branch and office facilities. The total pre-tax profit from the sale was $85.4 million, of which $71.7 million was recognized in the first quarter of 2017, and $13.7 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 Note 3 — Dispositions to the same periodConsolidated Financial Statements in 2016,was mainly attributable to decreases in rental income, as a result of the commercial property sale during the first quarter of 2017, and decreases in dividend income from other investments. The $4.5 million decrease 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.this Form 10-Q.
Noninterest Expense
NoninterestThe following table presents the components of noninterest expense totaled $164.5 million for the threethird quarters and first nine months ended September 30, 2017,of 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
| Compensation and employee benefits | | $ | 97,819 |
| | $ | 96,733 |
| | 1 | % | | $ | 300,649 |
| | $ | 285,832 |
| | 5 | % |
| Occupancy and equipment expense | | 17,912 |
| | 17,292 |
| | 4 | % | | 52,592 |
| | 50,879 |
| | 3 | % |
| Deposit insurance premiums and regulatory assessments | | 3,550 |
| | 6,013 |
| | (41 | )% | | 9,557 |
| | 18,118 |
| | (47 | )% |
| Legal expense | | 1,720 |
| | 1,544 |
| | 11 | % | | 6,300 |
| | 6,636 |
| | (5 | )% |
| Data processing | | 3,328 |
| | 3,289 |
| | 1 | % | | 9,945 |
| | 10,017 |
| | (1 | )% |
| Consulting expense | | 2,559 |
| | 2,683 |
| | (5 | )% | | 6,687 |
| | 10,155 |
| | (34 | )% |
| Deposit related expense | | 3,584 |
| | 2,600 |
| | 38 | % | | 10,426 |
| | 8,201 |
| | 27 | % |
| Computer software expense | | 6,556 |
| | 5,478 |
| | 20 | % | | 18,845 |
| | 16,081 |
| | 17 | % |
| Other operating expense | | 22,769 |
| | 23,394 |
| | (3 | )% | | 67,737 |
| | 61,780 |
| | 10 | % |
| Amortization of tax credit and other investments | | 16,833 |
| | 20,789 |
| | (19 | )% | | 58,477 |
| | 58,670 |
| | — | % |
| Total noninterest expense | | $ | 176,630 |
| | $ | 179,815 |
| | (2 | )% | | $ | 541,215 |
| | $ | 526,369 |
| | 3 | % |
| |
Third quarter 2019 noninterest expense was $176.6 million, a decrease of $6.0$3.2 million or 4%2%, compared to $170.5with $179.8 million for the same period in 2016.2018. This decrease was primarily due to an $8.8 million decreasedecreases in amortization of tax credit and other investments, as well as deposit insurance premiums and a $2.0 million decrease in legal expense,regulatory assessments, partially offset by a $4.5 millionan increase in compensation and employee benefits. Noninterest expense totaled $486.7 million forFor the first nine months ended September 30, 2017,of 2019, noninterest expense was $541.2 million, an increase of $20.7$14.8 million or 4%3%, compared to $466.0with $526.4 million for the same period in 2016.2018. This increase was primarily dueattributable to a $24.8 million increaseincreases in compensation and employee benefits, and a $5.3 million increase in amortization of tax credit andas well as other investments,operating expense, partially offset by an $8.3 milliona decrease in consulting expensedeposit insurance premiums and a $3.8 million decrease in legal expense.regulatory assessments.
The following table presents the various components of noninterest expense for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | |
| |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| ($ 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$1.1 million or 6%1% to $79.6$97.8 million for the three months ended September 30, 2017, comparedthird quarter of 2019, and increased $14.8 million or 5% to $75.0$300.6 million for the same period in 2016, and increased $24.8 million or 11% to $244.9 million for thefirst nine months ended September 30, 2017, compared to $220.2 million for the same period in 2016. Theof 2019. These increases for the three and nine months ended September 30, 2017 were primarily attributable to an increase in headcountstaffing growth to support the Company’s growing business and risk managementannual employee merit increases.
Deposit insurance premiums and compliance requirements, as well as additional severance expenses.regulatory assessments decreased $2.5 million or 41% to $3.6 million for the third quarter of 2019, and decreased $8.6 million or 47% to $9.6 million for the first nine months of 2019. These decreases were primarily due to lower Federal Deposit Insurance Corporation (“FDIC”) assessment rates. Effective October 1, 2018, the FDIC removed the temporary surcharge applied on the larger banks’ assessment base, since the Deposit Insurance Fund Reserve Ratio has exceeded its statutory minimum requirement of 1.35%.
Other operating expense primarily consists of marketing, travel, telecommunications and postage, charitable contributions, loan related expenses, and other miscellaneous expense categories. Year-over-year, other operating expense decreased $625 thousand or 3% to $22.8 million for the third quarter of 2019, compared with the same period in 2018. For the first nine months of 2019, other operating expense increased $6.0 million or 10% to $67.7 million, primarily due to increases in marketing expenses, and a decrease in gains on sale of other real estate owned (“OREO”).
Amortization of tax credit and other investments decreased $8.8$4.0 million or 27%19% to $23.8$16.8 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 2017,2019, 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,2018. This decrease was primarily driven by additional renewable energy and historical rehabilitationdue to fewer tax credit investments placed in service during 2019, partially offset by $1.7 million in other-than-temporary impairment (“OTTI”) charges related to two historic tax credit investments recorded in the nine months ended September 30, 2017.
Legal expensethird quarter of 2019. Amortization of tax credit and other investments decreased $2.0 million or 38%$193 thousand to $3.3$58.5 million for the threefirst nine months ended September 30, 2017,of 2019, compared to $5.4 million forwith the same period in 2016, and decreased $3.8 million or 30% to $8.9 million for the nine months ended September 30, 2017, compared to $12.7 million for the same period in 2016.2018. The decreases for the three and nine months ended September 30, 2017 were predominantlydecrease was mainly due to lower legal fees and litigation expense followingfewer tax credit investments placed in service during 2019, which was offset by a $7.0 million full write-off of the resolutionDC Solar related tax credit investments during the first quarter of previously outstanding litigation.
Consulting expense decreased $507 thousand or 11% to $4.1 million for2019, as well as the three months ended September 30, 2017, compared to $4.6 million for the same period in 2016,of OTTI charges related to three historic tax credit investments and decreased $8.3 million or 43% to $10.8 million for the nine months ended September 30, 2017, compared to $19.0 million for the same period in 2016. The decreases for both periods were primarily attributable to a decline in Bank SecrecyCommunity Reinvestment Act (“BSA”) and Anti-Money Laundering (“AML”) related consulting expense.investment.
Income Taxes
Income |
| | | | | | | | | | | | | | | | | | | | | | |
|
| ($ in thousands) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
| Income before income taxes |
| $ | 206,367 |
|
| $ | 204,865 |
|
| 1 | % |
| $ | 624,635 |
|
| $ | 613,641 |
|
| 2 | % |
| Income tax expense |
| $ | 34,951 |
|
| $ | 33,563 |
|
| 4 | % |
| $ | 138,815 |
|
| $ | 82,958 |
|
| 67 | % |
| Effective tax rate |
| 16.9 | % |
| 16.4 | % |
|
|
|
| 22.2 | % |
| 13.5 | % |
|
|
|
|
The effective tax expense was $42.6 millionrates were 16.9% and $140.2 million16.4% for the threethird quarters of 2019 and nine months ended September 30, 2017, respectively, compared to $13.3 million and $90.1 million, respectively, for the same periods in 2016.2018, respectively. The effective tax rate was 24.3% and 25.0%income tax expense for the threethird quarter of 2019 included a $6.4 million discrete item for the reversal of state income taxes payable. The effective tax rates were 22.2% and 13.5% for the first nine months ended September 30, 2017, respectively, compared to 10.8%of 2019 and 21.9%, respectively,2018, respectively. The year-over-year increase for the same periodsnine-month effective tax rate and income tax expense was primarily due to $30.1 million of income tax expense recorded in 2016.
The higherthe second quarter of 2019 to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar. Excluding this $30.1 million income tax expense recorded in the second quarter of 2019, the non-GAAP effective tax rates for the three andfirst nine months ended September 30, 2017,of 2019 was 17.4%. (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.) The higher effective tax rate during the first nine months of 2019, compared towith the same periods in 2016, were mainlyperiod a year ago, was due to higher projected income before income taxes that was partially offset by increasesa decrease in tax credits primarily generatedrecognized from investments in renewable energy and historic rehabilitation tax credit projects.
The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and affordable housing partnership projects. For2018 as a limited member. These tax credit funds engaged in the threeacquisition and nine months ended September 30, 2017,leasing of mobile solar generators through DC Solar entities. The Company’s investments in the DC Solar tax credits generatedcredit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from thesean external law firm supporting the legal structure of the investments for tax credit purposes. These investments were $40.0 millionrecorded in Investments in tax credit 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 further reduced by the adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, beginning January 1, 2017. As a result of the adoption of this ASU,other investments, net excess tax benefits for restricted stock units of $151 thousand and $4.6 million were recognized in Income tax expense on the Consolidated Statements of Income during the threeBalance Sheet and nine months ended September 30, 2017, respectively, which partially offset the higher effective tax rateswere accounted for the same periods.
Management regularly reviews the Company’s tax positions and deferred tax assets. Factors considered in this analysis include 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 under the applicable tax law),equity method of accounting. For reasons that were not known or knowable to the Company, DC Solar had its assets frozen in December 2018. DC Solar filed for bankruptcy protection in February 2019. In February 2019, an affidavit from a Federal Bureau of Investigation special agent stated that DC Solar was operating a fraudulent “Ponzi-like scheme” and that the majority of the mobile solar generators sold to investors and managed by DC Solar, as well as future reversalsthe majority of existing taxable temporary differences.the related lease revenues claimed to had been received by DC Solar might not have existed.
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 OTTI charge within Amortization of tax credit and other investments on the Consolidated Statement of Income. The Company accounts for income taxes using the asset and liability approach, the objective of which isconcluded at that time that there would be no material future cash flows related to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basisthese investments, in part because of the Company’s assetsfact that DC Solar has ceased operations and liabilities at enacted tax rates expectedits bankruptcy case had been converted from Chapter 11 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, basedChapter 7 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 to net operating losses in certain states. Accordingly, a valuation allowance has been recorded for these amounts. The Company believes that adequate provisions have been made for all income tax uncertainties consistent with ASC 740-10, Income Taxes.
Operating Segment Results
The Company defines its operating segments based on its core strategy and has identified three reportable operating segments: Retail Banking, Commercial Banking and Other.
The Retail Banking segment focuses primarily 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 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 inMarch 22, 2019. More discussion regarding the Company’s management structure or reporting methodologies may resultimpairment evaluation and monitoring process of tax credit investments is provided in changes in the measurementNote 4 — Fair Value Measurement and Fair Value 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 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 its business segments and product net interest margins. The Company’s internal funds transfer pricing assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions.
Note 15 — Business SegmentsFinancial Instruments to the Consolidated Financial Statements describesin this Form 10-Q.
Investors in DC Solar funds, including the Company, received tax credits for making these renewable energy investments. The Company claimed tax credits of approximately $53.9 million in the Consolidated Financial Statements between 2014 and 2018, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact to the Consolidated Financial Statements of $48.2 million. During the second quarter of 2019, the Company reversed $33.6 million out of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax expense.
ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. Under ASC 740, Income Taxes, when evaluating an uncertain tax position as of the balance sheet date, an entity should not consider new information that is received after the balance sheet date. Based on the available information known as of December 31, 2018 and March 31, 2019, the Company reassessed the technical merits of the position taken and concluded, based on initial and ongoing due diligence performed by the Company, it believed that the DC Solar related tax credits the Company had previously claimed continued to meet the more-likely-than-not criterion for recognition as of those dates.
During the first quarter of 2019, the Company, in coordination with other fund investors, engaged an unaffiliated third party inventory firm to report on the actual number of mobile solar generators in existence. As of September 30, 2019, based on the latest inventory report, none of the mobile service generators that had been purchased by the Company���s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Based on the inventory information available as of the second and third quarters of 2019, as well as management’s best judgments regarding the future settlement of the related tax positions with the Internal Revenue Service, the Company concluded that a portion of the previously claimed tax credits would be recaptured. Accordingly, the Company recorded $30.1 million in income tax expense in the second quarter of 2019.
The Company continues to conduct an ongoing investigation to gather information related to this matter, including tracking asset seizures of DC Solar and ongoing federal investigations. There can be no assurance that the Company will not have to recognize additional income tax expense as new information becomes available, or due to changes in tax laws, case law and regulations; or that the Company will not ultimately need to reverse the remaining tax credits previously claimed. For additional information on the risks surrounding the Company’s investments in tax-advantaged projects, see Item 1A. Risk Factors in the Company’s 2018 Form 10-K.
Operating Segment Results
The Company organizes its operations into three reportable operating segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These segments are defined by the type of customers and the related products and services provided, and reflect how financial information is currently evaluated by management. For additional description of the Company’s internal management reporting process, including the segment cost allocation methodology, see Note 18 — Business segments to the Consolidated Financial Statements in this Form 10-Q.
During the first quarter of 2019, the Company enhanced its segment cost allocation methodology related to stock compensation expense and bonus accrual. Effective first quarter of 2019, stock compensation expense is allocated to all three segments, whereas it was previously recorded in the Other segment as a corporate expense. In addition, bonus expense is now allocated at a more granular level at the segment level at the time of accrual. For comparability, segment information for the third quarter and the first nine months of 2018 have been restated to conform to the current presentation. During the third quarter of 2019, the Company enhanced its funds transfer pricing (“FTP”) methodology related to deposits by setting a minimum floor rate for the FTP credits paid by the Other segment to the Consumer and Business Banking, as well as the Commercial Banking segments in consideration of the flattened and inverted yield curve. For consistency in the application of this change, the Company adjusted the 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 SeptemberMarch 31 and June 30, 20172019, which increased segment net income for the Consumer and 2016.Business Banking, as well as the Commercial Banking segments, and, correspondingly, reduced net income for Other segment. This change in FTP methodology related to deposits had no impact on 2018 segment results.
The following tables present the selected segment information for the threethird quarters and first nine months ended September 30, 2017of 2019 and 2016:2018:
| | | | ($ in thousands) | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2019 |
| | 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 | | | $ | 170,183 |
| | $ | 166,106 |
| | $ | 33,518 |
| | $ | 369,807 |
|
| Provision for credit losses | | | 4,251 |
| | 34,033 |
| | — |
| | 38,284 |
|
| Noninterest income | | $ | 16,218 |
| | $ | 30,320 |
| | $ | 3,086 |
| | $ | 49,624 |
| | 15,103 |
| | 33,731 |
| | 2,640 |
| | 51,474 |
|
| Noninterest expense | | $ | 56,062 |
| | $ | 45,686 |
| | $ | 62,751 |
| | $ | 164,499 |
| | 86,489 |
| | 62,246 |
| | 27,895 |
| | 176,630 |
|
| Pre-tax income | | $ | 68,554 |
| | $ | 99,025 |
| | $ | 7,705 |
| | $ | 175,284 |
| |
| Segment income before income taxes | | | 94,546 |
| | 103,558 |
| | 8,263 |
| | 206,367 |
|
| Segment net income | | | $ | 67,592 |
| | $ | 74,111 |
| | $ | 29,713 |
| | $ | 171,416 |
|
| | | | | |
| | | | | | | |
| ($ in thousands) | | Three Months Ended September 30, 2016 | | Three Months Ended September 30, 2018 |
| | 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 | | | $ | 182,272 |
| | $ | 149,770 |
| | $ | 16,678 |
| | $ | 348,720 |
|
| Provision for credit losses | | | 705 |
| | 9,837 |
| | — |
| | 10,542 |
|
| Noninterest income | | $ | 14,700 |
| | $ | 26,218 |
| | $ | 8,423 |
| | $ | 49,341 |
| | 13,137 |
| | 27,861 |
| | 5,504 |
| | 46,502 |
|
| Noninterest expense | | $ | 55,942 |
| | $ | 45,306 |
| | $ | 69,252 |
| | $ | 170,500 |
| | 87,640 |
| | 57,376 |
| | 34,799 |
| | 179,815 |
|
| Pre-tax income | | $ | 32,304 |
| | $ | 80,393 |
| | $ | 10,767 |
| | $ | 123,464 |
| |
| Segment income (loss) before income taxes | | | 107,064 |
| | 110,418 |
| | (12,617 | ) | | 204,865 |
|
| Segment net income | | | $ | 76,711 |
| | $ | 79,344 |
| | $ | 15,247 |
| | $ | 171,302 |
|
| | | | | |
| | | | | | | |
| ($ in thousands) | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2019 |
| | Retail Banking | | Commercial Banking | | Other | | Total | | Consumer and Business Banking | | Commercial Banking | | Other | | Total |
| Net interest income | | $ | 430,437 |
| | $ | 408,570 |
| | $ | 26,361 |
| | $ | 865,368 |
| |
| Net interest income before provision for credit losses | | | $ | 536,153 |
| | $ | 477,755 |
| | $ | 85,686 |
| | $ | 1,099,594 |
|
| Provision for credit losses | | | 8,880 |
| | 71,228 |
| | — |
| | 80,108 |
|
| Noninterest income | | $ | 43,767 |
| | $ | 82,645 |
| | $ | 86,635 |
| | $ | 213,047 |
| | 43,378 |
| | 91,931 |
| | 11,055 |
| | 146,364 |
|
| Noninterest expense | | $ | 181,811 |
| | $ | 149,510 |
| | $ | 155,372 |
| | $ | 486,693 |
| | 258,051 |
| | 200,093 |
| | 83,071 |
| | 541,215 |
|
| Pre-tax income | | $ | 204,601 |
| | $ | 284,195 |
| | $ | 72,177 |
| | $ | 560,973 |
| |
| Segment income before income taxes | | | 312,600 |
| | 298,365 |
| | 13,670 |
| | 624,635 |
|
| Segment net income | | | $ | 223,478 |
| | $ | 213,331 |
| | $ | 49,011 |
| | $ | 485,820 |
|
| | | | | | | |
| | | | | | | |
| ($ in thousands) | | Nine Months Ended September 30, 2016 | | Nine Months Ended September 30, 2018 |
| | Retail Banking | | Commercial Banking | | Other | | Total | | Consumer and Business Banking | | Commercial Banking | | Other | | Total |
| Net interest income | | $ | 329,120 |
| | $ | 389,559 |
| | $ | 41,257 |
| | $ | 759,936 |
| |
| Net interest income before provision for credit losses | | | $ | 538,568 |
| | $ | 448,128 |
| | $ | 30,396 |
| | $ | 1,017,092 |
|
| Provision for credit losses | | | 7,212 |
| | 39,084 |
| | — |
| | 46,296 |
|
| Noninterest income | | $ | 37,798 |
| | $ | 70,450 |
| | $ | 25,870 |
| | $ | 134,118 |
| | 72,170 |
| | 86,043 |
| | 11,001 |
| | 169,214 |
|
| Noninterest expense | | $ | 173,337 |
| | $ | 145,695 |
| | $ | 146,953 |
| | $ | 465,985 |
| | 259,416 |
| | 179,251 |
| | 87,702 |
| | 526,369 |
|
| Pre-tax income | | $ | 114,513 |
| | $ | 268,401 |
| | $ | 28,137 |
| | $ | 411,051 |
| |
| Segment income (loss) before income taxes | | | 344,110 |
| | 315,836 |
| | (46,305 | ) | | 613,641 |
|
| Segment net income | | | $ | 246,555 |
| | $ | 226,798 |
| | $ | 57,330 |
| | $ | 530,683 |
|
| | | | | |
RetailConsumer and Business Banking
The RetailConsumer 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 Consumer and Business Banking segment reported pre-taxsegment net income of $68.6 million and $204.6$67.6 million for the three and nine months ended September 30, 2017, respectively,third quarter of 2019, compared to $32.3with $76.7 million and $114.5 million, respectively, for the same periodsperiod in 2016.2018. The increases$9.1 million or 12% decrease in pre-taxsegment net income for this segment for the three and nine months ended September 30, 2017, compared to the same periods in 2016, werewas primarily driven by an increasea decrease in net interest income partially offset bybefore provision for credit losses and an increase in provision for credit losses.
Netlosses, partially offset by a corresponding decrease in income tax expense. Third quarter 2019 net interest income before provision for credit losses for this segment increased $40.8was $170.2 million, a decrease of $12.1 million or 38% to $147.57% compared with $182.3 million for the threethird quarter of 2018, reflecting higher interest expense paid on customer deposits. The provision for credit losses was $4.3 million for the third quarter of 2019, up from $705 thousand for the same period in 2018, an increase of $3.5 million or 503%, primarily due to growth in this segment’s loan portfolio. The decrease in income tax expense reflected the decrease in segment income before income taxes.
The Consumer and Business Banking segment reported segment net income of $223.5 million for the first nine months ended September 30, 2017,of 2019, compared to $106.6with $246.6 million for the same period in 2016. Net interest income increased $101.32018. The $23.1 million or 31% to $430.49% decrease in segment net income was primarily driven by a decrease in noninterest income, partially offset by a corresponding decrease in income tax expense. Noninterest income was $43.4 million for the first nine months ended September 30, 2017,of 2019, a decrease of $28.8 million or 40%, compared to $329.1with $72.2 million for the same period in 2016. The increases in net interest2018. Noninterest income for the three andfirst nine months ended September 30, 2017, compared toof 2018 included a non-recurring pre-tax gain of $31.5 million from 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 undersale of the Bank’s internal funds transfer pricing system.
Noninterest income for this segment increased $1.5 million or 10% to $16.2 million foreight DCB branches, recognized in 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.first quarter of 2018. 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.income tax expense reflected the decrease in segment income before income taxes.
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 lending, affordable housing loans and letters of credit, asset-based lending, and equipment financings. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity hedging risk management.
The Commercial Banking segment reported pre-taxsegment net income of $99.0 million and $284.2$74.1 million for the three and nine months ended September 30, 2017, respectively,third quarter of 2019, 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 $79.3 million for the same period in 2016.2018. The $5.2 million or 7% decrease in segment net income primarily reflected an increase in the provision for credit losses, partially offset by an increase in net interest income before provision for credit losses. Third quarter 2019 provision for credit losses for this segment was $34.0 million, an increase of $24.2 million or 246% from $9.8 million for the third quarter of 2018. This increase was primarily due to loan portfolio growth, increased charge-offs on C&I loans, and a deterioration in the credit risk ratings of C&I loans. Net interest income increased $19.0 million or 5% to $408.6before provision for credit losses was $166.1 million for the nine months ended September 30, 2017, compared to $389.6third quarter of 2019, an increase of $16.3 million or 11% from $149.8 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 due to the2018, primarily driven by growth in commercial loans and commercial core deposits, for which thethis segment’s loan portfolio.
The Commercial Banking segment receives interestreported segment net income credit under the Bank’s internal funds transfer pricing system.
Noninterest income for this segment increased $4.1 million or 16% to $30.3of $213.3 million for the threefirst nine months ended September 30, 2017,of 2019, compared to $26.2with $226.8 million for the same period in 2016. Noninterest income increased $12.22018. The $13.5 million or 17% to $82.66% decrease in segment net income was primarily driven by increases in the provision for credit losses and noninterest expense, partially offset by an increase in net interest income before provision for credit losses. Provision for credit losses for this segment was $71.2 million for the first nine months ended September 30, 2017,of 2019, an increase of $32.1 million or 82%, compared to $70.5with $39.1 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, were2018. This increase was primarily due toloan portfolio growth, increased charge-offs on C&I loans, and a net gain on saledeterioration in the credit risk ratings 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 fees and other income, as well as letters of credit fees and foreign exchange income.
C&I loans. Noninterest expense for this segment increased slightly by $380 thousand to $45.7was $200.1 million for the threefirst nine months ended September 30, 2017, compared to $45.3of 2019, an increase of $20.8 million or 12% from $179.3 million for the same period in 2016. Noninterest expense increased $3.8 million or 3%2018, primarily due to $149.5an increase in compensation and employee benefits expense. Net interest income before provision for credit losses was $477.8 million for the first nine months ended September 30, 2017, compared to $145.7of 2019, an increase of $29.6 million or 7% from $448.1 million for the same period in 2016. The increases2018, primarily driven by growth in noninterest expense forthis segment’s loan portfolio.
Other
Centralized functions, including the threecorporate treasury activities of the Company and nine months ended September 30, 2017, comparedeliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the same periods in 2016, were primarily due to increases in compensationtwo core segments, the Consumer and employee benefits,Business Banking and consulting expense, partially offset by a decrease in legal expense.the Commercial Banking segments.
Other
The Other segment includesreported segment income before income taxes of $8.3 million and segment net income of $29.7 million for the activitiesthird quarter of the treasury function, which is responsible for liquidity and interest rate risk management2019, reflecting an income tax benefit 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.$21.5 million. The Other segment reported pre-taxsegment loss before income taxes of $12.6 million and segment net income of $7.7 million and $72.2$15.2 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-taxthird quarter of 2018, reflecting an 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.tax benefit of $27.9 million. The increase in pre-taxsegment income for this segment for the nine months ended September 30, 2017, compared to the same period in 2016,before income taxes was primarily driven by an increase in noninterestnet interest income as the result of the net gain on sale of the commercial property, partially offset bybefore provision for credit losses and a decrease in net interest income and an increase in noninterest expense.
Net interest income before provision for this segment increased $1.4 million or 8% to $17.5credit losses was $33.5 million for the three months ended September 30, 2017, compared to $16.2third quarter of 2019, an increase of $16.8 million or 101% from $16.7 million for the same period in 2016. Net interest income decreased $14.9 million or 36%2018. This change reflected an increase in the net spread between the total internal FTP charges for loans and total internal FTP credits for deposits, which widened due to $26.4the inverted yield curve. Noninterest expense was $27.9 million for the nine months ended September 30, 2017, compared to $41.3third quarter of 2019, a $6.9 million or 20% decrease from $34.8 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, wasthird quarter of 2018, primarily due to an increasea decrease in interest income fromthe amortization of tax credit and other 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 was due to fewer tax credit investments placed in service during this period, partially offset by increases of $2.5$1.7 million in compensationOTTI charges related to two historic tax credit investments.
The Other segment reported segment income before income taxes of $13.7 million and employee benefits.segment net income of $49.0 million for the first nine months of 2019, reflecting an income tax benefit of $35.3 million. The Other segment reported segment loss before income taxes of $46.3 million and segment net income of $57.3 million for the first nine months of 2018, reflecting an income tax benefit of $103.6 million. The increase in noninterest expensesegment income before income taxes was primarily driven by an increase in net interest income before provision for credit losses, which increased $55.3 million or 182% to $85.7 million for the first nine months ended September 30, 2017, compared toof 2019 from $30.4 million for the same period in 2016, was primarily attributable2018. This change reflected an increase in the net spread between the total internal FTP charges for loans and total internal FTP credits for deposits, which widened due to increasesthe inverted yield curve.
The income tax expense or benefit in the Other segment consists of $5.3 million in amortization ofthe remaining unallocated income tax creditexpense or benefit after allocating income tax expense to the two core segments. Income tax expense is allocated to the Consumer and other investments, and $6.5 million in compensation and employee benefits.Business Banking, as well as the Commercial Banking segments by applying segment effective tax rates to the segment income before income taxes.
Balance Sheet Analysis
The following istable presents a discussion of the significant changes between September 30, 20172019 and December 31, 2016.2018:
Selected Consolidated Balance SheetsSheet Data
| | | | | | | | | |
| | | | | | | Change | |
| ($ in thousands) | | | September 30, 2019 | | December 31, 2018 | | Change |
| | September 30, 2017 | | December 31, 2016 | | $ | | % | | | $ | | % |
| | | (Unaudited) | | | | | | | | (Unaudited) | | | | | | |
| ASSETS | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,736,749 |
| | $ | 1,878,503 |
| | $ | (141,754 | ) | | (8 | )% | | $ | 3,042,281 |
| | $ | 3,001,377 |
| | $ | 40,904 |
| | 1 | % |
| Interest-bearing deposits with banks | | 404,946 |
| | 323,148 |
| | 81,798 |
| | 25 | % | | 160,423 |
| | 371,000 |
| | (210,577 | ) | | (57 | )% |
| Resale agreements | | 1,250,000 |
| | 2,000,000 |
| | (750,000 | ) | | (38 | )% | | 860,000 |
| | 1,035,000 |
| | (175,000 | ) | | (17 | )% |
| Available-for-sale investment securities, at fair value | | 2,956,776 |
| | 3,335,795 |
| | (379,019 | ) | | (11 | )% | | 3,284,034 |
| | 2,741,847 |
| | 542,187 |
| | 20 | % |
| Held-to-maturity investment security, at cost | | — |
| | 143,971 |
| | (143,971 | ) | | (100 | )% | |
| Restricted equity securities, at cost | | 73,322 |
| | 72,775 |
| | 547 |
| | 1 | % | | 78,334 |
| | 74,069 |
| | 4,265 |
| | 6 | % |
| Loans held-for-sale | | 178 |
| | 23,076 |
| | (22,898 | ) | | (99 | )% | | 294 |
| | 275 |
| | 19 |
| | 7 | % |
| 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 $345,576 in 2019 and $311,322 in 2018) | | | 33,679,400 |
| | 32,073,867 |
| | 1,605,533 |
| | 5 | % |
| Investments in qualified affordable housing partnerships, net | | 178,344 |
| | 183,917 |
| | (5,573 | ) | | (3 | )% | | 190,000 |
| | 184,873 |
| | 5,127 |
| | 3 | % |
| Investments in tax credit and other investments, net | | 203,758 |
| | 173,280 |
| | 30,478 |
| | 18 | % | | 211,603 |
| | 231,635 |
| | (20,032 | ) | | (9 | )% |
| Premises and equipment | | 131,311 |
| | 159,923 |
| | (28,612 | ) | | (18 | )% | | 120,859 |
| | 119,180 |
| | 1,679 |
| | 1 | % |
| Goodwill | | 469,433 |
| | 469,433 |
| | — |
| | — | % | | 465,697 |
| | 465,547 |
| | 150 |
| | 0 | % |
| Operating lease right-of-use assets | | | 103,894 |
| | — |
| | 103,894 |
| | 100 | % |
| Other assets | | 663,718 |
| | 782,400 |
| | (118,682 | ) | | (15 | )% | | 1,077,840 |
| | 743,686 |
| | 334,154 |
| | 45 | % |
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 1,519,126 |
| | 4 | % | | $ | 43,274,659 |
| | $ | 41,042,356 |
| | $ | 2,232,303 |
| | 5 | % |
| LIABILITIES | | |
| | |
| | | |
|
| | | | | | | | |
| Customer deposits | | $ | 31,311,662 |
| | $ | 29,890,983 |
| | $ | 1,420,679 |
| | 5 | % | |
| Noninterest-bearing | | | $ | 10,806,937 |
| | $ | 11,377,009 |
| | $ | (570,072 | ) | | (5 | )% |
| Interest-bearing | | | 25,852,589 |
| | 24,062,619 |
| | 1,789,970 |
| | 7 | % |
| Total deposits | | | 36,659,526 |
| | 35,439,628 |
| | 1,219,898 |
| | 3 | % |
| Short-term borrowings | | 24,813 |
| | 60,050 |
| | (35,237 | ) | | (59 | )% | | 47,689 |
| | 57,638 |
| | (9,949 | ) | | (17 | )% |
| FHLB advances | | 323,323 |
| | 321,643 |
| | 1,680 |
| | 1 | % | | 745,494 |
| | 326,172 |
| | 419,322 |
| | 129 | % |
| Repurchase agreements | | 50,000 |
| | 350,000 |
| | (300,000 | ) | | (86 | )% | | 50,000 |
| | 50,000 |
| | — |
| | — | % |
| Long-term debt | | 176,513 |
| | 186,327 |
| | (9,814 | ) | | (5 | )% | |
| Long-term debt and finance lease liabilities | | | 152,390 |
| | 146,835 |
| | 5,555 |
| | 4 | % |
| Operating lease liabilities | | | 112,142 |
| | — |
| | 112,142 |
| | 100 | % |
| Accrued expenses and other liabilities | | 639,759 |
| | 552,096 |
| | 87,663 |
| | 16 | % | | 624,754 |
| | 598,109 |
| | 26,645 |
| | 4 | % |
| Total liabilities | | 32,526,070 |
| | 31,361,099 |
| | 1,164,971 |
| | 4 | % | | 38,391,995 |
| | 36,618,382 |
| | 1,773,613 |
| | 5 | % |
| STOCKHOLDERS’ EQUITY | | 3,781,896 |
| | 3,427,741 |
| | 354,155 |
| | 10 | % | | 4,882,664 |
| | 4,423,974 |
| | 458,690 |
| | 10 | % |
| TOTAL | | $ | 36,307,966 |
| | $ | 34,788,840 |
| | $ | 1,519,126 |
| | 4 | % | | $ | 43,274,659 |
| | $ | 41,042,356 |
| | $ | 2,232,303 |
| | 5 | % |
| | | | | | | |
As of September 30, 2017,2019, total assets were $36.31$43.27 billion, an increase of $1.52$2.23 billion or 4%5% from December 31, 2016.2018, primarily due to loan growth and an increase in available-for-sale investment securities. The predominant area of assetloan growth was in loans, which was driven by strong increases across all of the Company’s commercialin single-family residential, CRE, C&I, as well as construction and retail lines of business.land loans. These increases were partially offset by maturities of resale agreements, and decreases in investment securities, cashinterest-bearing deposits with banks and cash equivalents, and other assets.resale agreements.
As of September 30, 2017,2019, total liabilities were $32.53$38.39 billion, an increase of $1.16$1.77 billion or 4%5% from December 31, 2016,2018, primarily due to a $1.22 billion increase in deposits and $419.3 million increase in FHLB advances. The increase in deposits was largely driven by increases in customer deposits, reflecting the continued strong growthtime deposits.
As of September 30, 2019, total stockholders’ equity was $4.88 billion, an increase of $458.7 million or 10% from existing and new customers.December 31, 2018. This increase was partially offset by a decrease in repurchase agreements primarily due to an increase in resale agreements that were eligible for netting against repurchase agreements under ASC 210-20-45, Balance Sheet Offsetting.
Stockholders’ equity growth benefited primarily from $420.7$485.8 million in net income and a $57.2 million increase in accumulated other comprehensive income, partially offset by $87.6$114.8 million of cash dividends declared on common stock.
Investment Securities
The Company aims to maintainmaintains an investment 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 investment securities provide:
interest income for earnings and yield enhancement;
availability for funding needs arisingthat arise 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 Investment 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 $115.6 million from held-to-maturity to available-for-sale. The transfer reflects the Company’s intent to sell the security under active liquidity management.
Available-for-sale investment securities
As of September 30, 20172019 and December 31, 2016,2018, the Company’s available-for-sale investment securities portfolio was primarily comprised of mortgage-backed securities and debt securities issued by U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities,enterprises, foreign bonds, and U.S. Treasury securities and foreign bonds.securities. Investment securities classified as available-for-sale are carried at their estimated fair value with the corresponding changes in fair value recorded in Accumulated other comprehensive loss, net of tax, as a component of Stockholders’ equity on the Consolidated Balance Sheets.Sheet.
The following table presents the breakout of the amortized cost and fair value by major categories of available-for-sale investment securities as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Available-for-sale investment securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 427,535 |
| | $ | 426,113 |
| | $ | 577,561 |
| | $ | 564,815 |
|
| U.S. government agency and U.S. government sponsored enterprise debt securities | | 688,529 |
| | 691,368 |
| | 219,485 |
| | 217,173 |
|
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities | | 1,454,336 |
| | 1,475,180 |
| | 1,377,705 |
| | 1,355,296 |
|
| Municipal securities | | 76,948 |
| | 78,159 |
| | 82,965 |
| | 82,020 |
|
| Non-agency mortgage-backed securities | | 98,727 |
| | 101,738 |
| | 35,935 |
| | 35,983 |
|
| Corporate debt securities | | 11,250 |
| | 11,022 |
| | 11,250 |
| | 10,869 |
|
| Foreign bonds | | 454,431 |
| | 453,179 |
| | 489,378 |
| | 463,048 |
|
| Asset-backed securities | | 48,028 |
| | 47,275 |
| | 12,621 |
| | 12,643 |
|
| Total available-for-sale investment securities | | $ | 3,259,784 |
| | $ | 3,284,034 |
| | $ | 2,806,900 |
| | $ | 2,741,847 |
|
| |
The fair value of available-for-sale investment securities by major categories as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | |
| |
| ($ 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. |
The fair value of the available-for-sale investment securities totaled $2.96$3.28 billion as of September 30, 2017,2019, compared to $3.34with $2.74 billion as of December 31, 2016.2018. The decrease of $379.0$542.2 million or 11%20% increase was primarily reflectedattributable to the salespurchases of corporateU.S. government agency and U.S. government sponsored enterprise debt securities, U.S. Treasury securities, U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, and municipal securities;U.S. Treasury securities, partially offset by the sales, repayments, and paydowns, maturities of U.S. Treasury securities and calls of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, U.S. government agency and U.S. government sponsored enterprise debt securities, 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 enterprise debt securities, U.S. Treasury securities and municipal securities; and the transfer of a non-agency commercial mortgage-backed security from held-to-maturity security.
The Company’s available-for-sale investment securities are carried at fair value with changes in fair value reflected in Other comprehensive income (loss) unless a security is deemed to be other-than-temporarily impaired. Asportfolio had an effective duration of 2.4 as of September 30, 2017,2019, which shortened from 4.1 as of December 31, 2018, primarily due to the Company’s netdecline in interest rates. As of both September 30, 2019 and December 31, 2018, 99% of the carrying value of the investment securities portfolio was rated “AA-” or “Aa3” or higher by nationally recognized statistical rating organizations. 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.
Net unrealized lossesgains on available-for-sale investment securities were $36.0$24.3 million compared to $49.6as of September 30, 2019, which improved from net unrealized losses of $65.1 million as of December 31, 2016. The favorable2018. This change in the net unrealized losses was primarily attributeddue to the flatteningdecrease in the yield curve with long-term interest rates falling.rates. Gross unrealized losses on available-for-sale investment securities totaled $42.3$8.1 million as of September 30, 2017,2019, compared to $56.3with $70.8 million as of December 31, 2016.2018. Of the securities with gross unrealized losses, approximately 99% and 100% were rated investment grade as of September 30, 2019 and December 31, 2018, respectively, classified primarily based upon the lowest of the credit ratings issued by S&P, Moody’s, or Fitch. As of September 30, 2017,2019, 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 was
The Company assesses individual securities for OTTI for each reporting period. There were no OTTI credit losses recognized in earnings for both the threethird quarters and first nine months ended September 30, 2017of 2019 and 2016.2018. For a complete discussionadditional information on our accounting policies, valuation and disclosure,composition, see Note 1— Summary of Significant Accounting Policies in the Company’s 2018 Form 10-K, Note 4 — Fair Value Measurement and Fair Value of Financial Instruments, and Note 6 — 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 $767.4 million, respectively, were pledged to secure public deposits, repurchase agreements, the Federal Reserve Bank’s discount window and for other purposes required or permitted by law.
The following table presents the weighted averageweighted-average yields and contractual maturity distributions, excluding periodic principal payments,distribution of the Company’s investment securities as of the periods indicated.September 30, 2019 and December 31, 2018. Actual maturities of mortgage-backedthe investment securities can differ from contractual maturities as the borrowers have the rightdue to prepay the obligations.prepayments or embedded call options. In addition, factors such factors as prepayments and interest rate changes may affect the yields on the carrying value of mortgage-backedthe investment securities.
| | | | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2019 | | December 31, 2018 |
| | 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: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | $ | 150,431 |
| | $ | 150,134 |
| | 0.96 | % | | $ | 100,707 |
| | $ | 100,653 |
| | 0.65 | % | | $ | 199,786 |
| | $ | 199,711 |
| | 1.80 | % | | $ | 50,134 |
| | $ | 49,773 |
| | 1.08 | % |
| Maturing after one year through five years | | 382,604 |
| | 376,198 |
| | 1.35 | % | | 376,580 |
| | 371,917 |
| | 1.27 | % | | 227,749 |
| | 226,402 |
| | 1.35 | % | | 527,427 |
| | 515,042 |
| | 1.69 | % |
| 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 | % | | 427,535 |
| | 426,113 |
| | 1.56 | % | | 577,561 |
| | 564,815 |
| | 1.64 | % |
| 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 | % | | 406,381 |
| | 406,572 |
| | 2.17 | % | | 26,955 |
| | 26,909 |
| | 3.51 | % |
| Maturing after one year through five years | | 9,732 |
| | 9,774 |
| | 2.37 | % | | 52,622 |
| | 52,630 |
| | 1.38 | % | | 133,500 |
| | 133,713 |
| | 2.71 | % | | 10,181 |
| | 10,037 |
| | 2.18 | % |
| Maturing after five years through ten years | | 103,394 |
| | 101,030 |
| | 2.19 | % | | 81,829 |
| | 78,977 |
| | 2.07 | % | | 94,900 |
| | 95,510 |
| | 2.21 | % | | 114,771 |
| | 113,812 |
| | 2.30 | % |
| Maturing after ten years | | 53,602 |
| | 53,465 |
| | 2.58 | % | | 24,474 |
| | 24,277 |
| | 2.50 | % | | 53,748 |
| | 55,573 |
| | 2.78 | % | | 67,578 |
| | 66,415 |
| | 2.79 | % |
| Total | | 191,727 |
| | 189,185 |
| | 2.15 | % | | 277,891 |
| | 274,866 |
| | 1.49 | % | | 688,529 |
| | 691,368 |
| | 2.33 | % | | 219,485 |
| | 217,173 |
| | 2.59 | % |
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | | 2,986 |
| | 2,983 |
| | 1.76 | % | | 2,633 |
| | 2,600 |
| | 1.62 | % |
| Maturing after one year through five years | | 52,312 |
| | 52,055 |
| | 2.33 | % | | 47,278 |
| | 46,950 |
| | 1.74 | % | | 26,631 |
| | 26,841 |
| | 2.25 | % | | 30,808 |
| | 30,487 |
| | 2.11 | % |
| Maturing after five years through ten years | | 66,351 |
| | 65,534 |
| | 2.45 | % | | 79,379 |
| | 78,903 |
| | 3.11 | % | | 78,533 |
| | 81,705 |
| | 2.74 | % | | 96,822 |
| | 95,365 |
| | 2.68 | % |
| Maturing after ten years | | 1,357,306 |
| | 1,348,517 |
| | 2.20 | % | | 1,412,387 |
| | 1,399,693 |
| | 2.34 | % | | 1,346,186 |
| | 1,363,651 |
| | 2.64 | % | | 1,247,442 |
| | 1,226,844 |
| | 2.74 | % |
| Total | | 1,475,969 |
| | 1,466,106 |
| | 2.22 | % | | 1,539,044 |
| | 1,525,546 |
| | 2.36 | % | | 1,454,336 |
| | 1,475,180 |
| | 2.63 | % | | 1,377,705 |
| | 1,355,296 |
| | 2.72 | % |
Municipal securities (2): | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | 12,987 |
| | 13,058 |
| | 3.56 | % | | 6,404 |
| | 6,317 |
| | 2.56 | % | | 35,580 |
| | 35,720 |
| | 2.65 | % | | 29,167 |
| | 28,974 |
| | 2.60 | % |
| Maturing after one year through five years | | 85,244 |
| | 85,767 |
| | 2.29 | % | | 127,178 |
| | 127,080 |
| | 2.31 | % | | 24,777 |
| | 25,080 |
| | 2.47 | % | | 48,398 |
| | 47,681 |
| | 2.39 | % |
| Maturing after five years through ten years | | 6,274 |
| | 6,235 |
| | 2.50 | % | | 9,785 |
| | 9,515 |
| | 2.50 | % | | 12,200 |
| | 12,766 |
| | 3.15 | % | | 500 |
| | 476 |
| | 2.38 | % |
| Maturing after ten years | | 12,293 |
| | 12,182 |
| | 4.31 | % | | 4,935 |
| | 4,742 |
| | 3.95 | % | | 4,391 |
| | 4,593 |
| | 3.40 | % | | 4,900 |
| | 4,889 |
| | 5.03 | % |
| Total | | 116,798 |
| | 117,242 |
| | 2.67 | % | | 148,302 |
| | 147,654 |
| | 2.40 | % | | 76,948 |
| | 78,159 |
| | 2.71 | % | | 82,965 |
| | 82,020 |
| | 2.62 | % |
| Non-agency residential mortgage-backed securities: | | | | | | | | | | | | | |
| Non-agency mortgage-backed securities: | | | | | | | | | | | | | |
| Maturing after one year through five years | | | 7,920 |
| | 7,914 |
| | 3.90 | % | | — |
| | — |
| | — | % |
| Maturing after ten years | | 9,680 |
| | 9,694 |
| | 2.72 | % | | 11,592 |
| | 11,477 |
| | 2.52 | % | | 90,807 |
| | 93,824 |
| | 3.30 | % | | 35,935 |
| | 35,983 |
| | 3.67 | % |
| Total | | | 98,727 |
| | 101,738 |
| | 3.35 | % | | 35,935 |
| | 35,983 |
| | 3.67 | % |
| Corporate debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | 12,655 |
| | 11,942 |
| | 2.19 | % | | 12,671 |
| | 11,347 |
| | 1.80 | % | | 1,250 |
| | 1,247 |
| | 5.42 | % | | 1,250 |
| | 1,231 |
| | 5.50 | % |
| 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 |
| | 9,775 |
| | 4.00 | % | | 10,000 |
| | 9,638 |
| | 4.00 | % |
| Total | | 12,655 |
| | 11,942 |
| | 2.19 | % | | 232,381 |
| | 231,550 |
| | 2.26 | % | | 11,250 |
| | 11,022 |
| | 4.16 | % | | 11,250 |
| | 10,869 |
| | 4.17 | % |
| Foreign bonds: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | 405,395 |
| | 389,876 |
| | 2.13 | % | | 304,427 |
| | 287,695 |
| | 2.09 | % | | 454,431 |
| | 453,179 |
| | 2.33 | % | | 439,378 |
| | 414,065 |
| | 2.19 | % |
| Maturing after one year through five years | | 100,000 |
| | 99,264 |
| | 2.70 | % | | 101,016 |
| | 96,199 |
| | 2.11 | % | | — |
| | — |
| | — | % | | 50,000 |
| | 48,983 |
| | 3.12 | % |
| Total | | 505,395 |
| | 489,140 |
| | 2.24 | % | | 405,443 |
| | 383,894 |
| | 2.09 | % | | 454,431 |
| | 453,179 |
| | 2.33 | % | | 489,378 |
| | 463,048 |
| | 2.28 | % |
| 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 | % | | — |
| | — |
| | — | % | | 48,028 |
| | 47,275 |
| | 2.53 | % | | 12,621 |
| | 12,643 |
| | 3.22 | % |
| Total | | 147,504 |
| | 147,135 |
| | 2.96 | % | | 40,501 |
| | 40,329 |
| | 2.72 | % | |
| Total available-for-sale investment securities | | | $ | 3,259,784 |
| | $ | 3,284,034 |
| | 2.42 | % | | $ | 2,806,900 |
| | $ | 2,741,847 |
| | 2.43 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total: | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturing in one year or less | | 638,257 |
| | 621,343 |
| | | | 583,676 |
| | 565,323 |
| | | | $ | 1,100,414 |
| | $ | 1,099,412 |
| | 2.19 | % | | $ | 549,517 |
| | $ | 523,552 |
| | 2.18 | % |
| Maturing after one year through five years | | 629,892 |
| | 623,058 |
| | | | 704,674 |
| | 694,776 |
| | | | 430,577 |
| | 429,725 |
| | 2.00 | % | | 676,814 |
| | 661,868 |
| | 1.91 | % |
| Maturing after five years through ten years | | 176,118 |
| | 172,902 |
| | | | 464,472 |
| | 455,804 |
| | | | 185,633 |
| | 189,981 |
| | 2.50 | % | | 212,093 |
| | 209,653 |
| | 2.47 | % |
| Maturing after ten years | | 1,548,496 |
| | 1,539,473 |
| | | | 1,632,619 |
| | 1,619,892 |
| | | | 1,543,160 |
| | 1,564,916 |
| | 2.68 | % | | 1,368,476 |
| | 1,346,774 |
| | 2.78 | % |
| Total available-for-sale investment securities | | $ | 2,992,763 |
| | $ | 2,956,776 |
| | | | $ | 3,385,441 |
| | $ | 3,335,795 |
| | | | $ | 3,259,784 |
| | $ | 3,284,034 |
| | 2.42 | % | | $ | 2,806,900 |
| | $ | 2,741,847 |
| | 2.43 | % |
| | | | | | | | | | | | | | |
| 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
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 $33.68 billion as of September 30, 20172019, an increase of $1.61 billion or 5% from $25.27$32.07 billion as of December 31, 2016. The increase2018. This was broad based andprimarily driven by strongyear-to-date increases of $1.14 billion$774.6 million or 22%13% in single-family residential loans, $1.00 billion or 10% in C&I loans, $836.3$489.4 million or 10%5% in CRE loans and $44.1$244.0 million or 2% in consumerC&I loans. The composition of the loan portfolio was similar as of September 30, 2019 compared with December 31, 2018.
The following table presents the composition of the Company’s total loan portfolio by loan type as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | |
| |
| ($ 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) | | September 30, 2019 | | December 31, 2018 | | Change |
| | Amount (1) | | Amount (1) | | $ | | % |
| Commercial: | | | | | | | | |
| C&I | | $ | 12,301,002 |
| | $ | 12,056,970 |
| | $ | 244,032 |
| | 2 | % |
| CRE | | 9,749,583 |
| | 9,260,199 |
| | 489,384 |
| | 5 | % |
| Multifamily residential | | 2,589,203 |
| | 2,470,668 |
| | 118,535 |
| | 5 | % |
| Construction and land | | 719,900 |
| | 538,794 |
| | 181,106 |
| | 34 | % |
| Total commercial | | 25,359,688 |
| | 24,326,631 |
| | 1,033,057 |
| | 4 | % |
| Consumer: | | | | | | | |
|
|
| Single-family residential | | 6,811,014 |
| | 6,036,454 |
| | 774,560 |
| | 13 | % |
| HELOCs | | 1,540,121 |
| | 1,690,834 |
| | (150,713 | ) | | (9 | )% |
| Other consumer | | 314,153 |
| | 331,270 |
| | (17,117 | ) | | (5 | )% |
| Total consumer | | 8,665,288 |
| | 8,058,558 |
| | 606,730 |
| | 8 | % |
Total loans held-for-investment (2) | | $ | 34,024,976 |
| | $ | 32,385,189 |
| | $ | 1,639,787 |
| | 5 | % |
| Allowance for loan losses | | (345,576 | ) | | (311,322 | ) | | (34,254 | ) | | 11 | % |
| Loans held-for-sale | | 294 |
| | 275 |
| | 19 |
| | 7 | % |
| Total loans, net | | $ | 33,679,694 |
| | $ | 32,074,142 |
| | $ | 1,605,552 |
| | 5 | % |
| |
| |
| (1) | Includes $(29.2)net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(39.8) million and $1.2$(48.9) million as of September 30, 20172019 and December 31, 2016, respectively, of net deferred loan fees, unearned income, unamortized premiums and unaccreted discounts.2018, respectively. |
| |
| (2) | Loans net ofIncludes ASC 310-30 discount.discount of $16.7 million and $22.2 million as of September 30, 2019 and December 31, 2018, respectively. |
Although the
Commercial
The commercial loan portfolio, grew 12% during the nine months endedwhich comprised 75% of total loans as of both September 30, 2017, the loan type composition remained relatively unchanged from2019 and December 31, 2016. The Company’s largest credit risks are concentrated in the commercial lending portfolios, which are comprised2018, is discussed as follows.
Commercial — Commercial and Industrial Loans. C&I loans totaled $12.30 billion or 36% of C&I and CRE loans. The commercial lending portfolios comprised 70% and 72% of the total loan portfolioloans, as of September 30, 20172019, and December 31, 2016, respectively, and are discussed further below.
C&I Loans. C&I loans of $10.65$12.06 billion and $9.64 billion, which accounted for 37% and 38% of the total loan portfolio as of September 30, 2017 and December 31, 2016, respectively, include commercial business and trade finance 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 such as private equity, energy, entertainment and structured specialty finance. As of September 30, 2017 and December 31, 2016, specialized lending verticals comprised 42% andor 37% of total loans, as of December 31, 2018. The C&I loans, respectively.
Although the C&Iloan portfolio is well-diversified by industry, sectors in which the Company provides financing are diversified, the Company haswith higher concentrations in the industry sectors of wholesale trade, energy, private equity, 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 billiontechnology 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.life sciences. The Company monitors concentrations within the C&I loan portfolio by customer exposure and industry classifications, setting diversification targets and limits for specialized lending verticalsportfolios.The Company’s wholesale trade exposure largely consists of U.S. domiciled companies, many of which are based in California that import goods from Greater China for U.S. consumer consumption. The Company also had a portfolio of broadly syndicated C&I term loans, which totaled $876.5 million and setting diversification targets.$778.7 million as of September 30, 2019 and December 31, 2018, respectively. The majority of the C&I loans have variable interest rates.
CRECommercial — Commercial Real Estate Loans. CRE loans include income producing real estate, constructiontotaled $9.75 billion or 29% of total loans as of September 30, 2019, and land$9.26 billion or 28% of total loans where the interest rates may be fixed, variable or hybrid.as of December 31, 2018. The Company focuses on providing financing to experienced real estate investors and developers who are long-time customers and have moderate levels of leverage.leverage, many of whom are long-time customers. Loans are generally underwritten with highconservative standards for cash flows, debt service coverage ratios and loan-to-value ratios. Due toloan-to-value. As of both September 30, 2019 and December 31, 2018, 21% of the naturetotal CRE loans were owner occupied properties; the remainder were non-owner occupied properties where 50% or more of the debt service for the loan is primarily provided by unaffiliated rental income from a third party. Interest rates on CRE loans may be fixed, variable or hybrid.
The following tables provide a summary of the Company’s CRE, multifamily residential, and construction and land loans by geographic market as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 |
| | CRE | | % | | Multifamily
Residential | | % | | Construction
and Land | | % | | Total | | % |
| Geographic markets: | | | | | | | | | | | | | | | | |
| Southern California | | $ | 5,245,303 |
| | | | $ | 1,584,951 |
| | | | $ | 258,133 |
| | | | $ | 7,088,387 |
| |
|
|
| Northern California | | 2,250,000 |
| | | | 585,412 |
| | | | 168,707 |
| | | | 3,004,119 |
| |
|
|
| California | | 7,495,303 |
| | 77 | % | | 2,170,363 |
| | 84 | % | | 426,840 |
| | 60 | % | | 10,092,506 |
| | 78 | % |
| New York | | 684,403 |
| | 7 | % | | 108,550 |
| | 4 | % | | 93,065 |
| | 13 | % | | 886,018 |
| | 7 | % |
| Texas | | 566,688 |
| | 6 | % | | 119,404 |
| | 5 | % | | 8,720 |
| | 1 | % | | 694,812 |
| | 5 | % |
| Washington | | 283,451 |
| | 3 | % | | 66,780 |
| | 3 | % | | 42,566 |
| | 6 | % | | 392,797 |
| | 3 | % |
| Arizona | | 131,324 |
| | 1 | % | | 36,999 |
| | 1 | % | | 22,501 |
| | 3 | % | | 190,824 |
| | 1 | % |
| Nevada | | 112,717 |
| | 1 | % | | 36,354 |
| | 1 | % | | 82,596 |
| | 11 | % | | 231,667 |
| | 2 | % |
| Other markets | | 475,697 |
| | 5 | % | | 50,753 |
| | 2 | % | | 43,612 |
| | 6 | % | | 570,062 |
| | 4 | % |
Total loans (1) | | $ | 9,749,583 |
| | 100 | % | | $ | 2,589,203 |
| | 100 | % | | $ | 719,900 |
| | 100 | % | | $ | 13,058,686 |
| | 100 | % |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | CRE | | % | | Multifamily
Residential | | % | | Construction
and Land | | % | | Total | | % |
| Geographic markets: | | | | | | | | | | | | | | | | |
| Southern California | | $ | 5,106,098 |
| | | | $ | 1,512,753 |
| | | | $ | 215,370 |
| | | | $ | 6,834,221 |
| |
|
|
| Northern California | | 2,112,789 |
| | | | 600,566 |
| | | | 133,828 |
| | | | 2,847,183 |
| |
|
|
| California | | 7,218,887 |
| | 79 | % | | 2,113,319 |
| | 86 | % | | 349,198 |
| | 65 | % | | 9,681,404 |
| | 79 | % |
| New York | | 651,510 |
| | 7 | % | | 110,840 |
| | 4 | % | | 46,702 |
| | 9 | % | | 809,052 |
| | 7 | % |
| Texas | | 508,473 |
| | 5 | % | | 72,585 |
| | 3 | % | | 12,055 |
| | 2 | % | | 593,113 |
| | 5 | % |
| Washington | | 288,522 |
| | 3 | % | | 58,294 |
| | 2 | % | | 29,079 |
| | 5 | % | | 375,895 |
| | 3 | % |
| Arizona | | 108,102 |
| | 1 | % | | 24,808 |
| | 1 | % | | 24,890 |
| | 5 | % | | 157,800 |
| | 1 | % |
| Nevada | | 94,924 |
| | 1 | % | | 44,052 |
| | 2 | % | | 47,897 |
| | 9 | % | | 186,873 |
| | 2 | % |
| Other markets | | 389,781 |
| | 4 | % | | 46,770 |
| | 2 | % | | 28,973 |
| | 5 | % | | 465,524 |
| | 3 | % |
Total loans (1) | | $ | 9,260,199 |
| | 100 | % | | $ | 2,470,668 |
| | 100 | % | | $ | 538,794 |
| | 100 | % | | $ | 12,269,661 |
| | 100 | % |
| |
| |
| (1) | Loans net of ASC 310-30 discount. |
As illustrated by the above tables, the distribution of the CRE loan portfolio reflects the Company’s geographical footprint, and market presence, the Company has CRE loan concentrations primarilywith a primary concentration in California which comprised 74%accounting for 77% and 79% of the CRE loan portfolio as of each of September 30, 20172019 and December 31, 2016. Accordingly, changes2018, respectively. 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%
The Company’s CRE portfolio is broadly diversified by property type, which serves to mitigate some of the geographical concentration in California. The following table summarizes the Company’s CRE loan portfolio by property type as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| | Amount | | % | | Amount | | % |
| Property types: | | | | | | | | |
| Retail | | $ | 3,251,398 |
| | 33 | % | | $ | 3,171,374 |
| | 34 | % |
| Offices | | 2,216,628 |
| | 23 | % | | 2,160,382 |
| | 23 | % |
| Industrial | | 2,042,733 |
| | 21 | % | | 1,883,444 |
| | 20 | % |
| Hotel/Motel | | 1,785,148 |
| | 18 | % | | 1,619,905 |
| | 17 | % |
| Other | | 453,676 |
| | 5 | % | | 425,094 |
| | 6 | % |
Total CRE loans (1) | | $ | 9,749,583 |
| | 100 | % | | $ | 9,260,199 |
| | 100 | % |
| |
| |
| (1) | Loans net of ASC 310-30 discount. |
Commercial — Multifamily Residential Loans. Multifamily residential loans totaled $2.59 billion and $2.47 billion as of September 30, 2019 and December 31, 2018, respectively, and accounted for 8% of total loans as of eachboth dates. The multifamily residential loan portfolio is largely made up of September 30, 2017 and December 31, 2016 were owner occupiedloans secured by residential properties while the remaining 81% were non-owner occupied properties (where 50%with five or more ofunits in the debt service for the loan is provided by rental income).Bank’s primary lending areas. As of September 30, 20172019 and December 31, 2016,2018, 84% and 86%, respectively, 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 $719.9 million of construction loans and $507.3$538.8 million of unfunded commitments as of September 30, 2017, compared to $551.6 million2019 and December 31, 2018, respectively, and accounted for 2% of total loans as of both dates. Included in the portfolio were construction loans and $526.4of $630.5 million ofwith additional unfunded commitments of $365.3 million as of September 30, 2019, and construction loans of $477.2 million with additional unfunded commitments of $525.1 million as of December 31, 2016.2018. The construction portfolioloans provide financing for hotels, offices, and industrial structures. Similar to CRE and multifamily residential loans, the Company has a geographic concentration of construction and land loans in California.
Consumer
The following tables summarize the Company’s single-family residential and HELOC loan portfolios by geographic market as of September 30, 20172019 and December 31, 20162018:
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 |
| | Single- Family Residential | | % | | HELOCs | | % | | Total | | % |
| Geographic markets: | | | | | | | | | | | | |
| Southern California | | $ | 3,006,830 |
| | | | $ | 736,403 |
| | | | $ | 3,743,233 |
| | |
| Northern California | | 1,033,662 |
| | | | 324,743 |
| | | | 1,358,405 |
| | |
| California | | 4,040,492 |
| | 59 | % | | 1,061,146 |
| | 69 | % | | 5,101,638 |
| | 61 | % |
| New York | | 1,472,941 |
| | 22 | % | | 266,224 |
| | 17 | % | | 1,739,165 |
| | 21 | % |
| Washington | | 618,858 |
| | 9 | % | | 140,040 |
| | 9 | % | | 758,898 |
| | 9 | % |
| Massachusetts | | 225,533 |
| | 3 | % | | 34,380 |
| | 2 | % | | 259,913 |
| | 3 | % |
| Texas | | 188,544 |
| | 3 | % | | — |
| | — | % | | 188,544 |
| | 2 | % |
| Other markets | | 264,646 |
| | 4 | % | | 38,331 |
| | 3 | % | | 302,977 |
| | 4 | % |
Total (1) | | $ | 6,811,014 |
| | 100 | % | | $ | 1,540,121 |
| | 100 | % | | $ | 8,351,135 |
| | 100 | % |
| Lien priority: | | | | | | | | | | | | |
| First mortgage | | $ | 6,811,011 |
| | 100 | % | | $ | 1,304,918 |
| | 85 | % | | $ | 8,115,929 |
| | 97 | % |
| Junior lien mortgage | | 3 |
| | 0 | % | | 235,203 |
| | 15 | % | | 235,206 |
| | 3 | % |
Total (1) | | $ | 6,811,014 |
| | 100 | % | | $ | 1,540,121 |
| | 100 | % | | $ | 8,351,135 |
| | 100 | % |
| |
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | December 31, 2018 |
| | Single-
Family
Residential | | % | | HELOCs | | % | | Total | | % |
| Geographic markets: | | | | | | | | | | | | |
| Southern California | | $ | 2,768,725 |
| | | | $ | 839,790 |
| | | | $ | 3,608,515 |
| | |
| Northern California | | 954,835 |
| | | | 350,008 |
| | | | 1,304,843 |
| | |
| California | | 3,723,560 |
| | 62 | % | | 1,189,798 |
| | 70 | % | | 4,913,358 |
| | 64 | % |
| New York | | 1,165,135 |
| | 19 | % | | 279,792 |
| | 17 | % | | 1,444,927 |
| | 19 | % |
| Washington | | 572,017 |
| | 9 | % | | 149,579 |
| | 9 | % | | 721,596 |
| | 9 | % |
| Massachusetts | | 206,920 |
| | 3 | % | | 32,333 |
| | 2 | % | | 239,253 |
| | 3 | % |
| Texas | | 165,873 |
| | 3 | % | | — |
| | — | % | | 165,873 |
| | 2 | % |
| Other markets | | 202,949 |
| | 4 | % | | 39,332 |
| | 2 | % | | 242,281 |
| | 3 | % |
Total (1) | | $ | 6,036,454 |
| | 100 | % | | $ | 1,690,834 |
| | 100 | % | | $ | 7,727,288 |
| | 100 | % |
| Lien priority: | | | | | | | | | | | | |
| First mortgage | | $ | 6,036,450 |
| | 100 | % | | $ | 1,438,414 |
| | 85 | % | | $ | 7,474,864 |
| | 97 | % |
| Junior lien mortgage | | 4 |
| | 0 | % | | 252,420 |
| | 15 | % | | 252,424 |
| | 3 | % |
Total (1) | | $ | 6,036,454 |
| | 100 | % | | $ | 1,690,834 |
| | 100 | % | | $ | 7,727,288 |
| | 100 | % |
| |
| |
| (1) | Loans net of ASC 310-30 discount. |
Consumer — Single-Family Residential Loans. Single-family residential loans totaled $6.81 billion or 20% of total loans as of September 30, 2019, and $6.04 billion or 19% of total loans as of December 31, 2018. The Company was largely comprisedin a first lien position for virtually all of financing for the constructionsingle-family residential loans as of hotels, multifamilyboth September 30, 2019 and residential condominiums, as well as mixed use (residential and retail) structures.
Residential Loans. ResidentialDecember 31, 2018. Many of these loans are comprisedreduced documentation loans where a substantial down payment is required, resulting in a low loan-to-value ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and default rates. As of September 30, 2019 and December 31, 2018, 59% and 62% 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 conformingperiod.
Consumer — Home Equity Lines of Credit. HELOCs totaled $1.54 billion or 4% of total loans 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 as of September 30, 20172019, and $1.69 billion or 5% of total loan portfolio as of December 31, 2018. The Company was in a first lien position for 85% of total HELOCs as of both September 30, 2019 and December 31, 2016, respectively.2018. 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-value ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and default 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, 20172019 and December 31, 2016,2018, 69% and 70% of the Company’s HELOCs, respectively, 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 position for many ofcompliance with these reduced documentation HELOCs. These loans have historically experienced low delinquency and default rates.requirements.
The Company’s total loan portfolio includes originated and purchased loans. Originated and purchased loans, for which there was noPurchased Credit-Impaired Loans
Loans acquired with evidence of credit deterioration atsince their acquisition date,origination and where it is probable that the Company will not collect all contractually required principal and interest payments are collectively referred to as non-PCI loans. Acquired loans for which there was, at the acquisition date, evidence of credit deterioration are referred to as PCI loans. PCI loans are recorded netat fair value as of ASC 310-30 discount andthe date of acquisition. The carrying value of PCI loans totaled $532.3$240.7 million and $642.4$308.0 million as of September 30, 20172019 and December 31, 2016,2018, respectively. PCI loans are considered to be accruing due to the existence of the accretable yield, which represents the cash expected to be collected in excess of their carrying value, and which is not based on consideration given to contractual interest payments. The accretable yield was $56.9 million and $74.9 million as of September 30, 2019 and December 31, 2018, respectively. A nonaccretable difference is established for PCI loans to absorb losses expected on the contractual amounts of these loans, in excess of the fair value recorded as of the date of acquisition. Loss amounts absorbed by the nonaccretable difference do not affect the Consolidated Statement of Income or the allowance for credit losses. For additional details regarding PCI loans, see Note 8 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements.Statements in this Form 10-Q.
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, 20172019 and December 31, 2016,2018, loans held in the Hong Kong branch totaled $686.3 millionheld-for-sale of $294 thousand and $733.3 million, respectively. As$275 thousand, respectively, 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/liability 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
Loan Purchases, Transfers and Sales
During the third quarter and first nine months of September 30, 2017,2019, the Company purchased loans held-for-sale amounted to $178 thousand, which were comprisedheld-for-investment of single-family residential loans. In comparison, as$69.0 million and $395.3 million, respectively, compared with $61.1 million and $450.9 million, respectively, during the same periods in 2018. The purchased loans held-for-investment for each of December 31, 2016, loans held-for-sale amounted to $23.1 million, whichthe third quarter and first nine months of 2019 and 2018 were primarily comprised of consumerbroadly syndicated C&I loans.
When purchased or originated loans are transferred from held-for-investment to held-for-sale, corresponding write-downs to the allowance for loan losses are recorded, as appropriate. Loans transferred from held-for-investment to held-for-sale were $74.5$49.0 million and $418.5$78.0 million during the threethird quarters of 2019 and 2018, respectively, and $222.4 million and $363.6 million during the first nine months ended September 30, 2017,of 2019 and 2018, respectively. These loan transfersThe transferred loans were primarily comprised of C&I loans for bothall periods. In comparison, $144.9 million and $720.7 million of loans were transferred from held-for-investmentRelated to held-for-sale during the three and nine months ended September 30, 2016, respectively. Thesethese loan transfers, were primarily comprised of C&I, multifamily residential and CRE loans for both periods. Thethe Company recorded $232$36 thousand and $441$426 thousand in write-downs to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale forduring the threethird quarter and first nine months ended September 30, 2017, respectively. In comparison, there were no write-downsof 2019, respectively, and $1.9$110 thousand and $13.5 million, of write-downs recorded torespectively, during the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale forsame periods in 2018.
During the threethird quarter and first nine months ended September 30, 2016, respectively.
During the three and nine months ended September 30, 2017,of 2019, the Company sold $33.8$47.8 million and $101.4$180.0 million respectively, inof originated loans, respectively, resulting in net gains of $2.3$2.0 million and $5.5$3.0 million, respectively. C&I loans made up $30.1 million and $140.5 million of the originated loans sold in the third quarter and first nine months of 2019, respectively. In comparison, during the same periods in 2018, the Company sold $58.9 million and $252.1 million in originated loans, respectively, resulting in net gains of $1.1 million and $5.0 million, respectively. Originated loans sold during the three months ended September 30, 2017 were primarily comprisedthird quarter of $15.7 million of CRE loans and $12.32018 included $28.3 million of C&I loans and $20.8 million of single-family residential loans. Originated loans sold during the first nine months ended September 30, 2017 were primarily comprised of $50.52018 included $170.9 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 purchases 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 threethird quarter and first nine months ended September 30, 2017,of 2019, the Company sold purchased loans of $57.4$7.9 million and $354.5$49.2 million, respectively, in the secondary market atresulting in minimal net gains on sale of $19 thousand and $1.2 million, respectively.loans. In comparison, during the third quarter and first nine months of 2018, the Company sold purchased loans of $45.8$34.5 million and $179.4$134.5 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 inrecording net gains recorded foron sale of $1 thousand and $33 thousand, respectively. These loans sold during the threethird quarters and first nine months endedof September 30, 2016, respectively.2019 and 2018 were comprised of broadly syndicated C&I term loans.
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 $2.4 million, respectively, in valuation adjustments.
Non-PCI Nonperforming Assets
Non-PCI nonperforming assets are comprised of nonaccrual loans, OREO, and other real estate owned (“OREO”), net. Loansnonperforming assets. OREO and other nonperforming assets are repossessed assets and properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. Generally, loans are placed on nonaccrual status when they become 90 days past due or when the full collection of principal or interest becomes uncertain regardless of the length of past due status. Collectability is generally assessed based on economic and business conditions, the borrower’s financial conditions and the adequacy of collateral, if any. The following table presents information regarding non-PCI nonperforming assets as of September 30, 20172019 and December 31, 2016:2018:
| | | | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2019 | | December 31, 2018 |
| 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 |
| |
| Commercial: | | | | | |
| C&I | | | $ | 90,830 |
| | $ | 43,840 |
|
| CRE | | | 18,942 |
| | 24,218 |
|
| Multifamily residential | | | 551 |
| | 1,260 |
|
| Consumer: | | | | | |
| Single-family residential | | | 9,484 |
| | 5,259 |
|
| HELOCs | | | 9,924 |
| | 8,614 |
|
| Other consumer | | | 2,495 |
| | 2,502 |
|
| Total nonaccrual loans | | 114,725 |
| | 122,817 |
| | 132,226 |
| | 85,693 |
|
| OREO, net | | 2,289 |
| | 6,745 |
| | 1,122 |
| | 133 |
|
| Other nonperforming assets | | | 1,167 |
| | 7,167 |
|
| Total nonperforming assets | | $ | 117,014 |
| | $ | 129,562 |
| | $ | 134,515 |
| | $ | 92,993 |
|
Non-PCI nonperforming assets to total assets (1) | | 0.32 | % | | 0.37 | % | | 0.31 | % | | 0.23 | % |
Non-PCI nonaccrual loans to loans held-for-investment (1) | | 0.40 | % | | 0.48 | % | | 0.39 | % | | 0.26 | % |
| Allowance for loan losses to non-PCI nonaccrual loans | | 249.23 | % | | 212.12 | % | | 261.35 | % | | 363.30 | % |
|
| |
| (1) | Total assets and loans held-for-investment include PCI loans of $532.3$240.7 million and $642.4$308.0 million as of September 30, 20172019 and December 31, 2016,2018, respectively. |
Typically,Period-over-period changes to nonaccrual loans period-over-period represent inflows for loans that are placed on nonaccrual status in accordance with the Company’s accounting policy, offset by reductions 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 borrower’sborrowers’ financial condition and loan repayment capabilities.repayments. Nonaccrual loans decreased by $8.1 million or 7%increased to $114.7$132.2 million as of September 30, 20172019, an increase of $46.5 million or 54% from $122.8$85.7 million as of December 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, 2017.2018. Nonaccrual loans as a percentage of loans held-for-investment declinedincreased to 0.39% as of September 30, 2019 from 0.48%0.26% as of December 31, 2016 to 0.40% as of September 30, 2017.2018. C&I nonaccrual loans comprised 64%were 69% and 66%51% of total nonaccrual loans as of September 30, 20172019 and December 31, 2016,2018, respectively. Credit risks related to the C&I nonaccrual loans were partially mitigated by the collateral. In addition, the risk of loss of all nonaccrual loans had been considered ascollateral in place. 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%2019, $41.8 million or 32% of non-PCI nonaccrual loans consistedwere less than 90 days delinquent. In comparison, $23.8 million or 28% of non-PCI nonaccrual loans that were less than 90 days delinquent as of September 30, 2017 and December 31, 2016, respectively.2018.
For additional details regarding the Company’s non-PCI nonaccrual loansloan policy, see Note 1 — Summary of Significant Accounting Policies— Loans Held-for-Investment to the Consolidated Financial Statements of the Company’s 20162018 Form 10-K.
Troubled
A loan is classified as a troubled debt restructuringsrestructuring (“TDRs”TDR”) when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Loans with contractual terms that have been modified as a TDR and are current at the time of restructuring may be designated as performing or nonperforming. A TDR may be designated as performing,remain on accrual status if there is demonstrated performance prior to the loan has demonstrated sustained performancerestructuring and payment in full under the modified terms. The period of sustained performance may include the periods prior to modification if prior performance has met or exceeded the modified terms. A loan will remainrestructured terms is expected. Otherwise, TDRs are placed on nonaccrual status and are reported as nonperforming, until the borrower demonstrates a sustained period of performance, generally six consecutive months, of payments.and the ability to repay the loan according to the contractual terms. If accruing TDRs cease to perform in accordance with their modified contractual terms, the loans are placed on nonaccrual status and reported as nonperforming TDRs.
The following table presents the performing and nonperforming TDRs by loan segmenttype as of September 30, 20172019 and December 31, 2016:2018:
| | | | ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2019 | | December 31, 2018 |
| | Performing TDRs | | Nonperforming TDRs | | Performing TDRs | | Nonperforming TDRs | | Performing TDRs | | Nonperforming TDRs | | Performing TDRs | | Nonperforming TDRs |
| Commercial: | | | | | | | | | |
| C&I | | | $ | 30,273 |
| | $ | 62,261 |
| | $ | 13,248 |
| | $ | 10,715 |
|
| CRE | | $ | 10,347 |
| | $ | 19,830 |
| | $ | 20,145 |
| | $ | 14,446 |
| | 5,934 |
| | 12,044 |
| | 6,134 |
| | 17,272 |
|
| C&I | | 20,416 |
| | 44,292 |
| | 44,363 |
| | 23,771 |
| |
| Residential | | 18,872 |
| | 486 |
| | 17,178 |
| | 717 |
| |
| Consumer | | 1,204 |
| | 375 |
| | 1,552 |
| | 49 |
| |
| Multifamily residential | | | 4,188 |
| | 237 |
| | 4,300 |
| | 260 |
|
| Consumer: | | | | | | | | | |
| Single-family residential | | | 7,516 |
| | 1,109 |
| | 8,201 |
| | 325 |
|
| HELOCs | | | 2,574 |
| | 611 |
| | 1,342 |
| | 1,743 |
|
| Total TDRs | | $ | 50,839 |
| | $ | 64,983 |
| | $ | 83,238 |
| | $ | 38,983 |
| | $ | 50,485 |
| | $ | 76,262 |
| | $ | 33,225 |
| | $ | 30,315 |
|
|
Performing TDRs decreased by $32.4 million or 39%increased to $50.8$50.5 million as of September 30, 2017, primarily due to2019, an increase of $17.3 million or 52% from $33.2 million as of December 31, 2018. This increase reflects performing C&I loans that were newly designated as TDRs and the transferstransfer of oneC&I, CRE and two C&IHELOC loans from performing to nonperforming status during the nine months ended September 30, 2017.status. Nonperforming TDRs increased by $26.0 million or 67% to $65.0$76.3 million as of September 30, 2017, primarily due to2019, an increase of $46.0 million or 152% from $30.3 million as of December 31, 2018. This increase reflects nonperforming C&I, single-family residential and HELOC loans that were newly designated as TDRs, partially offset by paydowns and payoffs of several nonperforming C&I and CRE loans, and the aforementioned transferstransfer of C&I, CRE and C&IHELOC loans betweento 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 includeare predominantly made up of non-PCI loans held-for-investment on nonaccrual status and any non-PCI loans modified as a TDR, on either accrual or nonaccrual status. See Note 1 — Summary of Significant Accounting Policies — Troubled Debt Restructurings and Impaired Loansto the Consolidated Financial Statements of the Company’s 20162018 Form 10-K for additional information regarding the Company’s TDRsTDR 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 $84.1 million as of December 31, 2016.
The following table presents the recorded investment balances for non-PCI impaired loans as of September 30, 20172019 and December 31, 2016:2018:
|
| | | | | | | | | | | | | | |
| |
| ($ 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 | % |
| |
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| | Amount | | % | | Amount | | % |
| Commercial: | | | | | | | | |
| C&I | | $ | 121,103 |
| | 66 | % | | $ | 57,088 |
| | 48 | % |
| CRE | | 24,876 |
| | 14 | % | | 30,352 |
| | 26 | % |
| Multifamily residential | | 4,739 |
| | 3 | % | | 5,560 |
| | 5 | % |
| Total commercial | | 150,718 |
| | 83 | % | | 93,000 |
| | 79 | % |
| Consumer: | | | | | | | | |
| Single-family residential | | 17,000 |
| | 9 | % | | 13,460 |
| | 11 | % |
| HELOCs | | 12,498 |
| | 7 | % | | 9,956 |
| | 8 | % |
| Other consumer | | 2,495 |
| | 1 | % | | 2,502 |
| | 2 | % |
| Total consumer | | 31,993 |
| | 17 | % | | 25,918 |
| | 21 | % |
| Total non-PCI impaired loans | | $ | 182,711 |
| | 100 | % | | $ | 118,918 |
| | 100 | % |
| |
As of September 30, 2019, the allowance for loan losses included $16.5 million for impaired loans with a total recorded investment balance of $62.1 million. In comparison, the allowance for loan losses included $4.0 million for impaired loans with a total recorded investment balance of $31.1 million as of December 31, 2018.
Allowance for Credit Losses
Allowance for credit losses consists of allowance for loan losses and allowance for unfunded credit reserves. Allowance for loan losses is comprised of reserves for two components, performing loans with unidentified incurred losses, as well as nonperforming loans and TDRs (collectively, impaired loans), and excludes loans held-for-sale. The allowance for loan losses is calculated after analyzing internal historical loan loss experience, internal loan risk ratings, economic conditions, bank risks, portfolio risks and any other pertinent information. 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 the current period operatingperiod’s results of operations, and is increased or decreased by the net 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.Sheet. Net adjustments to the allowance for unfunded credit reserves are included in Provision for credit losses on the Consolidated StatementsStatement of Income.
The Company is committed to maintaining the allowance for credit losses at a level that is commensurate with the estimated inherent losslosses 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 assessmentassessments of the risks inherent in the loan portfolio. While the Company believes that the allowance for loan losses is appropriate as of September 30, 2017,2019, future allowance levels may increase or decrease based on a variety of factors, including but not limited to, loan growth, portfolio performance and general economic conditions. The calculation of the allowance for credit losses involves subjective and complex judgments. For additional details onabout the Company’s allowance for credit losses, including the methodologies used, seeNote 8 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-Q and Item 7. MD&A — Critical Accounting Policies and Estimatesand Note 1 — Summary of Significant Accounting Policies — Allowance for Credit Losses to the Consolidated Financial Statements of the Company’s 20162018 Form 10-K.
The following table presents a summary of activities in the allowance for credit losses for the threethird quarters and first nine months ended September 30, 2017of 2019 and 2016:2018:
| | | | ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
| Allowance for loan losses, beginning of period | | $ | 276,316 |
| | $ | 266,768 |
| | $ | 260,520 |
| | $ | 264,959 |
| | $ | 330,625 |
| | $ | 301,550 |
| | $ | 311,322 |
| | $ | 287,128 |
|
| Provision for loan losses | | 13,448 |
| | 11,514 |
| | 32,134 |
| | 19,049 |
| | 37,879 |
| | 12,642 |
| | 79,250 |
| | 47,695 |
|
| Gross charge-offs: | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | |
| C&I | | | (25,098 | ) | | (4,462 | ) | | (54,087 | ) | | (36,441 | ) |
| CRE | | — |
| | (309 | ) | | (149 | ) | | (504 | ) | | (1,021 | ) | | — |
| | (1,021 | ) | | — |
|
| C&I | | (7,359 | ) | | (23,696 | ) | | (19,802 | ) | | (31,770 | ) | |
| Residential | | — |
| | (29 | ) | | (1 | ) | | (166 | ) | |
| Consumer | | (65 | ) | | (13 | ) | | (72 | ) | | (17 | ) | |
| Consumer: | | | | | | | | | |
| Single-family residential | | | (11 | ) | | — |
| | (11 | ) | | (1 | ) |
| Other consumer | | | (12 | ) | | (6 | ) | | (40 | ) | | (185 | ) |
| Total gross charge-offs | | (7,424 | ) | | (24,047 | ) | | (20,024 | ) | | (32,457 | ) | | (26,142 | ) | | (4,468 | ) | | (55,159 | ) | | (36,627 | ) |
| Gross recoveries: | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | |
| C&I | | | 1,648 |
| | 411 |
| | 5,612 |
| | 8,841 |
|
| CRE | | 610 |
| | 634 |
| | 1,714 |
| | 873 |
| | 1,896 |
| | 2 |
| | 3,955 |
| | 431 |
|
| C&I | | 2,165 |
| | 165 |
| | 9,658 |
| | 2,068 |
| |
| Residential | | 809 |
| | 654 |
| | 1,758 |
| | 1,048 |
| |
| Consumer | | 2 |
| | 124 |
| | 166 |
| | 272 |
| |
| Multifamily residential | | | 42 |
| | 77 |
| | 376 |
| | 1,471 |
|
| Construction and land | | | 21 |
| | 23 |
| | 523 |
| | 716 |
|
| Consumer: | | | | | | | | | |
| Single-family residential | | | 60 |
| | 295 |
| | 134 |
| | 1,108 |
|
| HELOCs | | | 5 |
| | — |
| | 7 |
| | — |
|
| Other consumer | | | 7 |
| | 1 |
| | 14 |
| | 2 |
|
| Total gross recoveries | | 3,586 |
| | 1,577 |
| | 13,296 |
| | 4,261 |
| | 3,679 |
| | 809 |
| | 10,621 |
| | 12,569 |
|
| Net charge-offs | | (3,838 | ) | | (22,470 | ) | | (6,728 | ) | | (28,196 | ) | | (22,463 | ) | | (3,659 | ) | | (44,538 | ) | | (24,058 | ) |
| Foreign currency translation adjustments | | | (465 | ) | | (492 | ) | | (458 | ) | | (724 | ) |
| Allowance for loan losses, end of period | | 285,926 |
| | 255,812 |
| | 285,926 |
| | 255,812 |
| | 345,576 |
| | 310,041 |
| | 345,576 |
| | 310,041 |
|
| | | | | | | | | | | | | | | | | |
| Allowance for unfunded credit reserves, beginning of period | | 15,188 |
| | 20,318 |
| | 16,121 |
| | 20,360 |
| | 13,019 |
| | 14,019 |
| | 12,566 |
| �� | 13,318 |
|
| Reversal of unfunded credit reserves | | (452 | ) | | (1,989 | ) | | (1,385 | ) | | (2,031 | ) | |
| Provision for (reversal of) unfunded credit reserves | | | 405 |
| | (2,100 | ) | | 858 |
| | (1,399 | ) |
| Allowance for unfunded credit reserves, end of period | | 14,736 |
| | 18,329 |
| | 14,736 |
| | 18,329 |
| | 13,424 |
| | 11,919 |
| | 13,424 |
| | 11,919 |
|
| Allowance for credit losses | | $ | 300,662 |
| | $ | 274,141 |
| | $ | 300,662 |
| | $ | 274,141 |
| | $ | 359,000 |
| | $ | 321,960 |
| | $ | 359,000 |
| | $ | 321,960 |
|
| | | | | | | | | | | | | | | | | |
| Average loans held-for-investment | | $ | 27,529,103 |
| | $ | 24,258,913 |
| | $ | 26,764,327 |
| | $ | 23,961,288 |
| | $ | 33,661,077 |
| | $ | 30,488,140 |
| | $ | 33,023,468 |
| | $ | 29,762,719 |
|
| Loans held-for-investment, end of period | | $ | 28,525,357 |
| | $ | 24,731,962 |
| | $ | 28,525,357 |
| | $ | 24,731,962 |
| |
| Loans held-for-investment | | | $ | 34,024,976 |
| | $ | 31,210,185 |
| | $ | 34,024,976 |
| | $ | 31,210,185 |
|
| Allowance for loan losses to loans held-for-investment | | | 1.02 | % | | 0.99 | % | | 1.02 | % | | 0.99 | % |
| Annualized net charge-offs to average loans held-for-investment | | (0.06 | )% | | (0.37 | )% | | (0.03 | )% | | (0.16 | )% | | 0.26 | % | | 0.05 | % | | 0.18 | % | | 0.11 | % |
| Allowance for loan losses to loans held-for-investment | | 1.00 | % | | 1.03 | % | | 1.00 | % | | 1.03 | % | |
| | | |
As of September 30, 2017,2019, the allowance for loan losses amounted to $285.9 million or 1.00% of loans held-for-investment, compared to $260.5$345.6 million or 1.02% and $255.8of loans held-for-investment. This compares with $311.3 million or 1.03%0.96% of loans held-for-investment as of December 31, 20162018 and $310.0 million or 0.99% of loans held-for-investment as of September 30, 2016,2018, respectively. The increase in the allowance for loan losses was largely due to the overallloan growth, as well as a deterioration 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 rateratings of change in the allowance for loan losses compared to the Company’s loan growth.ProvisionC&I loans.
The provision for credit losses includes the provision for loan losses and unfunded credit reserves. ProvisionA 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.its calculation methodology. 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 losseswas $38.3 million and $80.1 million for the threethird quarter and first nine months ended September 30, 2017,of 2019, respectively, compared towith $10.5 million and $46.3 million for the same periods in 2016, was reflective of2018. The year-over-year increases in both periods, compared with the overallsame periods in 2018, reflected loan portfolio growth, partially offset byincreased charge-offs in C&I loans and a declinedeterioration in the historical loss factorcredit risk ratings of C&I loans during the same periods. third quarter of 2019.
The Company believes that the allowance for credit losses as of September 30, 20172019 and December 31, 20162018 was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at that date.commitments.
The following table presents the Company’s allocation of the allowance for loan losses by segmentloan type and the ratio of each loan segmenttype to total loans held-for-investment as of September 30, 20172019 and December 31, 2016:2018:
| | | | | | | | | | | |
| ($ in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2019 | | December 31, 2018 |
| | Allowance Allocation | | % of Total Loans | | Allowance Allocation | | % of Total Loans | | Allowance Allocation | | Loans as % of Total Loans | | Allowance Allocation | | Loans as % of Total Loans |
| Commercial: | | | | | | | | | |
| C&I | | | $ | 218,869 |
| | 36 | % | | $ | 189,117 |
| | 37 | % |
| CRE | | $ | 74,317 |
| | 33 | % | | $ | 72,916 |
| | 34 | % | | 37,473 |
| | 29 | % | | 40,666 |
| | 28 | % |
| C&I | | 160,598 |
| | 37 | % | | 142,167 |
| | 38 | % | |
| Residential | | 43,905 |
| | 23 | % | | 37,338 |
| | 20 | % | |
| Consumer | | 7,106 |
| | 7 | % | | 8,099 |
| | 8 | % | |
| Multifamily residential | | | 20,307 |
| | 8 | % | | 19,885 |
| | 8 | % |
| Construction and land | | | 29,171 |
| | 2 | % | | 20,290 |
| | 2 | % |
| Consumer: | | | | | | | | | |
| Single-family residential | | | 29,935 |
| | 20 | % | | 31,340 |
| | 19 | % |
| HELOCs | | | 5,856 |
| | 4 | % | | 5,774 |
| | 5 | % |
| Other consumer | | | 3,965 |
| | 1 | % | | 4,250 |
| | 1 | % |
| Total | | $ | 285,926 |
| | 100 | % | | $ | 260,520 |
| | 100 | % | | $ | 345,576 |
| | 100 | % | | $ | 311,322 |
| | 100 | % |
| | | | | | | | | | |
The Company maintains an allowance onfor loan losses for both non-PCI and PCI loans. BasedAn allowance for loan losses for PCI loans is based on the Company’s estimates of cash flows expected to be collected an allowance for thefrom PCI loans is established, with a charge to income through the provision for loan losses.loans. PCI loan losses are estimated collectively for groups of loans with similar characteristics. As of September 30, 2017,2019, the Company established anhad no allowance of $68 thousand on $532.3for loan losses for $240.7 million of PCI loans. In comparison, the Company established an allowance for loan losses of $118$22 thousand was established on $642.4for $308.0 million of PCI loans as of December 31, 2016. The allowance balances for both periods were attributed mainly to the PCI2018, comprising of CRE loans.
Deposits and Other Sources of Funds
Deposits are the Company’s primary source of funding, the cost of which has a significant impact on the Company’s net interest income and net interest margin. Additional funding is provided by short and long-term borrowings, and long-term debt. See Item 2— MD&A — Asset Liability and Market Risk Management — Liquidity in this Form 10-Q for a discussion of the Company’s liquidity management. The following table summarizes the Company’s sources of funds as of September 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 | | Change |
| | Amount | | Amount | | $ | | % |
| Deposits | | | | | | | | |
| Noninterest-bearing demand | | $ | 10,806,937 |
| | $ | 11,377,009 |
| | $ | (570,072 | ) | | (5 | )% |
| Interest-bearing checking | | 4,837,391 |
| | 4,584,447 |
| | 252,944 |
| | 6 | % |
| Money market | | 8,400,353 |
| | 8,262,677 |
| | 137,676 |
| | 2 | % |
| Savings | | 2,094,638 |
| | 2,146,429 |
| | (51,791 | ) | | (2 | )% |
| Time deposits | | 10,520,207 |
| | 9,069,066 |
| | 1,451,141 |
| | 16 | % |
| Total deposits | | $ | 36,659,526 |
| | $ | 35,439,628 |
| | $ | 1,219,898 |
| | 3 | % |
| Other Funds | | | | | | | | |
| Short-term borrowings | | $ | 47,689 |
| | $ | 57,638 |
| | $ | (9,949 | ) | | (17 | )% |
| FHLB advances | | 745,494 |
| | 326,172 |
| | 419,322 |
| | 129 | % |
| Repurchase agreements | | 50,000 |
| | 50,000 |
| | — |
| | — | % |
| Long-term debt | | 147,033 |
| | 146,835 |
| | 198 |
| | 0 | % |
| Total other funds | | $ | 990,216 |
| | $ | 580,645 |
| | $ | 409,571 |
| | 71 | % |
| Total sources of funds | | $ | 37,649,742 |
| | $ | 36,020,273 |
| | $ | 1,629,469 |
| | 5 | % |
| | | | | | | | | |
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 comprised 81% of total depositswere $36.66 billion as of each of September 30, 2017 and2019, an increase of $1.22 billion or 3% from $35.44 billion as of December 31, 2016. The $1.24 billion or 5% increase in core deposits2018. Year-to-date change was primarily due to the increasesgrowth of $1.45 billion or 16% in noninterest-bearing demand deposits and interest-bearing checkingtime deposits. Noninterest-bearing demand deposits comprised 35%29% and 34%32% of total deposits as of September 30, 20172019 and December 31, 2016,2018, respectively. Interest-bearing checkingAdditional information regarding the impact of deposits comprised 13%on net interest income and 12%a comparison of total deposits asaverage deposit balances and rates are provided in Item 2. MD&A — Results of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, deposits were 110% of total loans, compared to 117% as of December 31, 2016, as the growth Operations — Net Interest Income in total loans outpaced deposit growth.this Form 10-Q.
Borrowings
The Company utilizes short-term and long-term borrowings to manage its liquidity position. Borrowings includeCompany’s other sources of funding consist of short-term borrowings, long-term FHLB advances, repurchase agreements and repurchase agreements.long-term debt.
AsThe Company had $47.7 million of short-term borrowings outstanding as of September 30, 2017 and2019, compared with $57.6 million as of December 31, 2016, short-term borrowings were comprised of2018. This funding was entered into by the Company’s subsidiary, East West Bank (China) Limited’s borrowings of $24.8 millionLimited, and $60.1 million, respectively. The interest rates of these borrowings ranged from 2.96% 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 towill mature in the fourth quarter of 2017. 2019 and in 2020. As of September 30, 2019, short-term borrowings had fixed interest rates ranging from 3.65% to 3.73%.
FHLB advances increased by $1.7 million to $323.3were $745.5 million as of September 30, 20172019, an increase of $419.3 million or 129% from $321.6$326.2 million as of December 31, 2016.2018. As of September 30, 2017,2019, FHLB advances had fixed and floating interest rates ranging from 1.48%1.98% to 1.72%2.58% with remaining maturities between 1.4four months and 5.13.11 years.
Gross repurchase agreements totaled $450.0 million as of each ofboth September 30, 20172019 and December 31, 2016.2018. Resale and repurchase agreements are reported net, pursuant to ASC 210-20-45, 210-20-45-11, Balance Sheet OffsettingOffsetting: Repurchase and Reverse Repurchase Agreements. Net repurchase agreements totaled $50.0 million and $350.0 million as of both September 30, 20172019 and December 31, 2016, respectively. As of September 30, 2017,2018, after netting $400.0 million of repurchase agreements were eligible for netting against resale agreements, resulting in $50.0 million of net repurchase agreements reported. In comparison, $100.0 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, 2017,2019, gross repurchase agreements of $450.0 million had interest rates ranging between 3.54%from 4.33% to 3.58% and4.55%, original terms ranging between 10.04.0 years and 16.59.0 years and remaining maturities between 3.1 years and 3.9 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 September 30, 2019, 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 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 funding from a diverse group of counterparties and entering into repurchase agreements with longer durations, when appropriate. For additional details, see Note 5 — 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 consists of junior subordinated debttotaled $147.0 million and a term loan, decreased $9.8 million or 5% from $186.3 million as of December 31, 2016 to $176.5$146.8 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.
2019 and December 31, 2018, respectively. Long-term debt is comprised of junior subordinated debt, which qualifies as Tier 2 capital for regulatory purposes. The junior subordinated debt was issued in connection with the Company’s various pooled trust preferred securities offerings. 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%4.11% and 2.22%3.67% for the first nine months ended September 30, 2017of 2019 and 2016,2018, respectively, with remaining maturities between 15.2 years and remaining maturity terms of 17.2 to 20.018 years as of September 30, 2017. Beginning2019.
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 $40.0 millionCompany’s overseas offices as of September 30, 20172019 and December 31, 2016, respectively.2018:
|
| | | | | | | | | | | | | | |
| |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| | Amount | | % of Total Consolidated Assets | | Amount | | % of Total Consolidated Assets |
| Hong Kong Branch: | | | | | | | | |
| Cash and cash equivalents | | $ | 315,281 |
| | 1 | % | | $ | 360,786 |
| | 1 | % |
Available-for-sale investment securities (1) | | $ | 204,829 |
| | 0 | % | | $ | 221,932 |
| | 1 | % |
Loans held-for-investment (2)(3) | | $ | 684,058 |
| | 2 | % | | $ | 653,860 |
| | 2 | % |
| Total assets | | $ | 1,269,775 |
| | 3 | % | | $ | 1,247,207 |
| | 3 | % |
| Subsidiary Bank in China: | | | | | | | | |
| Cash and cash equivalents | | $ | 657,210 |
| | 2 | % | | $ | 695,527 |
| | 2 | % |
| Interest-bearing deposits with banks | | $ | 127,524 |
| | 0 | % | | $ | 221,000 |
| | 1 | % |
Loans held-for-investment (3) | | $ | 837,118 |
| | 2 | % | | $ | 777,412 |
| | 2 | % |
| Total assets | | $ | 1,625,828 |
| | 4 | % | | $ | 1,700,357 |
| | 4 | % |
| |
| |
| (1) | Primarily comprised of foreign bonds and U.S. Treasury securities as of both September 30, 2019 and December 31, 2018. |
| |
| (2) | Includes ASC 310-30 discount of $45 thousand and $103 thousand as of September 30, 2019 and December 31, 2018, respectively. |
| |
| (3) | Primarily comprised of C&I loans as of both September 30, 2019 and December 31, 2018. |
The following table presents the total revenue generated by the Company’s overseas offices for the third quarters and first nine months of 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | Amount | | % of Total Consolidated
Revenue | | Amount | | % of Total Consolidated
Revenue | | Amount | | % of Total
Consolidated
Revenue | | Amount | | % of Total
Consolidated
Revenue |
| Hong Kong Branch: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 8,161 |
| | 2 | % | | $ | 8,001 |
| | 2 | % | | $ | 25,909 |
| | 2 | % | | $ | 22,859 |
| | 2 | % |
| Subsidiary Bank in China: | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 9,393 |
| | 2 | % | | $ | 9,655 |
| | 2 | % | | $ | 25,584 |
| | 2 | % | | $ | 26,157 |
| | 2 | % |
| |
Capital
The Company maintains an adequate 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.
The Company’s stockholders’ equity increased by $354.2 million or 10% to $3.78was $4.88 billion as of September 30, 2017, compared to $3.432019, an increase of $458.7 million or 10% from $4.42 billion as of December 31, 2016.2018. The Company’s primary source of capital is the retention of its operating earnings. Retained earnings increased by $333.1 million or 15%to $2.52were $3.55 billion as of September 30, 2017, compared to $2.192019, an increase of $385.7 million or 12% from $3.16 billion as of December 31, 2016.2018. The increase was primarily due toreflected net income of $420.7$485.8 million, reducedoffset by $87.6$114.8 million of cash dividends declared during the first nine months ended September 30, 2017.of 2019. In addition, common stock and additional paid-in capitalthe beginning balance of retained earnings increased by $17.7$14.7 million or 1.0% primarily dueas of January 1, 2019, because the Company recognized a cumulative adjustment related to the activities in employee stock compensation plans.deferred gains on the sale and leaseback transactions, which had occurred prior to the date of adoption of ASU 2016-02, Leases (Topic 842). 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$33.54 per common share based on 144.5 million common shares outstanding as of September 30, 2017,2019, compared to $23.78with $30.52 per common share based on 144.2 million common shares outstanding as of December 31, 2016.2018. The Company madepaid a quarterly cash dividend paymentsof $0.23 per common share for the first quarter of 2019, and $0.275 per common share for both the second and third quarters of 2019. In comparison, the Company paid a quarterly cash dividend of $0.20 per common share in eachfor the first and second quarters of 2018, and $0.23 per common share for the third quarter during the nine months ended September 30, 2017 and 2016.of 2018. In October 2017,2019, the Company’s Board of Directors (the “Board”) declared fourth quarter 20172019 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 November 15, 20172019 to stockholders of record as of November 1, 2017.2019.
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 20162018 Form 10-K for additional details. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for certain components).
The Basel III Capital Rules require that banking organizations maintain a minimum CET1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0%, and a minimum total capital ratio of 8.0%. Moreover, to be considered adequately capitalized. In addition, the rules require that banking organizations to maintain a capital conservation buffer of 2.5% above the capital minimums are beingin order to avoid limitations on capital distributions (including common stock dividends and share repurchases) and certain discretionary incentive compensation payments. The capital conservation buffer has been fully phased-in over four years beginning in 2016 (increasing by 0.625% on each subsequent2016. As of January 1, until it reaches 2.5% on January 1, 2019). When fully phased-in in 2019, the banking organizations will beare required to maintain a minimum CET1 capital ratio 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.in a fully phased-in basis.
The Company is committed to maintaining capital at a level sufficient to assure the Company’s stockholders,investors, customers and regulators that the Company and the Bank are financially sound. As of September 30, 20172019 and December 31, 2016,2018, both the Company and the Bank were considered “well-capitalized,” and metmeeting all capital requirements on a fully phased-in basis under the Basel III Capital Rules.
The following table presents the Company’s and the Bank’s capital ratios as of September 30, 20172019 and December 31, 20162018 under the Basel III Capital Rules, and those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
| | | | | | Basel III Capital Rules | | Basel III Capital Rules |
| | September 30, 2017 | | December 31, 2016 | | Minimum Regulatory Requirements | | Well- Capitalized Requirements | | Fully Phased-in Minimum Regulatory Requirements | | September 30, 2019 | | December 31, 2018 | | Minimum Regulatory Requirements | | Well- Capitalized Requirements | | Fully Phased-in Minimum Regulatory Requirements |
| | Company | | East
West
Bank | | Company | | East
West
Bank | | | 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 | % | | 12.8 | % | | 12.7 | % | | 12.2 | % | | 12.1 | % | | 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 | % | | 12.8 | % | | 12.7 | % | | 12.2 | % | | 12.1 | % | | 6.0 | % | | 8.0 | % | | 8.5 | % |
| Total risk-based capital | | 12.9 | % | | 12.3 | % | | 12.4 | % | | 12.3 | % | | 8.0 | % | | 10.0 | % | | 10.5 | % | | 14.2 | % | | 13.7 | % | | 13.7 | % | | 13.1 | % | | 8.0 | % | | 10.0 | % | | 10.5 | % |
Tier 1 leverage capital | | 9.4 | % | | 9.3 | % | | 8.7 | % | | 9.1 | % | | 4.0 | % | | 5.0 | % | | 4.0 | % | | 10.3 | % | | 10.2 | % | | 9.9 | % | | 9.8 | % | | 4.0 | % | | 5.0 | % | | 4.0 | % |
|
| |
| (1) | The Tier 1 leverage capital well-capitalized requirement applies to the Bank only since there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank-holding company. |
TheDuring the first nine months of 2019, the Company’s CET1 and Tier 1 risk-based capital ratios have improved by 49increased 54 basis points, while the total risk-based capital ratio increased 56 basis points, and the Tier 1 leverage capital ratiosratio increased by 48 and 6541 basis points, respectively, during the nine months endedpoints. Tier 1 risk-based capital of $4.39 billion as of September 30, 2017. The improvement was primarily driven by the increases in revenues, primarily due to increase in net interest income and net gains recorded2019 increased $422.4 million or 11% from the sale of commercial property during the first quarter of 2017. The $1.82 billion or 7% increase in risk-weighted assets increased from $27.36$3.97 billion as of December 31, 2016 to $29.182018. Total risk-based capital of $4.90 billion as of September 30, 2019 increased $457.5 million or 10% from $4.44 billion as of December 31, 2018. The Company’s risk-weighted assets were $34.42 billion as of September 30, 2019, an increase of $1.93 billion or 6% from $32.50 billion as of December 31, 2018.
Other Matters
LIBOR Transition
On July 27, 2017, was primarily duethe United 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 growthCompany. 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,loans, derivatives, investment securities, resale agreements, FHLB advances, and deposits, as well as all the Company’s CET1 risk-based capital, Tier 1 risk-based capital, total risk-based capital ratiosjunior subordinated debt and Tier 1 leverage capital ratios were 11.4%, 11.4%, 12.9%repurchase agreements are indexed to LIBOR and 9.4%, respectively, well above the well-capitalized requirements of 6.5%, 8.0%, 10.0% 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 expected to provide guidance on fallback contract language.
Due to the uncertainty surrounding the future of LIBOR, the transition is anticipated to span several reporting periods through the end of 2021. Certain actions already taken by the Company believesrelated 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 monitors this activity and continues to evaluate the related risks. The Company’s cross-functional team also manages communication of the Company’s transition plans with both internal and external stakeholders and 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 2018 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, 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 asis provided in Note 12 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.
Guarantees
In the ordinary course of September 30, 2017: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 12 — 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 |
|
| |
A discussion of significant contractual arrangements under which the Company may be held contingently liable is included in Note 11 12—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 16 — Employee Benefit Plans to the Consolidated Financial Statements of the Company’s 20162018 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 20162018 Form 10-K.
Asset Liability and Market Risk Management
Liquidity
Liquidity refers to the Company’s abilityis 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 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 the core deposit base generated by its banking business, which is relatively stable and low-cost. The Company’s loan-to-deposit ratio was 93% and 91% as of September 30, 2019 and December 31, 2018, respectively. Total deposits amounted to $36.66 billion as of September 30, 2019, compared with $35.44 billion as of December 31, 2018, of which core deposits comprised 71% and 74% of total deposits as of September 30, 2019 and December 31, 2018, respectively. In addition, the Company maintains liquidity has access to various sources of wholesale funding, and has 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 form ofCompany’s funding sources.
The Company’s liquid asset portfolio includes cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements and unencumbered available-for-sale investment securities. These assets totaled $5.10 billion and $5.54 billion, accounting for 14% and 16% of total assets,The following table presents the Company’s liquid asset portfolio as of September 30, 20172019 and December 31, 2016, respectively. Traditional forms of funding such as customer deposits2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| ($ in thousands) | | September 30, 2019 | | December 31, 2018 |
| | Encumbered | | Unencumbered | | Total | | Encumbered | | Unencumbered | | Total |
| Cash and cash equivalents | | $ | — |
| | $ | 3,042,281 |
| | $ | 3,042,281 |
| | $ | — |
| | $ | 3,001,377 |
| | $ | 3,001,377 |
|
| Interest-bearing deposits with banks | | — |
| | 160,423 |
| | 160,423 |
| | — |
| | 371,000 |
| | 371,000 |
|
| Short-term resale agreements | | — |
| | 300,000 |
| | 300,000 |
| | — |
| | 375,000 |
| | 375,000 |
|
| Available-for-sale investment securities | | 524,413 |
| | 2,759,621 |
| | 3,284,034 |
| | 435,833 |
| | 2,306,014 |
| | 2,741,847 |
|
| Total | | $ | 524,413 |
| | $ | 6,262,325 |
| | $ | 6,786,738 |
| | $ | 435,833 |
| | $ | 6,053,391 |
| | $ | 6,489,224 |
|
| | | |
Unencumbered assets totaled $6.26 billion and borrowings augment these liquid assets. Total customer deposits amounted to $31.31$6.05 billion as of September 30, 2017, compared to $29.89 billion as of December 31, 2016, of which core deposits comprised 81% of total deposits as of each of September 30, 20172019 and December 31, 2016. 2018, respectively. Investment 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, foreign bonds, and U.S. Treasury securities. The Company believes these available-for-sale investment 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$6.49 billion and $3.23$3.04 billion, respectively, as of September 30, 2017.2019. Unencumbered loans and/or securities were pledged to the FHLB and FRB discount window as collateral. Eligibility of collateral is defined in guidelines from the FHLB and FRB and is subject to change at their discretion. The Bank’s unsecured federal funds’funds lines of credit with correspondent banks, subject to availability, totaled $731.0$585.0 million with correspondent banks as of September 30, 2017.2019. 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 2018 Form 10-K. During the first nine months of 2019 and 2018, the Bank paid total dividends of $140.0 million and $417.6$105.0 million duringto East West, respectively. East West’s cash flow obligations primarily consist of debt, operating expenses and dividends payments.
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 $87.0 million in cash dividends paid.
for individual entities. As of September 30, 2017,2019, the Company iswas not aware of any trends, events or uncertainties that hadwould or were reasonably likely to, have a material effect on its liquidity position. Furthermore, the Company is not aware of any material commitments for capital expenditures in the foreseeable future.
Consolidated Cash Flows Analysis
The following table presents a summary of the Company’s Consolidated Statement of Cash Flows for the first nine months of 2019 and 2018. In addition to this cash flow analysis, the discussion in Item 2. MD&A — Asset Liability and Market Risk Management — Liquidity may provide additional context in evaluating the Company’s liquidity has historically been dependent on the payment ofposition and related activity.
|
| | | | | | | | |
| |
| ($ in thousands) | | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| Net cash provided by operating activities | | $ | 389,019 |
| | $ | 693,316 |
|
| Net cash used in investing activities | | (1,868,818 | ) | | (2,654,135 | ) |
| Net cash provided by financing activities | | 1,533,223 |
| | 2,033,347 |
|
| Effect of exchange rate changes on cash and cash equivalents | | (12,520 | ) | | (28,333 | ) |
| Net increase in cash and cash equivalents | | 40,904 |
| | 44,195 |
|
| Cash and cash equivalents, beginning of period | | 3,001,377 |
| | 2,174,592 |
|
| Cash and cash equivalents, end of period | | $ | 3,042,281 |
| | $ | 2,218,787 |
|
| | | | | |
Operating Activities — Net cash dividendsprovided by its subsidiary, East West Bank, subject to applicable statutes, regulations and special approval. The Bank paid total dividends of $255.0operating activities was $389.0 million and $100.0$693.3 million for the first nine months of 2019 and 2018, respectively. During the first nine months of 2019 and 2018, net cash provided by operating activities mainly reflected inflows of $485.8 million and $530.7 million from net income, respectively. During the first nine months of 2019, net operating cash inflows also benefited from non-cash adjustments of $184.9 million to East Westreconcile net income to net operating cash, as well as $77.7 million of net changes in accrued expenses and other liabilities, partially offset by $363.2 million of net changes in accrued interest receivable and other assets. In comparison, during the first nine months ended September 30, 2017of 2018, net operating cash inflows benefited from non-cash adjustments of $108.6 million to reconcile net income to net cash, as well as $92.0 million of changes in accrued expenses and 2016, respectively. In addition,other liabilities, partially offset by $38.2 million of net changes in October 2017, the Board declared a quarterlyaccrued interest receivable and other assets.
Investing Activities —Net cash dividend of $0.20 per shareused in investing activities was $1.87 billion and $2.65 billion for the Company’s common stock payable on November 15, 2017 to stockholdersfirst nine months of record on November 1, 2017.2019 and 2018, respectively. During the first nine months of 2019, net cash used in investing activities primarily reflected cash outflows of $1.68 billion, $459.1 million and $103.3 million, respectively, from loans held-for-investment, available-for-sale investment securities, and investments in qualified affordable housing partnerships, tax credit and other investments. These cash outflows used in investing activities were partially offset by cash inflows of $204.5 million and $175.0 million from interest-bearing deposits with banks, and resale agreements, respectively. During the first nine months of 2018, net cash used in investing activities primarily reflected cash outflows of $2.25 billion and $503.7 million from loans held-for-investment and the sale of the Bank’s eight DCB branches, respectively. These cash outflows were partially offset by a $185.7 million net cash inflow from available-for-sale investment securities.
Financing Activities —Net cash provided by financing activities was $1.53 billion and $2.03 billion for the first nine months of 2019 and 2018, respectively. During the first nine months of 2019, net cash provided by financing activities primarily reflected net increases of $1.25 billion in deposits and $418.0 million in FHLB advances, partially offset by $115.0 million in cash dividends. During the first nine months of 2018, net cash provided by financing activities primarily reflected net increases of $2.09 billion in deposits and $63.1 million in short-term borrowings, partially offset by $92.6 million in cash dividends.
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. Refer to Item 2. MD&A — Asset Liability and Market Risk Management — Derivatives in this Form 10-Q for additional information.
The interest rate risk exposure is measured and monitored through various risk management tools, which include a simulation model that performs interest rate sensitivity analysisanalyses under multiple interest rate scenarios. The model includesincorporates the Company’s cash instruments, loans, investment 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 is a modeling technique that looks at interest rate risk through earnings. It projects the changes in interest rate sensitive asset and liability cash flows, expressed in terms of Net Interest Income, over a specified time horizon for defined interest rates scenarios. Net Interest Income simulations generate insight into the impact of changes in market rates 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, 20172019 and December 31, 2016 related2018, 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) |
| | September 30, 2019 | | December 31, 2018 |
| +200 | | 20.5 | % | | 22.4 | % | | 13.4 | % | | 12.3 | % | | 15.4 | % | | 16.6 | % |
| +100 | | 11.4 | % | | 12.0 | % | | 7.0 | % | | 7.5 | % | | 7.8 | % | | 8.4 | % |
| -100 | | (8.0 | )% | | (6.8 | )% | | (3.7 | )% | | (5.0 | )% | | (6.6 | )% | | (8.3 | )% |
| -200 | | (10.4 | )% | | (7.5 | )% | | (9.6 | )% | | (9.3 | )% | | (12.1 | )% | | (16.7 | )% |
|
| |
| (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 September 30, 2019 was lower when compared with the sensitivity as of December 31, 2018, for both the upward 100 and 200 basis point rate scenarios. This reflects a greater rate of upward repricing in the Company’s deposit portfolio, offsetting simulated increases in interest income from higher interest rates on assets. In both of the simulated downward interest rate scenarios, sensitivity decreased mainly due to the impact of the changes in the yield curve between September 30, 2019 and December 31, 2018.
The Company’s net interest income profile as of September 30, 2019 reflects an asset sensitive position. Net interest income would be expected to increase if interest rates rise and to decrease if interest rates decline. The 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 1.75% and 2.00% as of September 30, 2019 and between 2.25% and 2.50% as of December 31, 2018. In its statement released on September 18, 2019, the Federal Open Market Committee (“FOMC”) decided to lower the target range for the federal funds rate to a range of between 1.75% to 2.00%. As of October 30, 2019, the federal funds target rate was lowered to a range of between 1.50% to 1.75%, based on weakened economic data.
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:
|
| | | | | | |
| |
Change in Interest Rates
(Basis Points) | | Net Interest Income Volatility (1) |
| | September 30, 2019 | | December 31, 2018 |
| +200 Rate Ramp | | 6.1 | % | | 6.3 | % |
| +100 Rate Ramp | | 3.0 | % | | 3.0 | % |
| -100 Rate Ramp | | (2.6 | )% | | (3.0 | )% |
| -200 Rate Ramp | | (5.2 | )% | | (6.3 | )% |
| |
| |
(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 September 30, 2019 and December 31, 2018, the Company’s modeled sensitivity slightly decreased under a ramp simulation. This reflects model refinements to better incorporate the current, inverted yield curve in the analysis, as well as the gradual spreading of interest rate changes over 12 months, rather than at the end of each quarter.
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 September 30, 2019 and December 31, 2018 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions:
|
| | | | | | |
| | | | | |
Change in Interest Rates
(Basis Points) | | EVE Volatility (1) |
| | September 30, 2019 | | December 31, 2018 |
| +200 | | 6.4 | % | | 6.3 | % |
| +100 | | 3.6 | % | | 1.2 | % |
| -100 | | (1.3 | )% | | (3.1 | )% |
| -200 | | (3.4 | )% | | (11.9 | )% |
| | | | | |
| |
| (1) | The percentage change represents net portfolio value of the Company in a stable interest rate environment versus net portfolio value in the various rate scenarios. |
Twelve-Month Net Interest Income Simulation
The Company’s estimated twelve-month net interest incomeEVE sensitivity as of September 30, 2017 was slightly lower compared to December 31, 2016 for boththe upward interest rate scenarios as simulated increases in interest income are offset by an increase inof September 30, 2019 increased while the rate of repricingsensitivity 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 toas of September 30, 2019 decreased, as compared with 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%results 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 increases2018. The changes 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:
|
| | | | | | | | | |
| |
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. In the simulated upward 100 basis points and 200 basis points interest rate scenarios, 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 changes in the balance sheet portfolio mix. EVE declined 3.7% 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 being inverted.
The Company’s net interest income and EVE profile as of September 30, 2017, as presented in the net interest income and EVE tables,2019 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 December 31, 2016,2019, 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 Options
Net 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. As of September 30, 2019, the outstanding foreign currency forwards effectively hedged approximately 50% of the Chinese Renminbi 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 andto accommodate the business needs of its customers. For a $4.8 million liability, respectively, and have been included in the foreign exchange contracts’ notional amount 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 amountsportion of the foreign exchange contracts that were not designated as hedging instruments were $1.13 billion and $767.8 million, respectively.entered into with its customers, the Company either enters into offsetting foreign exchange contracts with third-party financial institutions or acquires collateral primarily in the form of cash on a portfolio basis to manage its 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 and common stock of technology and life sciences companies, as part of the loan origination process. As of September 30, 2017, thecompanies. 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 20162018 Form 10-K, Note 4 —Fair Value Measurement and Fair Value of Financial Instruments and Note 7 — Derivatives to the Consolidated Financial Statements.Statements of this report.
Critical Accounting Policies and Estimates
SignificantThe Company’s significant accounting policies and use of estimates (see Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements and Item 7. MD&A — Critical Accounting Policies and Estimates of the Company’s 20162018 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,methods, valuation assumptions and other subjective assessments. In addition, some accounting policiesmay require significant judgment in applying complex accounting principles to individual transactions to determine the most appropriate treatment.transactions. The Company has procedures and processes in place to facilitate making these judgments.
Certain The following accounting policies are consideredcritical to have a critical effect on the Company’s Consolidated Financial Statements in the Company’s judgment. In each area, the Company has identified the most important variables in the estimation process. The Company has used the best information availableas they require management to make the estimations necessary for the related assetssubjective and liabilities. Actualcomplex 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 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. During the second quarter of 2019, the Company reversed $30.1 million of certain previously claimed tax credits related to DC Solar. During the first quarter of 2018, the Company sold its eight DCB branches and recognized a pre-tax gain on sale of $31.5 million. Management believes that by adjusting for these non-recurring items from net income, diluted EPS, ROA, ROE and effective tax rate, will provide clarity to financial statement users regarding the ongoing performance of the Company and allows comparability to prior periods.
Non-GAAP efficiency ratio represents non-GAAP noninterest expense divided by non-GAAP revenue. Non-GAAP revenue represents the aggregate of net interest income and non-GAAP noninterest income, where non-GAAP noninterest income excludes the gain on the sale of the DCB branches that were sold in the first quarter of 2018. Non-GAAP noninterest expense excludes the amortization of tax credit and other investments and the amortization of core deposit intangibles. Non-GAAP tangible common equity represents stockholders’ equity, which has been reduced by goodwill and other intangible assets.
The following tables present the reconciliations of GAAP to non-GAAP financial measures for the periods presented:
|
| | | | | | | | | | | | | | | | | | |
| |
| ($ and shares in thousands, except per share data) | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net income | | (a) | | $ | 171,416 |
| | $ | 171,302 |
| | $ | 485,820 |
| | $ | 530,683 |
|
Add: Impairment charge related to DC Solar (1) | | | | — |
| | — |
| | 6,978 |
| | — |
|
| Less: Gain on sale of business | | | | — |
| | — |
| | — |
| | (31,470 | ) |
Tax effect of adjustments (2) | | | | — |
| | — |
| | (2,063 | ) | | 9,303 |
|
| Add: Reversal of certain previously claimed tax credits related to DC Solar | | | | — |
| | — |
| | 30,104 |
| | — |
|
| Non-GAAP net income | | (b) | | $ | 171,416 |
| | $ | 171,302 |
| | $ | 520,839 |
| | $ | 508,516 |
|
| | | | | | | | | | | |
| Diluted weighted-average number of shares outstanding | | | | 146,120 |
| | 146,173 |
| | 146,088 |
| | 146,158 |
|
| | | | | | | | | | | |
| Diluted EPS | | | | $ | 1.17 |
| | $ | 1.17 |
| | $ | 3.33 |
| | $ | 3.63 |
|
| Diluted EPS impact of impairment charge related to DC Solar, net of tax | | | | — |
| | — |
| | 0.03 |
| | — |
|
| Diluted EPS impact of gain on sale of business, net of tax | | | | — |
| | — |
| | — |
| | (0.15 | ) |
| Diluted EPS impact of reversal of certain previously claimed tax credits related to DC Solar | | | | — |
| | — |
| | 0.21 |
| | — |
|
| Non-GAAP diluted EPS | | | | $ | 1.17 |
| | $ | 1.17 |
| | $ | 3.57 |
| | $ | 3.48 |
|
| | | | | | | | | | | |
| Average total assets | | (c) | | $ | 43,136,273 |
| | $ | 38,659,262 |
| | $ | 41,815,490 |
| | $ | 37,874,434 |
|
| Average stockholders’ equity | | (d) | | $ | 4,838,281 |
| | $ | 4,197,675 |
| | $ | 4,687,746 |
| | $ | 4,061,977 |
|
ROA (3) | | (a)/(c) | | 1.58 | % | | 1.76 | % | | 1.55 | % | | 1.87 | % |
Non-GAAP ROA (3) | | (b)/(c) | | 1.58 | % | | 1.76 | % | | 1.67 | % | | 1.80 | % |
ROE (3) | | (a)/(d) | | 14.06 | % | | 16.19 | % | | 13.86 | % | | 17.47 | % |
Non-GAAP ROE (3) | | (b)/(d) | | 14.06 | % | | 16.19 | % | | 14.85 | % | | 16.74 | % |
| |
| |
| (1) | Included in Amortization of tax credit and other investments on the Consolidated Statement of Income. |
| |
| (2) | Applied statutory rate of 29.56%. |
|
| | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Income tax expense | | (a) | | $ | 34,951 |
| | $ | 33,563 |
| | $ | 138,815 |
| | $ | 82,958 |
|
| Less: Reversal of certain previously claimed tax credits related to DC Solar | | (b) | | — |
| | — |
| | (30,104 | ) | | — |
|
| Non-GAAP income tax expense | | (c) | | $ | 34,951 |
| | $ | 33,563 |
| | $ | 108,711 |
| | $ | 82,958 |
|
| | | | | | | | | | | |
| Income before income taxes | | (d) | | $ | 206,367 |
| | $ | 204,865 |
| | $ | 624,635 |
| | $ | 613,641 |
|
| | | | | | | | | | | |
| Effective tax rate | | (a)/(d) | | 16.9 | % | | 16.4 | % | | 22.2 | % | | 13.5 | % |
| Less: Reversal of certain previously claimed tax credits related to DC Solar | | (b)/(d) | | — | % | | — | % | | (4.8 | )% | | — | % |
| Non-GAAP effective tax rate | | (c)/(d) | | 16.9 | % | | 16.4 | % | | 17.4 | % | | 13.5 | % |
| |
|
| | | | | | | | | | | | | | | | | | |
| |
| ($ in thousands) | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net interest income before provision for credit losses | | (a) | | $ | 369,807 |
| | $ | 348,720 |
| | $ | 1,099,594 |
| | $ | 1,017,092 |
|
| Total noninterest income | | | | 51,474 |
| | 46,502 |
| | 146,364 |
| | 169,214 |
|
| Total revenue | | (b) | | $ | 421,281 |
| | $ | 395,222 |
| | $ | 1,245,958 |
| | $ | 1,186,306 |
|
| Noninterest income | | | | $ | 51,474 |
| | $ | 46,502 |
| | $ | 146,364 |
| | $ | 169,214 |
|
| Less: Gain on sale of business | | | | — |
| | — |
| | — |
| | (31,470 | ) |
| Non-GAAP noninterest income | | (c) | | $ | 51,474 |
| | $ | 46,502 |
| | $ | 146,364 |
| | $ | 137,744 |
|
| Non-GAAP revenue | | (a)+(c)=(d) | | $ | 421,281 |
| | $ | 395,222 |
| | $ | 1,245,958 |
| | $ | 1,154,836 |
|
| | | | | | | | | | | |
| Total noninterest expense | | (e) | | $ | 176,630 |
| | $ | 179,815 |
| | $ | 541,215 |
| | $ | 526,369 |
|
| Less: Amortization of tax credit and other investments | | | | (16,833 | ) | | (20,789 | ) | | (58,477 | ) | | (58,670 | ) |
| Amortization of core deposit intangibles | | | | (1,148 | ) | | (1,369 | ) | | (3,474 | ) | | (4,227 | ) |
| Non-GAAP noninterest expense | | (f) | | $ | 158,649 |
| | $ | 157,657 |
| | $ | 479,264 |
| | $ | 463,472 |
|
| | | | | | | | | | | |
| Efficiency ratio | | (e)/(b) | | 41.93 | % | | 45.50 | % | | 43.44 | % | | 44.37 | % |
| Non-GAAP efficiency ratio | | (f)/(d) | | 37.66 | % | | 39.89 | % | | 38.47 | % | | 40.13 | % |
| |
|
| | | | | | | | | | | | | | |
| |
($ and shares in thousands, except per share data) | | | September 30,
2019 | | June 30,
2019 | | September 30,
2018 |
| Stockholders’ equity | | (a) | | $ | 4,882,664 |
| | $ | 4,734,593 |
| | $ | 4,244,850 |
|
| Less: Goodwill | | | | (465,697 | ) | | (465,697 | ) | | (465,547 | ) |
Other intangible assets (1) | | | | (17,435 | ) | | (18,952 | ) | | (23,656 | ) |
| Non-GAAP tangible common equity | | (b) | | $ | 4,399,532 |
| | $ | 4,249,944 |
| | $ | 3,755,647 |
|
| | | | | | | | | |
| Number of common shares at period-end | | (c) | | 145,568 |
| | 145,547 |
| | 144,929 |
|
| Non-GAAP tangible common equity per share | | (b)/(c) | | $ | 30.22 |
| | $ | 29.20 |
| | $ | 25.91 |
|
| |
| |
| (1) | Includes core deposit intangibles and mortgage servicing assets. |
Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q contain 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 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 due to 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 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;
changes in the U.S. economy, including inflation, deflation, employment levels, rate of growth and general business conditions;
government intervention in the financial system, including changes in government interest rate policies;
impact of benchmark interest rate reform in the U.S. that resulted in the SOFR selected as the preferred alternative reference rate to LIBOR;
impact of political developments, 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 FDIC, the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission (“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;
changes in income tax laws and regulations;
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;
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 the Company’s stock price;
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 available-for-sale investment securities portfolio; and
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.
For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2018 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 7 — Derivatives and Item 2. MD&A — Asset Liability and 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, 2017,2019, 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, 2017.2019.
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 has been no change 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, 2017,2019, that has materially affected or is 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 1112 —Commitments and Contingencies— Litigation in Part I of this report, incorporated herein by reference.
ITEM 1A. RISK FACTORS
The Company’s 20162018 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 change to the Company’s risk factors as presented in the Company’s 20162018 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities or repurchase activities during the three months ended September 30, 2017.2019.
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:
|
| | |
| Exhibit No. | | Exhibit Description |
| | | |
| 10.1 | | |
| | |
| 31.1 | | |
| | | |
| | |
| | | |
| | |
| | | |
| | |
| | | |
| 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. |
| | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. Filed herewith. |
| | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith. |
| | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith. |
| | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. Filed herewith. |
| | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith. |
| | |
| 104 | | Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith). Filed herewith. |
| | |
| * Denotes management contract or compensatory plan or arrangement. |
| | |
All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted.
GLOSSARY OF ACRONYMS
|
| |
|
| ALCO | Asset/Liability Committee |
AML | Anti-Money Laundering |
| AOCI | Accumulated other comprehensive income (loss) |
| ARRC | Alternative Reference Rates Committee |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
BP | Basis point |
BSA | Bank Secrecy Act |
| C&I | Commercial and industrial |
| CECL | Current expected credit loss |
| CET1 | Common Equity Tier 1 |
| CME | Chicago Mercantile Exchange |
| CRA | Community Reinvestment Act |
| CRE | Commercial real estate |
DBODCB | California Department of Business OversightDesert Community Bank |
| EPS | Earnings per share |
| EVE | Economic value of equity |
| EWIS | East West Insurance Service,Services, Inc. |
| FASB | Financial Accounting Standards Board |
| FDIC | Federal Deposit Insurance Corporation |
| FHLB | Federal Home Loan Bank |
| FITCH | Fitch Ratings |
| FOMC | Federal Open Market Committee |
| FRB | Federal Reserve Bank of San Francisco |
GAAPFTP | Generally Accepted Accounting PrinciplesFunds transfer pricing |
HELOCsGAAP | United States generally accepted accounting principles |
| HELOC | Home equity linesline of credit |
| LCH | London Clearing House |
| LIBOR | London Interbank Offered Rate |
| MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
MOUMMBTU | Memorandum of UnderstandingMillion British thermal units |
Non-GAAPMOODY’S | Non-Generally Accepted Accounting PrinciplesMoody’s Investors Service |
Non-PCINAV | Non-purchased credit impairedNet asset value |
| OIS | Overnight Index Swap |
| OREO | Other real estate owned |
| OTTI | Other-than-temporary impairment |
| PCI | Purchased credit impairedcredit-impaired |
RPAsROA | Return on average assets |
| ROE | Return on average equity |
| RPA | Credit risk participation agreementsagreement |
RSAsRSU | Restricted stock awards |
RSUs | Restricted stock units |
SBLCs | Standby letters of creditunit |
| S&P | Standard and Poor’s |
TDRsSBLC | Standby letter of credit |
| SEC | U.S. Securities and Exchange Commission |
| SOFR | Secured Overnight Financing Rate |
| TDR | Troubled debt restructuringsrestructuring |
| U.S. | United States |
U.S. GAAP | United States Generally Accepted Accounting Principles |
| USD | U.S. Dollardollar |
| VIE | Variable interest entity |
|
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.
|
| | | | |
| Dated: | November 7, 20178, 2019 | |
| | | |
| | | EAST WEST BANCORP, INC. (Registrant) |
| | | |
| | | 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:
|
| | |
Exhibit No. | | Exhibit Description |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
101.INS | | XBRL Instance Document. |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
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.
