UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-24939
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
(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 | Trading Symbol(s) | Name of each exchange on which registered | |||
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | 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 ☒
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 145,625,385 shares as of October 31, 2019.
TABLE OF CONTENTS
Page | |||
2
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
September 30, 2019 | December 31, 2018 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | $ | ||||||
Interest-bearing cash with banks | ||||||||
Cash and cash equivalents | ||||||||
Interest-bearing deposits with banks | ||||||||
Securities purchased under resale agreements (“resale agreements”) | ||||||||
Securities: | ||||||||
Available-for-sale investment securities, at fair value (includes assets pledged as collateral of $524,413 in 2019 and $435,833 in 2018) | ||||||||
Restricted equity securities, at cost | ||||||||
Loans held-for-sale | ||||||||
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) | ||||||||
Investments in qualified affordable housing partnerships, net | ||||||||
Investments in tax credit and other investments, net | ||||||||
Premises and equipment (net of accumulated depreciation of $114,418 in 2019 and $118,547 in 2018) | ||||||||
Goodwill | ||||||||
Operating lease right-of-use assets | — | |||||||
Other assets | ||||||||
TOTAL | $ | $ | ||||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | $ | ||||||
Interest-bearing | ||||||||
Total deposits | ||||||||
Short-term borrowings | ||||||||
Federal Home Loan Bank (“FHLB”) advances | ||||||||
Securities sold under repurchase agreements (“repurchase agreements”) | ||||||||
Long-term debt and finance lease liabilities | ||||||||
Operating lease liabilities | — | |||||||
Accrued expenses and other liabilities | ||||||||
Total liabilities | ||||||||
COMMITMENTS AND CONTINGENCIES (Note 12) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
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 | ||||||||
Additional paid-in capital | ||||||||
Retained earnings | ||||||||
Treasury stock, at cost — 20,986,994 shares in 2019 and 20,906,224 shares in 2018 | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss (“AOCI”), net of tax | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
TOTAL | $ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
3
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands, except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||||||
Loans receivable, including fees | $ | $ | $ | $ | ||||||||||||
Available-for-sale investment securities | ||||||||||||||||
Resale agreements | ||||||||||||||||
Restricted equity securities | ||||||||||||||||
Interest-bearing cash and deposits with banks | ||||||||||||||||
Total interest and dividend income | ||||||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | ||||||||||||||||
Federal funds purchased and other short-term borrowings | ||||||||||||||||
FHLB advances | ||||||||||||||||
Repurchase agreements | ||||||||||||||||
Long-term debt and finance lease liabilities | ||||||||||||||||
Total interest expense | ||||||||||||||||
Net interest income before provision for credit losses | ||||||||||||||||
Provision for credit losses | ||||||||||||||||
Net interest income after provision for credit losses | ||||||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Lending fees | ||||||||||||||||
Deposit account fees | ||||||||||||||||
Foreign exchange income | ||||||||||||||||
Wealth management fees | ||||||||||||||||
Interest rate contracts and other derivative income | ||||||||||||||||
Net gains on sales of loans | ||||||||||||||||
Net gains on sales of available-for-sale investment securities | ||||||||||||||||
Net gains on sales of fixed assets | ||||||||||||||||
Net gain on sale of business | ||||||||||||||||
Other income | ||||||||||||||||
Total noninterest income | ||||||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Compensation and employee benefits | ||||||||||||||||
Occupancy and equipment expense | ||||||||||||||||
Deposit insurance premiums and regulatory assessments | ||||||||||||||||
Legal expense | ||||||||||||||||
Data processing | ||||||||||||||||
Consulting expense | ||||||||||||||||
Deposit related expense | ||||||||||||||||
Computer software expense | ||||||||||||||||
Other operating expense | ||||||||||||||||
Amortization of tax credit and other investments | ||||||||||||||||
Total noninterest expense | ||||||||||||||||
INCOME BEFORE INCOME TAXES | ||||||||||||||||
INCOME TAX EXPENSE | ||||||||||||||||
NET INCOME | $ | $ | $ | $ | ||||||||||||
EARNINGS PER SHARE (“EPS”) | ||||||||||||||||
BASIC | $ | $ | $ | $ | ||||||||||||
DILUTED | $ | $ | $ | $ | ||||||||||||
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||||||||||
BASIC | ||||||||||||||||
DILUTED | ||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
4
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Net changes in unrealized gains (losses) on available-for-sale investment securities | ( | ) | ( | ) | ||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||
COMPREHENSIVE INCOME | $ | $ | $ | $ | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except 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 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | — | ( | ) | — | |||||||||||||||||||
Cash dividends on common stock ($0.23 per share) | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
BALANCE, SEPTEMBER 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
BALANCE, JULY 1, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Other comprehensive income | — | — | — | — | |||||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | — | ( | ) | — | |||||||||||||||||||
Cash dividends on common stock ($0.275 per share) | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
BALANCE, SEPTEMBER 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Common Stock and Additional Paid-in Capital | Retained Earnings | Treasury Stock | AOCI, Net of Tax | Total Stockholders’ Equity | |||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
BALANCE, JANUARY 1, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Cumulative effect of change in accounting principle related to marketable equity securities (1) | — | — | ( | ) | — | ( | ) | ||||||||||||||||
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (2) | — | — | — | ( | ) | ||||||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | — | ( | ) | — | |||||||||||||||||||
Cash dividends on common stock ($0.63 per share) | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
BALANCE, SEPTEMBER 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
BALANCE, JANUARY 1, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Cumulative effect of change in accounting principle related to leases (3) | — | — | — | — | |||||||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Other comprehensive income | — | — | — | — | |||||||||||||||||||
Warrants exercised | — | — | |||||||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | — | ( | ) | — | |||||||||||||||||||
Cash dividends on common stock ($0.78 per share) | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
BALANCE, SEPTEMBER 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
(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 ASUs in 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.
6
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Accretion of discount and amortization of premiums, net | ( | ) | ( | ) | ||||
Stock compensation costs | ||||||||
Deferred income tax (benefit) expense | ( | ) | ||||||
Provision for credit losses | ||||||||
Net gains on sales of loans | ( | ) | ( | ) | ||||
Net gains on sales of available-for-sale investment securities | ( | ) | ( | ) | ||||
Net gains on sales of fixed assets | ( | ) | ( | ) | ||||
Net gain on sale of business | ( | ) | ||||||
Loans held-for-sale: | ||||||||
Originations and purchases | ( | ) | ( | ) | ||||
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | ||||||||
Proceeds from distributions received from equity method investees | ||||||||
Net change in accrued interest receivable and other assets | ( | ) | ( | ) | ||||
Net change in accrued expenses and other liabilities | ||||||||
Other net operating activities | ( | ) | ||||||
Total adjustments | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net (increase) decrease in: | ||||||||
Investments in qualified affordable housing partnerships, tax credit and other investments | ( | ) | ( | ) | ||||
Interest-bearing deposits with banks | ( | ) | ||||||
Resale agreements: | ||||||||
Proceeds from paydowns and maturities | ||||||||
Purchases | ( | ) | ( | ) | ||||
Available-for-sale investment securities: | ||||||||
Proceeds from sales | ||||||||
Proceeds from repayments, maturities and redemptions | ||||||||
Purchases | ( | ) | ( | ) | ||||
Loans held-for-investment: | ||||||||
Proceeds from sales of loans originally classified as held-for-investment | ||||||||
Purchases | ( | ) | ( | ) | ||||
Other changes in loans held-for-investment, net | ( | ) | ( | ) | ||||
Premises and equipment: | ||||||||
Purchases | ( | ) | ( | ) | ||||
Payment on sale of business, net of cash transferred | ( | ) | ||||||
Proceeds from sales of other real estate owned (“OREO”) | ||||||||
Proceeds from distributions received from equity method investees | ||||||||
Other net investing activities | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase in deposits | ||||||||
Net (decrease) increase in short-term borrowings | ( | ) | ||||||
FHLB advances: | ||||||||
Proceeds | ||||||||
Repayment | ( | ) | ||||||
Repayment of long-term debt and finance lease liabilities | ( | ) | ( | ) | ||||
Common stock: | ||||||||
Proceeds from issuance pursuant to various stock compensation plans and agreements | ||||||||
Stock tendered for payment of withholding taxes | ( | ) | ( | ) | ||||
Cash dividends paid | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | ||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
7
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
(Continued)
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | $ | ||||||
Income taxes, net | $ | $ | ||||||
Non-cash investing and financing activities: | ||||||||
Loans transferred from held-for-investment to held-for-sale | $ | $ | ||||||
Loans transferred from held-for-sale to held-for-investment | $ | $ | ||||||
Loans transferred to OREO | $ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
8
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation
The unaudited interim Consolidated Financial Statements are presented in accordance with United States generally accepted accounting principles (“GAAP”), applicable guidelines prescribed by regulatory authorities, and general practices in the banking 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 annual report on Form 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”).
9
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. |
10
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. |
11
Note 3 — Dispositions
On March 17, 2018, the Bank completed the sale of its eight Desert Community Bank (“DCB”) branches located in the High Desert area of Southern California to Flagstar Bank, a wholly-owned subsidiary of Flagstar Bancorp, Inc. The assets and liabilities of the DCB 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 net cash payment of $499.9 million by the Company to Flagstar Bank. After transaction costs, the sale resulted in a pre-tax gain of $31.5 million for the nine months ended September 30, 2018, which was reported as Net gain on sale of business on the Consolidated Statement of Income.
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 traded in active markets; quoted prices for identical or similar instruments traded in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data. |
• | Level 3 — Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities. |
The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.
Available-for-Sale Investment 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 comprised of U.S. Treasury securities. The fair value of other available-for-sale investment securities is generally determined by independent external pricing service providers who have experience in valuing these securities or by taking the average quoted market prices obtained from independent external brokers. The valuations provided by the third-party pricing service providers are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, prepayment expectation and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing collateralized mortgage obligations and other securitization structures also include new issue data, monthly payment information, whole loan collateral performance, tranche evaluation and “To Be Announced” prices. In valuing securities issued by state and political subdivisions, the inputs used by third-party pricing service providers also include material event notices.
12
On a monthly basis, the Company validates the valuations provided by third-party pricing service providers to ensure that the fair value determination is consistent with the applicable accounting guidance and the financial instruments are properly classified in the fair value hierarchy. To perform this validation, the Company evaluates the fair values of securities by comparing the fair values provided by the third-party pricing service to prices from other available independent sources for the same securities. When variances in prices are identified, the Company further compares inputs used by different sources to ascertain the reliability of these sources. On a quarterly basis, the Company reviews the documentation received from the third-party pricing service providers regarding the valuation inputs and methodology used for each category of securities.
When pricing is unavailable from third-party pricing service for certain securities, the 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.
Equity Securities — Equity securities were comprised of mutual funds as of both September 30, 2019 and December 31, 2018. The Company uses net asset value (“NAV”) information to determine the fair value of these equity securities. When NAV is available periodically and the equity securities can be put back to the transfer agents at the publicly available NAV, the fair value of the equity securities is classified as Level 1. When NAV is available periodically but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value of these equity securities is classified as Level 2.
Interest Rate Contracts — The Company enters into interest rate swap and option contracts with its borrowers to lock in attractive intermediate and long-term interest rates, resulting in the customer obtaining a synthetic fixed-rate loan. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The fair value of the interest rate options, which consist of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (rise above) the strike rate of the floors (caps). In addition, to comply with the provisions of ASC 820, Fair Value Measurement, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments associated with the Company’s derivatives utilize model-derived credit spreads, which are Level 3 inputs. As of September 30, 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 due to the observable nature of the significant inputs utilized.
Foreign Exchange Contracts — The Company enters into foreign exchange contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered with its customers, the Company entered into offsetting foreign exchange contracts with third-party financial institutions to manage its exposure. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. The fair value is determined at each reporting period based on changes in the foreign exchange rates. These are over-the-counter contracts where quoted market prices are not readily available. Valuation is measured using conventional valuation methodologies with observable market data. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and result in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign exchange contracts are classified as Level 2. The Company held foreign currency non-deliverable forward contracts as of September 30, 2019 and held foreign swap contracts as of December 31, 2018 to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. dollar (“USD”) functional currency subsidiary in China. These foreign currency non-deliverable forward and swap contracts were designated as net investment hedges. The fair value of foreign currency contracts is valued by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include spot rates and forward rates of the contractual currencies. Foreign exchange forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
13
Credit Contracts — The Company may periodically enter into credit risk participation agreements (“RPAs”) to manage the credit exposure on interest rate contracts associated with the syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The majority of the inputs used to value the RPAs are observable. Accordingly, RPAs fall within Level 2.
Equity Contracts — As part of the loan origination process, from time to time, the Company obtains equity warrants to purchase preferred and common stock of technology and life sciences companies it provides loans to. As of September 30, 2019 and December 31, 2018, the warrants included on the Consolidated Financial Statements were from both public and private companies. The Company values these warrants based on the Black-Scholes option pricing model. For equity warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on a duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The Company applies proxy volatilities based on the industry sectors of the private companies. The model values are then adjusted for a general lack of liquidity due to the private nature of the underlying companies. Due to the unobservable nature of the option volatility and liquidity discount assumptions used in deriving the estimated fair value, warrants from private companies are classified as Level 3. Since both option volatility and liquidity discount assumptions are subject to management judgment, measurement uncertainty is inherent in the valuation of private companies’ equity warrants. Given that the Company holds long positions in all equity warrants, an increase in volatility assumption would generally result in an increase in fair value measurement. A higher liquidity discount would result in a decrease in fair value measurement. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a measurement uncertainty analysis on the option volatility and liquidity discount assumptions is performed.
Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. The fair value of the commodity option contracts is determined using the Black’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 the known volumes and fixed price as specified in the swap agreement. The floating cash flows are correlated with the change of forward commodity prices, which is derived from market corroborated futures settlement prices. The fair value of the commodity swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments) based on the market prices of the commodity. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.
14
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 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 | $ | $ | $ | $ | ||||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | ||||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | ||||||||||||||||
Municipal securities | ||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | ||||||||||||||||
Corporate debt securities | ||||||||||||||||
Foreign bonds | ||||||||||||||||
Asset-backed securities | ||||||||||||||||
Total available-for-sale investment securities | $ | $ | $ | $ | ||||||||||||
Investments in tax credit and other investments: | ||||||||||||||||
Equity securities (1) | $ | $ | $ | $ | ||||||||||||
Total investments in tax credit and other investments | $ | $ | $ | $ | ||||||||||||
Derivative assets: | ||||||||||||||||
Interest rate contracts | $ | $ | $ | $ | ||||||||||||
Foreign exchange contracts | ||||||||||||||||
Credit contracts | ||||||||||||||||
Equity contracts | ||||||||||||||||
Commodity contracts | ||||||||||||||||
Gross derivative assets | $ | $ | $ | $ | ||||||||||||
Netting adjustments (2) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Net derivative assets | $ | $ | $ | $ | ||||||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate contracts | $ | $ | $ | $ | ||||||||||||
Foreign exchange contracts | ||||||||||||||||
Credit contracts | ||||||||||||||||
Commodity contracts | ||||||||||||||||
Gross derivative liabilities | $ | $ | $ | $ | ||||||||||||
Netting adjustments (2) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Net derivative liabilities | $ | $ | $ | $ | ||||||||||||
(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. |
15
($ 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 | $ | $ | $ | $ | ||||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | ||||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | ||||||||||||||||
Municipal securities | ||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | ||||||||||||||||
Corporate debt securities | ||||||||||||||||
Foreign bonds | ||||||||||||||||
Asset-backed securities | ||||||||||||||||
Total available-for-sale investment securities | $ | $ | $ | $ | ||||||||||||
Investment in tax credit and other investments: | ||||||||||||||||
Equity securities (1) | $ | $ | $ | $ | ||||||||||||
Total investments in tax credit and other investments | $ | $ | $ | $ | ||||||||||||
Derivative assets: | ||||||||||||||||
Interest rate contracts | $ | $ | $ | $ | ||||||||||||
Foreign exchange contracts | ||||||||||||||||
Credit contracts | ||||||||||||||||
Equity contracts | ||||||||||||||||
Commodity contracts | ||||||||||||||||
Gross derivative assets | $ | $ | $ | $ | ||||||||||||
Netting adjustments (2) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Net derivative assets | $ | $ | $ | $ | ||||||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate contracts | $ | $ | $ | $ | ||||||||||||
Foreign exchange contracts | ||||||||||||||||
Credit contracts | ||||||||||||||||
Commodity contracts | ||||||||||||||||
Gross derivative liabilities | $ | $ | $ | $ | ||||||||||||
Netting adjustments (2) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Net derivative liabilities | $ | $ | $ | $ | ||||||||||||
(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. |
16
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 | $ | $ | $ | $ | ||||||||||||
Total gains (losses) included in earnings (1) | ( | ) | ||||||||||||||
Issuances | ||||||||||||||||
Settlements | ( | ) | ( | ) | ||||||||||||
Ending balance | $ | $ | $ | $ | ||||||||||||
(1) | Includes unrealized gains (losses) of $ |
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 | $ | Black-Scholes option pricing model | Equity volatility | 45% — 56% | ||||||||
Liquidity discount | ||||||||||||
December 31, 2018 | ||||||||||||
Derivative assets: | ||||||||||||
Equity warrants | $ | Black-Scholes option pricing model | Equity volatility | 49% — 52% | ||||||||
Liquidity discount | ||||||||||||
(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 required by regulations, which utilize one or more valuation techniques such as income, market and/or cost approaches. |
17
Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of the 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 only be recognized in earnings for a decline in value that is determined to be other-than-temporary.
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure or at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.
The following tables present the carrying amounts of assets that were still held and had fair value changes measured on a nonrecurring basis as of 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”) | $ | $ | $ | $ | ||||||||||||
Commercial real estate (“CRE”) | ||||||||||||||||
Total non-PCI impaired loans | $ | $ | $ | $ | ||||||||||||
OREO (1) | $ | $ | $ | $ | ||||||||||||
Investments in tax credit and other investments, net | $ | $ | $ | $ | ||||||||||||
(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. |
18
($ 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 | $ | $ | $ | $ | ||||||||||||
CRE | ||||||||||||||||
Consumer: | ||||||||||||||||
Single-family residential | ||||||||||||||||
Total non-PCI impaired loans | $ | $ | $ | $ | ||||||||||||
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
CRE | ||||||||||||||||
Consumer: | ||||||||||||||||
Single-family residential | ||||||||||||||||
Home equity lines of credit (“HELOCs”) | ( | ) | ( | ) | ||||||||||||
Total non-PCI impaired loans | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
OREO (1) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Investments in tax credit and other investments, net | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
(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 | $ | Discounted cash flows | Discount | 4% — 12% | ||||||||
$ | Fair value of collateral | Discount | 20% — 50% | |||||||||
$ | Fair value of collateral | Contract value | NM | NM | ||||||||
OREO | $ | Fair value of property | Selling cost | |||||||||
Investments in tax credit and other investments, net | $ | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | |||||||
December 31, 2018 | ||||||||||||
Non-PCI impaired loans | $ | Discounted cash flows | Discount | 4% — 7% | ||||||||
$ | Fair value of collateral | Discount | 15% — 50% | |||||||||
$ | Fair value of collateral | Contract value | NM | NM | ||||||||
$ | Fair value of property | Selling cost | ||||||||||
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. |
19
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 | $ | $ | $ | $ | $ | |||||||||||||||
Interest-bearing deposits with banks | $ | $ | $ | $ | $ | |||||||||||||||
Resale agreements (1) | $ | $ | $ | $ | $ | |||||||||||||||
Restricted equity securities, at cost | $ | $ | $ | $ | $ | |||||||||||||||
Loans held-for-sale | $ | $ | $ | $ | $ | |||||||||||||||
Loans held-for-investment, net | $ | $ | $ | $ | $ | |||||||||||||||
Mortgage servicing rights | $ | $ | $ | $ | $ | |||||||||||||||
Accrued interest receivable | $ | $ | $ | $ | $ | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | $ | $ | $ | $ | |||||||||||||||
Time deposits | $ | $ | $ | $ | $ | |||||||||||||||
Short-term borrowings | $ | $ | $ | $ | $ | |||||||||||||||
FHLB advances | $ | $ | $ | $ | $ | |||||||||||||||
Repurchase agreements (1) | $ | $ | $ | $ | $ | |||||||||||||||
Long-term debt | $ | $ | $ | $ | $ | |||||||||||||||
Accrued interest payable | $ | $ | $ | $ | $ | |||||||||||||||
($ in thousands) | December 31, 2018 | |||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
Interest-bearing deposits with banks | $ | $ | $ | $ | $ | |||||||||||||||
Resale agreements (1) | $ | $ | $ | $ | $ | |||||||||||||||
Restricted equity securities, at cost | $ | $ | $ | $ | $ | |||||||||||||||
Loans held-for-sale | $ | $ | $ | $ | $ | |||||||||||||||
Loans held-for-investment, net | $ | $ | $ | $ | $ | |||||||||||||||
Mortgage servicing rights | $ | $ | $ | $ | $ | |||||||||||||||
Accrued interest receivable | $ | $ | $ | $ | $ | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | $ | $ | $ | $ | |||||||||||||||
Time deposits | $ | $ | $ | $ | $ | |||||||||||||||
Short-term borrowings | $ | $ | $ | $ | $ | |||||||||||||||
FHLB advances | $ | $ | $ | $ | $ | |||||||||||||||
Repurchase agreements (1) | $ | $ | $ | $ | $ | |||||||||||||||
Long-term debt | $ | $ | $ | $ | $ | |||||||||||||||
Accrued interest payable | $ | $ | $ | $ | $ | |||||||||||||||
(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, $ |
20
Note 5 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements
Resale Agreements
Resale agreements are recorded as receivables for the cash paid based on the values at which the securities are acquired. The market values of the underlying securities collateralizing the related receivables of the resale agreements, including accrued interest, are monitored. Additional collateral may be requested by the Company from the counterparties or excess collateral may be returned by the Company to the counterparties when deemed appropriate. Gross resale agreements were $1.26 billion and $1.44 billion as of September 30, 2019 and December 31, 2018, respectively. The weighted-average yields were 2.57 % and 2.63 % for the three months ended September 30, 2019 and 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 as liabilities based on the values at which the securities are sold. As of September 30, 2019, the collateral for the repurchase agreements was comprised of U.S. Treasury securities and U.S. government agency and U.S. government sponsored enterprise mortgage-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 when deemed appropriate. Gross repurchase agreements were $450.0 million as of both September 30, 2019 and December 31, 2018. The weighted-average interest rates were 4.68 % and 4.65 % for the three months ended September 30, 2019 and 2018, respectively, and 4.87 % and 4.36 % for the nine months ended September 30, 2019 and 2018, respectively.
The following table presents the gross repurchase agreements as of September 30, 2019 that will mature in the next five years and thereafter:
($ in thousands) | Repurchase Agreements | |||
Remainder of 2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total | $ | |||
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 Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral received includes securities that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral received or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, but is usually delivered to and held by the third-party trustees. The collateral amounts received/pledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.
21
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | |||||||||||||||||||
Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Received | ||||||||||||||||||||
Resale agreements | $ | $ | ( | ) | $ | $ | ( | ) | (1) | $ | ||||||||||
Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Pledged | ||||||||||||||||||||
Repurchase agreements | $ | $ | ( | ) | $ | $ | ( | ) | (2) | $ | ||||||||||
($ in thousands) | December 31, 2018 | |||||||||||||||||||
Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Received | ||||||||||||||||||||
Resale agreements | $ | $ | ( | ) | $ | $ | ( | ) | (1) | $ | ||||||||||
Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Pledged | ||||||||||||||||||||
Repurchase agreements | $ | $ | ( | ) | $ | $ | ( | ) | (2) | $ | ||||||||||
(1) | 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. |
(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 due to each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above. |
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to derivatives. Refer to Note 7 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
22
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 as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available-for-sale investment securities: | ||||||||||||||||
U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | ( | ) | ||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ( | ) | ||||||||||||||
Residential mortgage-backed securities | ( | ) | ||||||||||||||
Municipal securities | ( | ) | ||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ( | ) | ||||||||||||||
Residential mortgage-backed securities | ( | ) | ||||||||||||||
Corporate debt securities | ( | ) | ||||||||||||||
Foreign bonds | ( | ) | ||||||||||||||
Asset-backed securities | ( | ) | ||||||||||||||
Total available-for-sale investment securities | $ | $ | $ | ( | ) | $ | ||||||||||
($ in thousands) | December 31, 2018 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available-for-sale investment securities: | ||||||||||||||||
U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | ( | ) | ||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ( | ) | ||||||||||||||
Residential mortgage-backed securities | ( | ) | ||||||||||||||
Municipal securities | ( | ) | ||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||
Residential mortgage-backed securities | ( | ) | ||||||||||||||
Corporate debt securities | ( | ) | ||||||||||||||
Foreign bonds | ( | ) | ||||||||||||||
Asset-backed securities | ||||||||||||||||
Total available-for-sale investment securities | $ | $ | $ | ( | ) | $ | ||||||||||
23
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses of the Company’s available-for-sale investment securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position, as of September 30, 2019 and December 31, 2018:
($ 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 | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | ( | ) | ( | ) | ||||||||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
Commercial mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Residential mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Municipal securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||
Commercial mortgage-backed securities | ( | ) | ( | ) | ||||||||||||||||||||
Residential mortgage-backed securities | ( | ) | ( | ) | ||||||||||||||||||||
Corporate debt securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Foreign bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Asset-backed securities | ( | ) | ( | ) | ||||||||||||||||||||
Total available-for-sale investment securities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
($ 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 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
Commercial mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Residential mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Municipal securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||
Residential mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Corporate debt securities | ( | ) | ( | ) | ||||||||||||||||||||
Foreign bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Total available-for-sale investment securities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
Other-Than-Temporary Impairment
For each reporting period, the Company assesses 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 — Securities to the Consolidated Financial Statements of the Company’s 2018 Form 10-K.
24
The unrealized losses were primarily attributable to the movement in the yield curve, 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 because of changes in market interest rates. The Company believes that the gross unrealized losses presented in the previous tables are temporary and no credit losses are expected. As a result, the Company expects to recover the entire amortized cost basis of these securities. The Company has the intent to hold these securities through the anticipated recovery period and it is not more-likely-than-not that the Company will have to sell these securities before recovery of their amortized cost. As of September 30, 2019, the Company had 70 available-for-sale investment securities in a gross unrealized loss position with no credit impairment, primarily consisting of 37 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, six foreign bonds, and 10 U.S. Treasury securities. In comparison, as of December 31, 2018, the Company had 184 available-for-sale investment securities in a gross unrealized loss position with no credit impairment, primarily consisting of 108 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 16 foreign bonds, and 19 U.S. Treasury securities. There were no OTTI credit losses recognized in earnings for each of the three and nine months ended September 30, 2019 and 2018.
Realized Gains and Losses
The following table presents the proceeds, gross realized gains and tax expense related to the sales of available-for-sale investment securities 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 | |||||||||||||
Proceeds from sales | $ | $ | $ | $ | ||||||||||||
Gross realized gains | $ | $ | $ | $ | ||||||||||||
Related tax expense | $ | $ | $ | $ | ||||||||||||
Contractual Maturities of Investment Securities
The following table presents the contractual maturities of available-for-sale investment securities as of September 30, 2019:
($ in thousands) | Amortized Cost | Fair Value | ||||||
Due within one year | $ | $ | ||||||
Due after one year through five years | ||||||||
Due after five years through ten years | ||||||||
Due after ten years | ||||||||
Total available-for-sale investment securities | $ | $ | ||||||
Actual maturities of mortgage-backed securities can differ from contractual maturities as 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.
As of September 30, 2019 and December 31, 2018, available-for-sale investment securities with fair value of $524.4 million and $435.8 million, respectively, were pledged to secure public deposits, repurchase agreements, interest rate contracts, and for other purposes required or permitted by law.
Restricted Equity Securities
Restricted equity securities include the Federal Reserve Bank of San Francisco (“FRB”) and the FHLB stock. Restricted equity securities are carried at cost as these securities do not have a readily determinable fair value. The following table presents the restricted equity securities as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||
FRB stock | $ | $ | ||||||
FHLB stock | ||||||||
Total restricted equity securities | $ | $ | ||||||
25
Note 7 — Derivatives
The Company uses derivatives to manage exposure to market risk, primarily 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 Sheet at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies — Derivatives to the Consolidated Financial Statements of the Company’s 2018 Form 10-K.
The following table presents the total notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis as of September 30, 2019 and December 31, 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Net investment hedges: | ||||||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||
Interest rate contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||
Credit contracts | ||||||||||||||||||||||||
Equity contracts | (1) | (1) | ||||||||||||||||||||||
Commodity contracts | (2) | (2) | ||||||||||||||||||||||
Total derivatives not designated as hedging instruments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Gross derivative assets/liabilities | $ | $ | $ | $ | ||||||||||||||||||||
Less: Master netting agreements | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Less: Cash collateral received/paid | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Net derivative assets/liabilities | $ | $ | $ | $ | ||||||||||||||||||||
(1) | The Company held equity contracts in |
(2) | The notional amount of the Company’s commodity contracts entered with its customers totaled |
26
Derivatives Designated as Hedging Instruments
Fair Value Hedges — The Company is exposed to changes in the fair value of certain certificates of deposit due to changes in the benchmark interest rates. The Company enters into interest rate swaps, which are designated as fair value hedges. The interest rate swaps involve the exchange of variable rate payments over the life of the agreements without the exchange of the underlying notional amounts.
The following table presents the net gains (losses) recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the 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 | |||||||||||||
Gains (losses) recorded in interest expense: | ||||||||||||||||
Recognized on interest rate swaps | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Recognized on certificates of deposit | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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) | Carrying Value (1) | Cumulative Fair Value Adjustment (2) | ||||||||||||||
September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||
Certificates of deposit | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
(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. The Company enters into foreign currency 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 East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate of the Chinese Renminbi. The Company may de-designate the net investment hedges when the Company expects the hedge will cease to be highly effective. The notional and fair value amounts of the net investment hedges, made up of foreign exchange forwards, were $84.8 million and a $431 thousand liability, respectively, as of September 30, 2019. In comparison, the notional and fair value amounts of the net investment hedges, made up of foreign exchange swaps, were $90.2 million and a $611 thousand liability, respectively, as of December 31, 2018.
The following table presents the gains recognized in AOCI on net investment hedges for the three and nine months ended September 30, 2019 and 2018:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Gains recognized in AOCI | $ | $ | $ | $ | ||||||||||||
27
Derivatives Not Designated as Hedging Instruments
Interest Rate Contracts — The Company enters into interest rate contracts, which include interest rate swaps and options with its customers to allow customers to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions, including central clearing organizations. Beginning in 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, 2019, was a notional amount of $2.25 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair value of $317 thousand and liability fair 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, 2018, was a notional amount of $1.66 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair value of $16.4 million and liability fair value of $16.0 million as of December 31, 2018.
The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of September 30, 2019 and December 31, 2018:
($ 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 | $ | $ | $ | Purchased options | $ | $ | $ | |||||||||||||||||||
Sold collars and corridors | Collars and corridors | |||||||||||||||||||||||||
Swaps | Swaps | |||||||||||||||||||||||||
Total | $ | $ | $ | Total | $ | $ | $ | |||||||||||||||||||
($ 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 | $ | $ | $ | Purchased options | $ | $ | $ | |||||||||||||||||||
Sold collars and corridors | Collars and corridors | |||||||||||||||||||||||||
Swaps | Swaps | |||||||||||||||||||||||||
Total | $ | $ | $ | Total | $ | $ | $ | |||||||||||||||||||
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot, swap and option contracts to accommodate the business needs of its customers. For a portion of the foreign exchange contracts entered into with its customers, the Company either enters into offsetting foreign exchange contracts with third-party financial institutions or acquires collateral on a portfolio basis primarily in the form of cash to manage its exposure. The Company also utilizes foreign exchange contracts, which are not designated as hedging instruments to mitigate the economic effect of currency fluctuations on certain foreign currency-denominated on-balance sheet assets and liabilities, primarily for foreign currency-denominated deposits offered to its customers. A majority of the foreign exchange contracts have original maturities of one year or less as of September 30, 2019 and December 31, 2018.
28
The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of September 30, 2019 and December 31, 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 | $ | $ | $ | Forwards and spot | $ | $ | $ | |||||||||||||||||||
Swaps | Swaps | |||||||||||||||||||||||||
Written options | Purchased options | |||||||||||||||||||||||||
Collars | Collars | |||||||||||||||||||||||||
Total | $ | $ | $ | Total | $ | $ | $ | |||||||||||||||||||
($ 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 | $ | $ | $ | Forwards and spot | $ | $ | $ | |||||||||||||||||||
Swaps | Swaps | |||||||||||||||||||||||||
Written options | Purchased options | |||||||||||||||||||||||||
Collars | Collars | |||||||||||||||||||||||||
Total | $ | $ | $ | Total | $ | $ | $ | |||||||||||||||||||
Credit Contracts — The Company may periodically enter into RPA contracts to manage its credit exposure on interest rate contracts associated with syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. Under the RPA, the Company will receive or make a payment if a borrower defaults on the related interest rate contract. The Company manages its credit risk on RPAs by monitoring the creditworthiness 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 reflects the Company’s pro-rata share of the derivative instrument. The following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||
RPAs - protection sold | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
RPAs - protection purchased | ||||||||||||||||||||||||
Total RPAs | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Assuming all underlying borrowers referenced in the interest rate contracts defaulted as of September 30, 2019 and December 31, 2018, the exposure from the RPAs with protections sold would be $117 thousand and $125 thousand, respectively. As of September 30, 2019 and December 31, 2018, the weighted-average remaining maturities of the outstanding RPAs were 2.4 years and 6.6 years, respectively.
Equity Contracts — As part of the Company’s loan origination process, from time to time, the Company obtains equity warrants to purchase preferred and common stock of technology and life sciences companies it provides loans to. Equity warrants grant the Company the right to buy a certain class of the underlying company’s equity at a certain price before expiration. The Company held warrants in three public companies and 17 private companies as of September 30, 2019, and held warrants in four public companies and 18 private companies as of December 31, 2018. The total fair value of the warrants held in both public and private companies was a $1.5 million asset and $2.0 million asset as of September 30, 2019 and December 31, 2018, respectively.
29
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 reduction in gross derivative asset fair value of $13.2 million as of September 30, 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 | Barrels | $ | $ | Purchased options | Barrels | $ | $ | |||||||||||||||||||||
Collars | Barrels | Collars | Barrels | |||||||||||||||||||||||||
Swaps | Barrels | Swaps | Barrels | |||||||||||||||||||||||||
Total | $ | $ | Total | $ | $ | |||||||||||||||||||||||
Natural gas: | Natural gas: | |||||||||||||||||||||||||||
Written options | MMBTUs | $ | $ | Purchased Options | MMBTUs | $ | $ | |||||||||||||||||||||
Collars | MMBTUs | $ | $ | Collars | MMBTUs | $ | $ | |||||||||||||||||||||
Swaps | MMBTUs | Swaps | MMBTUs | |||||||||||||||||||||||||
Total | $ | $ | Total | $ | $ | |||||||||||||||||||||||
Total | $ | $ | Total | $ | $ | |||||||||||||||||||||||
($ 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 | Barrels | $ | $ | Purchased options | Barrels | $ | $ | |||||||||||||||||||||
Collars | Barrels | Collars | Barrels | |||||||||||||||||||||||||
Swaps | Barrels | Swaps | Barrels | |||||||||||||||||||||||||
Total | $ | $ | Total | $ | $ | |||||||||||||||||||||||
Natural gas: | Natural gas: | |||||||||||||||||||||||||||
Collars | MMBTUs | $ | $ | Collars | MMBTUs | $ | $ | |||||||||||||||||||||
Swaps | MMBTUs | Swaps | MMBTUs | |||||||||||||||||||||||||
Total | $ | $ | Total | $ | $ | |||||||||||||||||||||||
Total | $ | $ | Total | $ | $ | |||||||||||||||||||||||
30
The following table presents the net gains (losses) recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three and nine months ended September 30, 2019 and 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 | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
Foreign exchange contracts | Foreign exchange income | |||||||||||||||||
Credit contracts | Interest rate contracts and other derivative income | ( | ) | ( | ) | |||||||||||||
Equity contracts | Lending fees | ( | ) | |||||||||||||||
Commodity contracts | Interest rate contracts and other derivative income | ( | ) | ( | ) | ( | ) | |||||||||||
Net gains | $ | $ | $ | $ | ||||||||||||||
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 $9.4 million. In the event that the credit rating of East West Bank had been downgraded to below investment grade, minimal additional collateral would have been required to be posted as of both September 30, 2019 and December 31, 2018.
Offsetting of Derivatives
The following tables present the gross derivative fair values, the balance sheet netting adjustments and the resulting net fair values recorded on the Consolidated Balance Sheet, as well as the cash and non-cash collateral associated with master netting arrangements. The gross amounts of derivative assets and liabilities are presented after the application of variation margin payments as settlements with centrally cleared organizations, where applicable. The collateral amounts in the following tables are limited to the outstanding balances of the related asset or liability, after the application of netting; therefore, instances of overcollateralization are not shown:
($ 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 | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||
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 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||
31
($ 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 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||
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 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||
(1) | Gross amounts recognized for derivative assets include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $ |
(2) | Gross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $ |
(3) | Gross cash collateral received under master netting arrangements or similar agreements were $ |
(4) | Gross cash collateral pledged under master netting arrangements or similar agreements were $ |
(5) | Represents the fair value of security collateral received and pledged limited to derivative assets and liabilities that are subject to enforceable master netting arrangements or similar agreements. GAAP does not permit the netting of non-cash collateral on the Consolidated Balance Sheet but requires disclosure of such amounts. |
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to the resale and repurchase agreements. Refer to Note 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 to Note 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.
32
The following table presents the composition of the Company’s non-PCI and PCI loans as of September 30, 2019 and December 31, 2018:
($ 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
CRE | ||||||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||||||
Construction and land | ||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Single-family residential | ||||||||||||||||||||||||
HELOCs | ||||||||||||||||||||||||
Other consumer | ||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||
Total loans held-for-investment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Allowance for loan losses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Loans held-for-investment, net | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
(1) | Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $( |
(2) | Includes ASC 310-30 discount of $ |
The commercial portfolio includes C&I, CRE, multifamily residential, and construction and land loans. The consumer portfolio includes single-family residential, HELOC and other consumer loans.
The C&I loan portfolio, which is comprised of commercial business and trade finance loans, provides financing to businesses in a wide spectrum of industries. The CRE loan portfolio consists of income producing real estate loans that are either owner occupied, or non-owner occupied where 50% or more of the debt service for the loan is primarily provided by unaffiliated rental income from a third party. The multifamily residential loan portfolio is largely comprised of loans secured by residential properties with five 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, in which a substantial down payment is required, resulting in a low loan-to-value ratio at origination, typically 60 % or 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.
As of September 30, 2019 and December 31, 2018, loans of $21.83 billion and $20.59 billion, respectively, were pledged to secure borrowings and provide additional borrowing capacity from the FRB and FHLB.
Credit Quality Indicators
All loans are subject to the Company’s credit review and monitoring. For 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 or delinquency, current financial and liquidity status, and all other relevant information. For the majority of the consumer portfolio, payment 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 risk rating system classifies loans within the following categories: Pass, Watch, Special Mention, Substandard, Doubtful and Loss. The risk ratings reflect the relative strength of the repayment sources.
33
Pass and Watch loans are loans 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 loans that have potential weaknesses that warrant closer attention by management. Special Mention is a transitory grade. If the potential weaknesses are resolved, a 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 may become inadequate, a loan is downgraded to a Substandard grade. Substandard loans have well-defined weaknesses that may jeopardize the full and timely repayment of the loan. Substandard loans have the distinct possibility of loss, if the deficiencies are not corrected. When management has assessed that there is potential for loss, but a distinct possibility of loss is not yet recognizable, the loan remains classified as Substandard grade. Doubtful loans are loans that have insufficient sources of repayment and a high probability of loss. Loss loans are loans 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 loan type as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | |||||||||||||||||||
Pass/Watch | Special Mention | Substandard | Doubtful | Total Non-PCI Loans | ||||||||||||||||
Commercial: | ||||||||||||||||||||
C&I | $ | $ | $ | $ | $ | |||||||||||||||
CRE | ||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||
Construction and land | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Consumer: | ||||||||||||||||||||
Single-family residential | ||||||||||||||||||||
HELOCs | ||||||||||||||||||||
Other consumer | ||||||||||||||||||||
Total consumer | ||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
($ in thousands) | December 31, 2018 | |||||||||||||||||||
Pass/Watch | Special Mention | Substandard | Doubtful | Total Non-PCI Loans | ||||||||||||||||
Commercial: | ||||||||||||||||||||
C&I | $ | $ | $ | $ | $ | |||||||||||||||
CRE | ||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||
Construction and land | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Consumer: | ||||||||||||||||||||
Single-family residential | ||||||||||||||||||||
HELOCs | ||||||||||||||||||||
Other consumer | ||||||||||||||||||||
Total consumer | ||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
34
The following tables present the credit risk ratings for PCI loans by loan type as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | |||||||||||||||||||
Pass/Watch | Special Mention | Substandard | Doubtful | Total PCI Loans | ||||||||||||||||
Commercial: | ||||||||||||||||||||
C&I | $ | $ | $ | $ | $ | |||||||||||||||
CRE | ||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||
Construction and land | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Consumer: | ||||||||||||||||||||
Single-family residential | ||||||||||||||||||||
HELOCs | ||||||||||||||||||||
Total consumer | ||||||||||||||||||||
Total (1) | $ | $ | $ | $ | $ | |||||||||||||||
($ in thousands) | December 31, 2018 | |||||||||||||||||||
Pass/Watch | Special Mention | Substandard | Doubtful | Total PCI Loans | ||||||||||||||||
Commercial: | ||||||||||||||||||||
C&I | $ | $ | $ | $ | $ | |||||||||||||||
CRE | ||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||
Construction and land | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Consumer: | ||||||||||||||||||||
Single-family residential | ||||||||||||||||||||
HELOCs | ||||||||||||||||||||
Total consumer | ||||||||||||||||||||
Total (1) | $ | $ | $ | $ | $ | |||||||||||||||
(1) | Loans net of ASC 310-30 discount. |
35
Nonaccrual and Past Due Loans
Non-PCI loans that are 90 or more days past due are generally placed on nonaccrual status, 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, 2019 and December 31, 2018:
($ 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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
CRE | ||||||||||||||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||||||||||||||
Construction and land | ||||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||
Single-family residential | ||||||||||||||||||||||||||||||||
HELOCs | ||||||||||||||||||||||||||||||||
Other consumer | ||||||||||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
($ 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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
CRE | ||||||||||||||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||||||||||||||
Construction and land | ||||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||
Single-family residential | ||||||||||||||||||||||||||||||||
HELOCs | ||||||||||||||||||||||||||||||||
Other consumer | ||||||||||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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 2018 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 Note for additional details on interest income recognition. As of September 30, 2019 and December 31, 2018, PCI loans on nonaccrual status totaled $531 thousand and $4.0 million, respectively.
36
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, 2019 and December 31, 2018, consumer mortgage loans of $6.7 million and $3.0 million, respectively, were secured by residential real estate properties, for which formal foreclosure proceedings were in process in accordance with local requirements of the applicable jurisdictions. As of both September 30, 2019 and December 31, 2018, no foreclosed residential real estate property was included in total net OREO of $1.1 million and $133 thousand, respectively.
Troubled Debt Restructurings
Potential troubled debt restructurings (“TDRs”) are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered.
The following tables present the additions to non-PCI TDRs for the three and nine months ended September 30, 2019 and 2018:
($ 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
CRE | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||
Single-family residential | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
HELOCs | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
($ 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
CRE | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||
Single-family residential | $ | $ | $ | $ | $ | $ | ( | ) | ||||||||||||||||||||
HELOCs | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
(1) | Includes subsequent payments after modification and reflects the balance as of September 30, 2019 and 2018. |
(2) | The financial impact includes charge-offs and specific reserves recorded since the modification date. |
37
The following tables present the non-PCI TDR post-modification outstanding balances for the three and nine months ended September 30, 2019 and 2018 by modification type:
($ in thousands) | Modification Type During the Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||||||||||
Principal (1) | Interest Rate Reduction | Interest Deferments | Other | Total | Principal (1) | Interest Rate Reduction | Interest Deferments | Other | Total | |||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
C&I | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||
Single-family residential | ||||||||||||||||||||||||||||||||||||||||
HELOCs | ||||||||||||||||||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
($ in thousands) | Modification Type During the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||||||||||||||||||
Principal (1) | Interest Rate Reduction | Interest Deferments | Other (2) | Total | Principal (1) | Interest Rate Reduction | Interest Deferments | Other | Total | |||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
C&I | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
CRE | ||||||||||||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||
Single-family residential | ||||||||||||||||||||||||||||||||||||||||
HELOCs | ||||||||||||||||||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
(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 primarily funding to secure additional collateral and 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 be 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 which a subsequent default occurred during the three and nine months ended September 30, 2019 and 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, | |||||||||||||
2019 | 2018 | |||||||||||||
Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||
Commercial: | ||||||||||||||
C&I | $ | $ | ||||||||||||
CRE | $ | $ | ||||||||||||
38
($ 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 | $ | $ | ||||||||||||
CRE | $ | $ | ||||||||||||
The amount of additional funds committed to lend to borrowers whose terms have been modified as TDRs was $2.1 million and $3.9 million as of September 30, 2019 and December 31, 2018, respectively.
Impaired Loans
The following tables present information on non-PCI impaired loans as of September 30, 2019 and December 31, 2018:
($ 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 | $ | $ | $ | $ | $ | |||||||||||||||
CRE | ||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Consumer: | ||||||||||||||||||||
Single-family residential | ||||||||||||||||||||
HELOCs | ||||||||||||||||||||
Other consumer | ||||||||||||||||||||
Total consumer | ||||||||||||||||||||
Total non-PCI impaired loans | $ | $ | $ | $ | $ | |||||||||||||||
($ 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 | $ | $ | $ | $ | $ | |||||||||||||||
CRE | ||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||
Total commercial | ||||||||||||||||||||
Consumer: | ||||||||||||||||||||
Single-family residential | ||||||||||||||||||||
HELOCs | ||||||||||||||||||||
Other consumer | ||||||||||||||||||||
Total consumer | ||||||||||||||||||||
Total non-PCI impaired loans | $ | $ | $ | $ | $ | |||||||||||||||
39
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, 2019 and 2018:
($ 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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
CRE | ||||||||||||||||||||||||||||||||
Multifamily residential | ||||||||||||||||||||||||||||||||
Construction and land | ||||||||||||||||||||||||||||||||
Total commercial | ||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||
Single-family residential | ||||||||||||||||||||||||||||||||
HELOCs | ||||||||||||||||||||||||||||||||
Other consumer | ||||||||||||||||||||||||||||||||
Total consumer | ||||||||||||||||||||||||||||||||
Total non-PCI impaired loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) | Includes interest income recognized on accruing non-PCI TDRs. Interest payments received on nonaccrual non-PCI loans are reflected as a reduction to principal, not as interest income. |
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.
40
Allowance for Credit Losses
The following table presents a summary of activities in the allowance for loan losses by loan type 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 | |||||||||||||
Non-PCI Loans | ||||||||||||||||
Allowance for non-PCI loans, beginning of period | $ | $ | $ | $ | ||||||||||||
Provision for loan losses on non-PCI loans | ||||||||||||||||
Gross charge-offs: | ||||||||||||||||
Commercial: | ||||||||||||||||
C&I | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
CRE | ( | ) | ( | ) | ||||||||||||
Consumer: | ||||||||||||||||
Single-family residential | ( | ) | ( | ) | ( | ) | ||||||||||
Other consumer | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total gross charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Gross recoveries: | ||||||||||||||||
Commercial: | ||||||||||||||||
C&I | ||||||||||||||||
CRE | ||||||||||||||||
Multifamily residential | ||||||||||||||||
Construction and land | ||||||||||||||||
Consumer: | ||||||||||||||||
Single-family residential | ||||||||||||||||
HELOCs | ||||||||||||||||
Other consumer | ||||||||||||||||
Total gross recoveries | ||||||||||||||||
Net charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Allowance for non-PCI loans, end of period | ||||||||||||||||
PCI Loans | ||||||||||||||||
Allowance for PCI loans, beginning of period | ||||||||||||||||
Reversal of loan losses on PCI loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Allowance for PCI loans, end of period | ||||||||||||||||
Allowance for loan losses | $ | $ | $ | $ | ||||||||||||
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 2018 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, 2019 and 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 | $ | $ | $ | $ | ||||||||||||
Provision for (reversal of) unfunded credit reserves | ( | ) | ( | ) | ||||||||||||
Allowance for unfunded credit reserves, end of period | $ | $ | $ | $ | ||||||||||||
41
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 expenses and other liabilities on the Consolidated Balance Sheet. See Note 12 — 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 loan type and impairment methodology as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | |||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Recorded investment in loans | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality (1) | ||||||||||||||||||||||||||||||||
Total (1) | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
($ 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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Recorded investment in loans | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality (1) | ||||||||||||||||||||||||||||||||
Total (1) | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) | Loans net of ASC 310-30 discount. |
42
Purchased Credit-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 flows expectation. The cash flows expected over the life of the pools are estimated by an internal cash flows model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions 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. Projected 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 collected at acquisition, considering the impact of prepayments, is referred to as the “nonaccretable difference.”
The following table presents the changes in accretable yield for PCI loans 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 | |||||||||||||
Accretable yield for PCI loans, beginning of period | $ | $ | $ | $ | ||||||||||||
Accretion | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Changes in expected cash flows | ( | ) | ||||||||||||||
Accretable yield for PCI loans, end of period | $ | $ | $ | $ | ||||||||||||
Loans Held-for-Sale
Loan Purchases, Transfers and Sales
The Company purchases and sells loans in the secondary market in the ordinary course of business. From time to time, purchased loans may be transferred from held-for-investment to held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate. The 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, 2019 and 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) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Sales (2)(3)(4) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Purchases (5) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
43
($ 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) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Loans transferred from held-for-sale to held-for-investment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Sales (2)(3)(4) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Purchases (5) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
($ 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) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Sales (2)(3)(4) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Purchases (5) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
($ 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) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Loans transferred from held-for-sale to held-for-investment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Sales (2)(3)(4) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Purchases (5) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
(1) | The Company recorded $ |
(2) | Includes originated loans sold of $ |
(3) | Includes purchased loans sold in the secondary market of $ |
(4) | Net gains on sales of loans were $ |
(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 Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in 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. These entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. To fully utilize the available tax credits, each of these entities must meet the regulatory affordable housing requirements for a minimum 15 -year compliance period. In addition to affordable housing projects, the Company also invests in New Market Tax Credit projects that qualify for CRA credits, as 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, and the investments in historic tax credits promote the rehabilitation of historic buildings and economic revitalization of the surrounding areas.
44
Investments in Qualified Affordable Housing Partnerships, Net
The Company records its investments in qualified affordable housing partnerships, net, using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in Income tax expense on the Consolidated Statement of Income.
The following table presents the Company’s investments in qualified affordable housing partnerships, net, and related unfunded commitments as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Investments in qualified affordable housing partnerships, net | $ | $ | ||||||
Accrued expenses and other liabilities — Unfunded commitments | $ | $ | ||||||
The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, 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 | |||||||||||||
Tax credits and other tax benefits recognized | $ | $ | $ | $ | ||||||||||||
Amortization expense included in income tax expense | $ | $ | $ | $ | ||||||||||||
Investments in Tax Credit and Other Investments, Net
Depending on the ownership percentage and the influence the Company has on the investments in tax credit and other investments, net, the Company applies the equity or cost method of accounting, or the measurement alternative as elected under ASU 2016-01 for equity investments without readily determinable fair value.
The following table presents the Company’s investments in tax credit and other investments, net, and related unfunded commitments as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Investments in tax credit and other investments, net | $ | $ | ||||||
Accrued expenses and other liabilities — Unfunded commitments | $ | $ | ||||||
Amortization of tax credit and other investments was $16.8 million and $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.
45
The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. These investments were recorded in Investments in tax credit and other investments, net on the Consolidated Balance Sheet and were accounted for under the equity method of accounting. 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.
During the three months ended September 30, 2019, the Company recorded an OTTI charge of $1.7 million related to two historic tax credit investments within Amortization of tax credit and other investments on the Consolidated Statement of Income. Total OTTI charge was $1.7 million and $11.6 million for the three and nine months ended September 30, 2019, respectively. In comparison, there was no OTTI charge recorded for the three and 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 was $465.7 million and $465.5 million as of September 30, 2019 and December 31, 2018, respectively. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in an acquisition. The Company assesses goodwill for impairment at the reporting unit level (at the same level as the Company’s business segment) on an annual basis as of December 31 of each year, or more frequently if events or circumstances, such as adverse changes in the economic or business environment, indicate there may be impairment. The Company organizes its operation into three reporting segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. For information on how the reporting units are identified and components are aggregated, see Note 18 — Business Segments to the Consolidated Financial Statements in this Form 10-Q.
46
There were no changes in the carrying amount of goodwill during the three months ended September 30, 2019 and 2018. The following table presents changes in the carrying amount of goodwill by reporting unit during the nine months ended September 30, 2019 and 2018:
($ in thousands) | Consumer and Business Banking | Commercial Banking | Total | |||||||||
Balance, January 1, 2018 | $ | $ | $ | |||||||||
Disposition of the DCB branches | ( | ) | ( | ) | ||||||||
Balance, September 30, 2018 | $ | $ | $ | |||||||||
Balance, January 1, 2019 | $ | $ | $ | |||||||||
Acquisition of Enstream Capital Markets, LLC | ||||||||||||
Balance, September 30, 2019 | $ | $ | $ | |||||||||
Impairment Analysis
The Company performed its annual impairment analysis as of December 31, 2018, and concluded that there was no goodwill impairment as the fair value of all reporting units exceeded the carrying amount of their respective reporting unit. There were no triggering events during the three and nine months ended September 30, 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 2018 Form 10-K for additional details related to the Company’s annual goodwill impairment analysis.
Core Deposit Intangibles
The following table presents the gross carrying amount of core deposit intangible assets and accumulated amortization as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Gross balance (1) | $ | $ | ||||||
Accumulated amortization (1) | ( | ) | ( | ) | ||||
Net carrying balance (1) | $ | $ | ||||||
(1) | Excludes fully amortized core deposit intangible assets. |
Amortization Expense
47
The following table presents the estimated future amortization expense of core deposit intangibles as of September 30, 2019:
($ in thousands) | Amount | |||
Remainder of 2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total | $ | |||
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 | $ | ||||
Finance lease assets | Premises and equipment | |||||
Total lease assets | $ | |||||
Liabilities: | ||||||
Operating lease liabilities | Operating lease liabilities | $ | ||||
Finance lease liabilities | Long-term debt and finance lease liabilities | |||||
Total lease liabilities | $ | |||||
48
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 | $ | $ | ||||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | ||||||||
Interest on lease liabilities | ||||||||
Variable lease cost | ||||||||
Sublease income | ( | ) | ||||||
Net lease cost | $ | $ | ||||||
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 | $ | $ | ||||||
Operating cash flows from finance leases | $ | $ | ||||||
Financing cash flows from finance leases | $ | $ | ||||||
Right-of-use assets obtained in exchange for new lease liabilities: | ||||||||
Operating leases | $ | $ | ||||||
Financing leases | $ | $ | ||||||
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 | |||
Finance leases | |||
Weighted-average discount rate: | |||
Operating leases | % | ||
Finance leases | % | ||
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 | $ | $ | ||||||
2020 | ||||||||
2021 | ||||||||
2022 | ||||||||
2023 | ||||||||
Thereafter | ||||||||
Total minimum lease payments | $ | $ | ||||||
Less: imputed interest | ( | ) | ( | ) | ||||
Present value of lease liabilities | $ | $ | ||||||
49
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 | $ | |||
Unguaranteed residual assets | ||||
Net investment in direct financing and sales-type leases | $ | |||
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 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total minimum lease payments | $ | |||
Less: imputed interest | ( | ) | ||
Present value of lease receivables | $ | |||
Note 12 — Commitments and Contingencies
Commitments to Extend Credit — In the normal course of business, the Company provides customers loan commitments on predetermined terms. These outstanding commitments to extend credit 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”).
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The following table presents the Company’s credit-related commitments as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Loan commitments | $ | $ | ||||||
Commercial letters of credit and SBLCs | $ | $ | ||||||
Loan commitments are agreements to lend to customers 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 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, 2019, total letters of credit of $1.91 billion consisted of SBLCs in the amount of $1.84 billion and commercial letters of credit in the amount of $70.6 million.
The Company applies the same credit underwriting criteria to 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 a 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 $13.3 million as of September 30, 2019 and $12.4 million as of December 31, 2018. These amounts are included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.
Guarantees — The Company sells or securitizes single-family and multifamily residential loans with recourse in the ordinary course of business. The recourse component of the loans sold or securitized with recourse is considered a guarantee. As the guarantor, the Company is obligated to repurchase up to the recourse component of the loans if the loans default. The following table presents the types of guarantees the Company had outstanding as of September 30, 2019 and December 31, 2018:
($ 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 | $ | $ | $ | $ | ||||||||||||
Multifamily residential loans sold or securitized with recourse | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit reserves and totaled $87 thousand and $123 thousand as of September 30, 2019 and December 31, 2018, respectively. The allowance for unfunded credit reserves is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. The Company continues to experience minimal losses from the single-family and multifamily residential loan portfolios sold or securitized with recourse.
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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 Entities to the Consolidated Financial Statements in this Form 10-Q. As of September 30, 2019 and December 31, 2018, these commitments were $135.9 million and $161.0 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.
Note 13 — Revenue from Contracts with Customers
The following tables present revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, and other noninterest income, segregated by operating segments for the three and nine months ended September 30, 2019 and 2018:
($ 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 | $ | $ | $ | $ | ||||||||||||
Card income | ||||||||||||||||
Wealth management fees | ||||||||||||||||
Total revenue from contracts with customers | $ | $ | $ | $ | ||||||||||||
Other sources of noninterest income (1) | ||||||||||||||||
Total noninterest income | $ | $ | $ | $ | ||||||||||||
($ 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 | $ | $ | $ | $ | ||||||||||||
Card income | ||||||||||||||||
Wealth management fees | ||||||||||||||||
Total revenue from contracts with customers | $ | $ | $ | $ | ||||||||||||
Other sources of noninterest income (1) | ||||||||||||||||
Total noninterest income | $ | $ | $ | $ | ||||||||||||
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($ 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 | $ | $ | $ | $ | ||||||||||||
Card income | ||||||||||||||||
Wealth management fees | ||||||||||||||||
Total revenue from contracts with customers | $ | $ | $ | $ | ||||||||||||
Other sources of noninterest income (1) | ||||||||||||||||
Total noninterest income | $ | $ | $ | $ | ||||||||||||
($ 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 | $ | $ | $ | $ | ||||||||||||
Card income | ||||||||||||||||
Wealth management fees | ||||||||||||||||
Total revenue from contracts with customers | $ | $ | $ | $ | ||||||||||||
Other sources of noninterest income (1) | ||||||||||||||||
Total noninterest income | $ | $ | $ | $ | ||||||||||||
(1) | Primarily represents revenue from contracts with customers that are out of the scope of ASC 606, Revenue from Contracts with Customers. |
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.
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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 | $ | $ | % | $ | $ | % | ||||||||||||||||
Income tax expense | $ | $ | % | $ | $ | % | ||||||||||||||||
Effective tax rate | % | % | % | % | ||||||||||||||||||
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.
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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, 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 $30.1 million of income tax expense during the second quarter of 2019.
The Company continues to conduct an ongoing investigation to gather information related to this matter, including tracking asset seizures of DC Solar and ongoing federal investigations. There can be no assurance that the Company will not recognize additional income tax expense as new information becomes available, or due to changes in tax laws, case law and regulations; or that the Company will not ultimately need to reverse the remaining tax credits previously claimed. For further discussion related to the Company’s investment in DC Solar and the Company’s impairment evaluation and monitoring process in tax credit investments, refer to Note 9 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q.
Note 15 — Stock Compensation Plans
Pursuant to the Company’s 2016 Stock Incentive Plan, as amended, the Company may issue stock, restricted stock, restricted stock units (“RSUs”), stock options, stock purchase warrants, stock appreciation rights, phantom stock and dividend equivalents to eligible employees, non-employee directors, consultants, and other service providers of the Company and its subsidiaries. There were no outstanding stock awards other than RSUs as of both September 30, 2019 and December 31, 2018.
The following table presents a summary of the total compensation costs and the related net tax benefits associated with the Company’s various share-based compensation plans for the three and nine months ended September 30, 2019 and 2018:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Stock compensation costs | $ | $ | $ | $ | ||||||||||||
Related net tax benefits for stock compensation plans | $ | $ | $ | $ | ||||||||||||
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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 dividend 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 zero 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 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 activities and share price information for the Company’s time-based and performance-based RSUs that will be settled in shares for the nine months ended September 30, 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 | $ | $ | ||||||||||||
Granted | ||||||||||||||
Vested | ( | ) | ( | ) | ||||||||||
Forfeited | ( | ) | ||||||||||||
Outstanding, September 30, 2019 | $ | $ | ||||||||||||
The following table presents a summary of the activities for the Company’s time-based RSUs that will be settled in cash for the nine months ended September 30, 2019:
Shares | |||
Outstanding, January 1, 2019 | |||
Granted | |||
Vested | |||
Forfeited | ( | ) | |
Outstanding, September 30, 2019 | |||
As of September 30, 2019, there were $27.6 million and $16.6 million of total unrecognized compensation costs related to unvested time-based and performance-based RSUs, respectively. These costs are expected to be recognized over a weighted-average period of 1.89 years and 1.98 years, respectively.
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Note 16 — Stockholders’ Equity and Earnings Per Share
Warrant — The Company acquired MetroCorp Bancshares, Inc., on January 17, 2014. Prior to the acquisition, MetroCorp Bancshares, Inc. had outstanding warrants to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holders were converted into the rights to acquire 230,282 shares of East West’s common stock until January 16, 2019. All warrants were exercised on January 7, 2019.
Earnings Per Share — Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each period, plus any incremental dilutive common share equivalents calculated for warrants and RSUs outstanding using the treasury stock method.
The following table presents the EPS calculations for the three and nine months ended September 30, 2019 and 2018:
($ and shares in thousands, except per share data) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Basic: | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Basic weighted-average number of shares outstanding | ||||||||||||||||
Basic EPS | $ | $ | $ | $ | ||||||||||||
Diluted: | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Basic weighted-average number of shares outstanding | ||||||||||||||||
Diluted potential common shares (1) | ||||||||||||||||
Diluted weighted-average number of shares outstanding (1) | ||||||||||||||||
Diluted EPS | $ | $ | $ | $ | ||||||||||||
(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, 2018. |
For the three and nine months ended September 30, 2019, 564 thousand and 277 thousand weighted-average shares of anti-dilutive RSUs, respectively, were excluded from the diluted EPS computation. In 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, 2018.
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Note 17 — 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, 2019 and 2018:
($ in thousands) | Available- for-Sale Investment Securities | Foreign Currency Translation Adjustments, Net of Hedges (1) | Total | |||||||||
Balance, July 1, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net unrealized (losses) arising during the period | ( | ) | ( | ) | ( | ) | ||||||
Amounts reclassified from AOCI | ( | ) | ( | ) | ||||||||
Changes, net of tax | ( | ) | ( | ) | ( | ) | ||||||
Balance, September 30, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Balance, July 1, 2019 | $ | $ | ( | ) | $ | ( | ) | |||||
Net unrealized gains (losses) arising during the period | ( | ) | ||||||||||
Amounts reclassified from AOCI | ( | ) | ( | ) | ||||||||
Changes, net of tax | ( | ) | ||||||||||
Balance, September 30, 2019 | $ | $ | ( | ) | $ | ( | ) | |||||
($ in thousands) | Available- for-Sale Investment Securities | Foreign Currency Translation Adjustments, Net of Hedges (1) | Total | |||||||||
Balance, January 1, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Cumulative effect of change in accounting principle related to marketable equity securities (2) | ||||||||||||
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate (3) | ( | ) | ( | ) | ||||||||
Balance, January 1, 2018, Adjusted | ( | ) | ( | ) | ( | ) | ||||||
Net unrealized (losses) arising during the period | ( | ) | ( | ) | ( | ) | ||||||
Amounts reclassified from AOCI | ( | ) | ( | ) | ||||||||
Changes, net of tax | ( | ) | ( | ) | ( | ) | ||||||
Balance, September 30, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Balance, January 1, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net unrealized gains (losses) arising during the period | ( | ) | ||||||||||
Amounts reclassified from AOCI | ( | ) | ( | ) | ||||||||
Changes, net of tax | ( | ) | ||||||||||
Balance, September 30, 2019 | $ | $ | ( | ) | $ | ( | ) | |||||
(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. |
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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, 2019 and 2018:
($ in thousands) | Three Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Before-Tax | Tax Effect | Net-of-Tax | Before-Tax | Tax Effect | Net-of-Tax | |||||||||||||||||||
Available-for-sale investment securities: | ||||||||||||||||||||||||
Net unrealized gains (losses) arising during the period | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
Net realized gains reclassified into net income (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Net change | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Foreign currency translation adjustments, net of hedges: | ||||||||||||||||||||||||
Net unrealized (losses) arising during the period (2) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Net change | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Other comprehensive income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
($ in thousands) | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Before-Tax | Tax Effect | Net-of-Tax | Before-Tax | Tax Effect | Net-of-Tax | |||||||||||||||||||
Available-for-sale investment securities: | ||||||||||||||||||||||||
Net unrealized gains (losses) arising during the period | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
Net realized gains reclassified into net income (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Net change | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Foreign currency translation adjustments, net of hedges: | ||||||||||||||||||||||||
Net unrealized (losses) arising during the period (2) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Net change | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Other comprehensive income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
(1) | For the three and nine months ended September 30, 2019 and 2018, before-tax amounts were reported in Net gains on sales of available-for-sale investment securities on the Consolidated Statement 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 18 — Business Segments
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. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of certain balance 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.
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The remaining centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, the Consumer and Business Banking and the Commercial Banking segments.
The Company utilizes an internal reporting process to measure the performance of the three operating segments within the Company. The internal reporting process derives operating segment results by utilizing allocation methodologies for revenue and expenses. Net interest income of 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 (“FTP”) process. Noninterest income and noninterest expense directly attributable to a business segment are assigned to that segment. Indirect costs, including technology-related costs and corporate overhead, are allocated based on a segment’s estimated usage using factors, including but not limited to, full-time equivalent employees, net interest income, and loan and deposit volume. Charge-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 loan volume. The Company’s internal reporting process utilizes a full-allocation methodology. Under this methodology, corporate expenses and indirect expenses incurred by the Other segment are allocated to the Consumer and Business Banking and the Commercial Banking segments, except certain corporate treasury-related expenses and insignificant unallocated expenses.
The corporate treasury function within the Other segment is responsible for liquidity and interest rate management of the Company. The Company’s internal FTP process is also managed by the corporate treasury function within the Other segment. The process is formulated with the goal of encouraging loan and deposit growth that is consistent with the Company’s overall profitability objectives, as well as to 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 internal 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 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 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, 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 operating results and other key financial measures for the individual operating segments as of and for the three and nine months ended September 30, 2019 and 2018:
($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||
Net interest income before provision for credit losses | $ | $ | $ | $ | ||||||||||||
Provision for credit losses | ||||||||||||||||
Noninterest income | ||||||||||||||||
Noninterest expense | ||||||||||||||||
Segment income before income taxes | ||||||||||||||||
Segment net income | $ | $ | $ | $ | ||||||||||||
As of September 30, 2019 | ||||||||||||||||
Segment assets | $ | $ | $ | $ | ||||||||||||
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($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||
Net interest income before provision for credit losses | $ | $ | $ | $ | ||||||||||||
Provision for credit losses | ||||||||||||||||
Noninterest Income | ||||||||||||||||
Noninterest expense | ||||||||||||||||
Segment income (loss) before income taxes | ( | ) | ||||||||||||||
Segment net income | $ | $ | $ | $ | ||||||||||||
As of September 30, 2018 | ||||||||||||||||
Segment assets | $ | $ | $ | $ | ||||||||||||
($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||
Net interest income before provision for credit losses | $ | $ | $ | $ | ||||||||||||
Provision for credit losses | ||||||||||||||||
Noninterest Income | ||||||||||||||||
Noninterest expense | ||||||||||||||||
Segment income before income taxes | ||||||||||||||||
Segment net income | $ | $ | $ | $ | ||||||||||||
As of September 30, 2019 | ||||||||||||||||
Segment assets | $ | $ | $ | $ | ||||||||||||
($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||
Net interest income before provision for credit losses | $ | $ | $ | $ | ||||||||||||
Provision for credit losses | ||||||||||||||||
Noninterest income | ||||||||||||||||
Noninterest expense | ||||||||||||||||
Segment income (loss) before income taxes | ( | ) | ||||||||||||||
Segment net income | $ | $ | $ | $ | ||||||||||||
As of September 30, 2018 | ||||||||||||||||
Segment assets | $ | $ | $ | $ | ||||||||||||
Note 19 — Subsequent Events
On October 17, 2019, the Company’s Board of Directors declared fourth quarter 2019 cash dividends for the Company’s common stock. The common stock cash dividend of $0.275 per share is payable on November 15, 2019 to stockholders of record as of November 1, 2019.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page | |||
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Overview
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company” or “we”), and its subsidiaries, including its subsidiary bank, East West Bank and its subsidiaries (referred to herein as “East West Bank” or the “Bank”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented elsewhere in this report, and the Company’s annual report on Form 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”).
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 that has a strong focus on the financial service needs of the Chinese-American community. Through over 130 locations in the United States (“U.S.”) and Greater China, the Company provides a full range of consumer and commercial products and services through three business segments: Consumer and Business Banking, Commercial Banking, with the remaining operations included in Other. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primary source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and investment securities and interest paid on deposits and other funding sources. As of September 30, 2019, the Company had $43.27 billion in assets and approximately 3,300 full-time equivalent employees. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services of the Company’s 2018 Form 10-K.
Corporate Strategy
We are committed to enhancing long-term stockholder value by executing on the fundamentals of growing loans, deposits and revenue, improving profitability, and investing for the future while managing risks, expenses and capital. Our business model is built on customer loyalty and engagement, understanding of our customers’ financial goals, and meeting our customers’ financial needs through our diverse products and services. The Company’s approach is concentrated on seeking out and deepening client relationships that meet our risk/return measures. This focus guides our decision-making across every aspect of our operations: the products we develop, the expertise we cultivate and the infrastructure we build to help our customers conduct business. We expect our relationship-focused business model to continue to generate organic growth and to expand our targeted customer bases. On an ongoing basis, we invest in technology related to critical business infrastructure and streamlining core processes, in the context of maintaining appropriate expense management. Our risk management activities are focused on ensuring that the Company identifies and manages risks to maintain safety and soundness while maximizing profitability.
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Selected Financial Data
($ 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). |
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Financial Highlights
Noteworthy items about the Company’s performance for the third quarter and first nine months of 2019 included:
• | Earnings: Third quarter 2019 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.) |
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• | 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: Third quarter 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: The effective 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. |
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• | 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. |
Results of Operations
Net Interest Income
The Company’s primary source of revenue is net interest income, which is the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities. Net interest margin is the ratio of net interest income to average interest-earning assets. Net interest income and net interest margin are impacted by several factors, including changes in average balances and 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.
Third quarter 2019 net interest income was $369.8 million, an increase of $21.1 million or 6%, compared with $348.7 million for the third quarter of 2018. For the first nine months of 2019, net interest income was $1.10 billion, an increase of $82.5 million or 8%, compared with $1.02 billion for the first nine months of 2018. Year-over-year, net interest income growth was primarily driven by loan growth, partially offset by a higher 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.
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The average loan yield for the third quarter of 2019 was 5.11%, a nine basis point increase from 5.02% for the third quarter of 2018. For the first nine months of 2019, the average loan yield was 5.23%, a 34 basis point increase from 4.89% for the first nine months of 2018. The increases in both periods, compared with the same periods a year ago, were driven by the upward repricing of the Company’s loan portfolio in 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 first nine months 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 were $40.92 billion, an increase of $4.10 billion or 11% from $36.82 billion for the third quarter of 2018. This was primarily due to increases of $3.16 billion in average loans and $1.03 billion in average interest-bearing cash and deposits with banks. For the first nine months of 2019, average interest-earning assets were $39.72 billion, an increase of $3.68 billion or 10% from $36.04 billion for the first nine months of 2018. This was primarily due to increases of $3.23 billion in average loans and $608.6 million in average interest-bearing cash and deposits with banks, partially offset by a decrease of $156.8 million 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.
Deposits are an important source of funds and impact both net interest income and net interest margin. Average noninterest-bearing demand deposits totaled $10.71 billion for the third quarter of 2019, compared with $10.64 billion for the third quarter of 2018, an increase of $73.1 million or 1%. Average noninterest-bearing demand deposits were $10.34 billion for the first nine months of 2019, compared with $10.97 billion for the first nine months of 2018, a decrease of $626.0 million or 6%. Average noninterest-bearing demand deposits comprised 29% and 32% of average total deposits for the third quarters of 2019 and 2018, respectively; and 29% and 34% of average total deposits for the first nine months 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 of 2019 increased $3.58 billion or 16% from $21.67 billion for the first nine months of 2018.
The average cost of funds was 1.13% for the third quarter of 2019, an increase of 27 basis points from 0.86% for the third quarter of 2018. For the first nine months of 2019, the average cost of funds was 1.16%, an increase of 45 basis points from 0.71% for the first nine months of 2018. The increases in the average cost of funds were primarily due to an increase in the average cost of interest-bearing deposits. The average cost of interest-bearing deposits increased 35 basis points to 1.49% for the third quarter of 2019, up from 1.14% for the third quarter of 2018. The average cost of interest-bearing deposits increased 56 basis points to 1.52% for the first nine months of 2019, up from 0.96% for the first nine months of 2018. Other sources of funding included in the calculation of the average cost of funds consist of FHLB advances, long-term debt and securities sold under repurchase agreements (“repurchase agreements”).
The Company utilizes various tools to manage interest rate risk. Refer to Item 2. MD&A — Asset Liability and Market Risk Management — Interest Rate Risk Management in this Form 10-Q.
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The following table presents the interest rate spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the third quarters of 2019 and 2018:
($ in thousands) | Three Months Ended September 30, | |||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||
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 | $ | 3,547,626 | $ | 19,772 | 2.21 | % | $ | 2,521,002 | $ | 13,353 | 2.10 | % | ||||||||||
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) | 33,661,282 | 433,658 | 5.11 | % | 30,498,037 | 385,538 | 5.02 | % | ||||||||||||||
Restricted equity securities | 78,213 | 656 | 3.33 | % | 73,535 | 721 | 3.89 | % | ||||||||||||||
Total interest-earning assets | $ | 40,919,386 | $ | 476,912 | 4.62 | % | $ | 36,822,293 | $ | 422,185 | 4.55 | % | ||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||
Cash and due from banks | 441,898 | 424,350 | ||||||||||||||||||||
Allowance for loan losses | (328,523 | ) | (301,557 | ) | ||||||||||||||||||
Other assets | 2,103,512 | 1,714,176 | ||||||||||||||||||||
Total assets | $ | 43,136,273 | $ | 38,659,262 | ||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Checking deposits | $ | 4,947,511 | $ | 14,488 | 1.16 | % | $ | 4,515,256 | $ | 9,551 | 0.84 | % | ||||||||||
Money market deposits | 8,344,993 | 26,943 | 1.28 | % | 7,613,030 | 21,411 | 1.12 | % | ||||||||||||||
Savings deposits | 2,154,592 | 2,656 | 0.49 | % | 2,194,792 | 2,308 | 0.42 | % | ||||||||||||||
Time deposits | 10,337,990 | 52,733 | 2.02 | % | 8,277,129 | 31,762 | 1.52 | % | ||||||||||||||
Federal funds purchased and other short-term borrowings | 40,433 | 382 | 3.75 | % | 58,218 | 643 | 4.38 | % | ||||||||||||||
FHLB advances | 745,263 | 5,021 | 2.67 | % | 325,246 | 2,732 | 3.33 | % | ||||||||||||||
Repurchase agreements (2) | 50,000 | 3,239 | 25.70 | % | 50,000 | 3,366 | 26.71 | % | ||||||||||||||
Long-term debt and finance lease liabilities | 152,471 | 1,643 | 4.28 | % | 156,794 | 1,692 | 4.28 | % | ||||||||||||||
Total interest-bearing liabilities | $ | 26,773,253 | $ | 107,105 | 1.59 | % | $ | 23,190,465 | $ | 73,465 | 1.26 | % | ||||||||||
Noninterest-bearing liabilities and stockholders’ equity: | ||||||||||||||||||||||
Demand deposits | 10,712,612 | 10,639,554 | ||||||||||||||||||||
Accrued expenses and other liabilities | 812,127 | 631,568 | ||||||||||||||||||||
Stockholders’ equity | 4,838,281 | 4,197,675 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 43,136,273 | $ | 38,659,262 | ||||||||||||||||||
Interest rate spread | 3.03 | % | 3.29 | % | ||||||||||||||||||
Net interest income and net interest margin | $ | 369,807 | 3.59 | % | $ | 348,720 | 3.76 | % | ||||||||||||||
(1) | Annualized. |
(2) | Average balances of resale and repurchase agreements have been reported net, pursuant to Accounting Standards Codification (“ASC”) 210-20-45-11, Balance Sheet Offsetting: 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 premiums on investment securities of $3.0 million and $3.4 million for the third quarters of 2019 and 2018, respectively. |
(5) | Average balances include nonperforming loans and loans held-for-sale. |
(6) | Includes the accretion of net deferred loan fees, unearned fees and ASC 310-30 discounts, and amortization of premiums, which totaled $7.8 million and $8.6 million for the third quarters of 2019 and 2018, respectively. |
69
The following table presents the interest rate spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the first nine months of 2019 and 2018:
($ in thousands) | Nine Months Ended September 30, | |||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||
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 | $ | 2,996,340 | $ | 52,103 | 2.32 | % | $ | 2,387,712 | $ | 36,013 | 2.02 | % | ||||||||||
Resale agreements (2) | 1,005,147 | 22,070 | 2.94 | % | 1,016,044 | 21,509 | 2.83 | % | ||||||||||||||
Available-for-sale investment securities (3)(4) | 2,614,949 | 47,378 | 2.42 | % | 2,771,727 | 45,695 | 2.20 | % | ||||||||||||||
Loans (5)(6) | 33,023,713 | 1,291,642 | 5.23 | % | 29,790,281 | 1,088,997 | 4.89 | % | ||||||||||||||
Restricted equity securities | 76,313 | 1,874 | 3.28 | % | 73,618 | 2,155 | 3.91 | % | ||||||||||||||
Total interest-earning assets | $ | 39,716,462 | $ | 1,415,067 | 4.76 | % | $ | 36,039,382 | $ | 1,194,369 | 4.43 | % | ||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||
Cash and due from banks | 449,739 | 433,299 | ||||||||||||||||||||
Allowance for loan losses | (321,486 | ) | (293,403 | ) | ||||||||||||||||||
Other assets | 1,970,775 | 1,695,156 | ||||||||||||||||||||
Total assets | $ | 41,815,490 | $ | 37,874,434 | ||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Checking deposits | $ | 5,145,308 | $ | 44,579 | 1.16 | % | $ | 4,487,314 | $ | 24,694 | 0.74 | % | ||||||||||
Money market deposits | 8,094,933 | 85,858 | 1.42 | % | 7,919,845 | 56,056 | 0.95 | % | ||||||||||||||
Savings deposits | 2,117,773 | 7,360 | 0.46 | % | 2,286,402 | 6,364 | 0.37 | % | ||||||||||||||
Time deposits | 9,887,274 | 148,992 | 2.01 | % | 6,976,359 | 68,319 | 1.31 | % | ||||||||||||||
Federal funds purchased and other short-term borrowings | 45,410 | 1,359 | 4.00 | % | 23,805 | 774 | 4.35 | % | ||||||||||||||
FHLB advances | 540,535 | 12,011 | 2.97 | % | 327,978 | 7,544 | 3.08 | % | ||||||||||||||
Repurchase agreements (2) | 50,000 | 10,200 | 27.27 | % | 50,000 | 8,714 | 23.30 | % | ||||||||||||||
Long-term debt and finance lease liabilities | 152,480 | 5,114 | 4.48 | % | 161,691 | 4,812 | 3.98 | % | ||||||||||||||
Total interest-bearing liabilities | $ | 26,033,713 | $ | 315,473 | 1.62 | % | $ | 22,233,394 | $ | 177,277 | 1.07 | % | ||||||||||
Noninterest-bearing liabilities and stockholders’ equity: | ||||||||||||||||||||||
Demand deposits | 10,342,966 | 10,968,958 | ||||||||||||||||||||
Accrued expenses and other liabilities | 751,065 | 610,105 | ||||||||||||||||||||
Stockholders’ equity | 4,687,746 | 4,061,977 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 41,815,490 | $ | 37,874,434 | ||||||||||||||||||
Interest rate spread | 3.14 | % | 3.36 | % | ||||||||||||||||||
Net interest income and net interest margin | $ | 1,099,594 | 3.70 | % | $ | 1,017,092 | 3.77 | % | ||||||||||||||
(1) | Annualized. |
(2) | Average balances of resale and repurchase agreements have been reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 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 premiums on investment securities of $9.0 million and $11.6 million for the first nine months of 2019 and 2018, respectively. |
(5) | Average balances include nonperforming loans and loans held-for-sale. |
(6) | Includes the accretion of net deferred loan fees, unearned fees and ASC 310-30 discounts, and amortization of premiums, which totaled $24.6 million and $28.0 million for the first nine months of 2019 and 2018, respectively. |
70
The following table summarizes the extent to which changes in (1) interest rates; and (2) average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and interest rate. Changes that are not solely due to either volume or rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Nonaccrual loans are included in average loans to compute the table below:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 vs. 2018 | 2019 vs. 2018 | |||||||||||||||||||||||
Total Change | Changes Due to | Total Change | Changes Due to | |||||||||||||||||||||
Volume | Yield/Rate | Volume | Yield/Rate | |||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Interest-bearing cash and deposits with banks | $ | 6,419 | $ | 5,689 | $ | 730 | $ | 16,090 | $ | 10,057 | $ | 6,033 | ||||||||||||
Resale agreements | (512 | ) | (155 | ) | (357 | ) | 561 | (233 | ) | 794 | ||||||||||||||
Available-for-sale investment securities | 765 | (433 | ) | 1,198 | 1,683 | (2,678 | ) | 4,361 | ||||||||||||||||
Loans | 48,120 | 40,633 | 7,487 | 202,645 | 123,227 | 79,418 | ||||||||||||||||||
Restricted equity securities | (65 | ) | 44 | (109 | ) | (281 | ) | 77 | (358 | ) | ||||||||||||||
Total interest and dividend income | $ | 54,727 | $ | 45,778 | $ | 8,949 | $ | 220,698 | $ | 130,450 | $ | 90,248 | ||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Checking deposits | $ | 4,937 | $ | 984 | $ | 3,953 | $ | 19,885 | $ | 4,044 | $ | 15,841 | ||||||||||||
Money market deposits | 5,532 | 2,179 | 3,353 | 29,802 | 1,265 | 28,537 | ||||||||||||||||||
Savings deposits | 348 | (43 | ) | 391 | 996 | (496 | ) | 1,492 | ||||||||||||||||
Time deposits | 20,971 | 9,029 | 11,942 | 80,673 | 35,210 | 45,463 | ||||||||||||||||||
Federal funds purchased and other short-term borrowings | (261 | ) | (177 | ) | (84 | ) | 585 | 651 | (66 | ) | ||||||||||||||
FHLB advances | 2,289 | 2,923 | (634 | ) | 4,467 | 4,731 | (264 | ) | ||||||||||||||||
Repurchase agreements | (127 | ) | — | (127 | ) | 1,486 | — | 1,486 | ||||||||||||||||
Long-term debt and finance lease liabilities | (49 | ) | (47 | ) | (2 | ) | 302 | (285 | ) | 587 | ||||||||||||||
Total interest expense | $ | 33,640 | $ | 14,848 | $ | 18,792 | $ | 138,196 | $ | 45,120 | $ | 93,076 | ||||||||||||
Change in net interest income | $ | 21,087 | $ | 30,930 | $ | (9,843 | ) | $ | 82,502 | $ | 85,330 | $ | (2,828 | ) | ||||||||||
Noninterest Income
The following table presents the components of noninterest income 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 | % Change | 2019 | 2018 | % Change | |||||||||||||||||
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 | 4,841 | 3,535 | 37 | % | 12,453 | 10,989 | 13 | % | ||||||||||||||
Interest rate contracts and other derivative income | 8,423 | 4,595 | 83 | % | 22,037 | 17,855 | 23 | % | ||||||||||||||
Net gains on sales of loans | 2,037 | 1,145 | 78 | % | 2,967 | 5,081 | (42 | )% | ||||||||||||||
Net gains on sales of available-for-sale investment securities | 58 | 35 | 66 | % | 3,066 | 2,374 | 29 | % | ||||||||||||||
Net gains on sales of fixed assets | 48 | 3,402 | (99 | )% | 48 | 5,602 | (99 | )% | ||||||||||||||
Net gain on sale of business | — | — | — | % | — | 31,470 | (100 | )% | ||||||||||||||
Other income | 3,238 | 2,569 | 26 | % | 10,196 | 7,355 | 39 | % | ||||||||||||||
Total noninterest income | $ | 51,474 | $ | 46,502 | 11 | % | $ | 146,364 | $ | 169,214 | (14 | )% | ||||||||||
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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 for the first nine months of 2019. The increases in both periods were primarily driven by an increased volume of foreign exchange transactions and the favorable 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 for the third quarter of 2019, and increased $4.2 million or 23% to $22.0 million for the first nine months of 2019. These increases reflected strong customer demand for interest rate swaps in response to the 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 decreased to $48 thousand for both the third quarter and the first nine months of 2019, down from $3.4 million for the third quarter of 2018 and $5.6 million for the first nine months of 2018. This was due to the Company’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 $31.5 million pre-tax gain recognized from the sale of the Bank’s eight DCB branches as discussed in Note 3 — Dispositions to the Consolidated Financial Statements in this Form 10-Q.
Noninterest Expense
The following table presents the components of noninterest expense for the third quarters and first nine months of 2019 and 2018:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2019 | 2018 | % 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 | % | ||||||||||
72
Third quarter 2019 noninterest expense was $176.6 million, a decrease of $3.2 million or 2%, compared with $179.8 million for the same period in 2018. This decrease was primarily due to decreases in amortization of tax credit and other investments, as well as deposit insurance premiums and regulatory assessments, partially offset by an increase in compensation and employee benefits. For the first nine months of 2019, noninterest expense was $541.2 million, an increase of $14.8 million or 3%, compared with $526.4 million for the same period in 2018. This increase was primarily attributable to increases in compensation and employee benefits, as well as other operating expense, partially offset by a decrease in deposit insurance premiums and regulatory assessments.
Compensation and employee benefits increased $1.1 million or 1% to $97.8 million for the third quarter of 2019, and increased $14.8 million or 5% to $300.6 million for the first nine months of 2019. These increases were primarily attributable to staffing growth to support the Company’s growing business and annual employee merit increases.
Deposit insurance premiums and 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 $4.0 million or 19% to $16.8 million for the third quarter of 2019, compared with the third quarter of 2018. This decrease was primarily due 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 third quarter of 2019. Amortization of tax credit and other investments decreased $193 thousand to $58.5 million for the first nine months of 2019, compared with the same period in 2018. The decrease was mainly due to fewer tax credit investments placed in service during 2019, which was offset by a $7.0 million full write-off of the DC Solar related tax credit investments during the first quarter of 2019, as well as the $4.6 million of OTTI charges related to three historic tax credit investments and a Community Reinvestment Act investment.
Income Taxes
($ 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 third quarters of 2019 and 2018, respectively. The effective tax rate and income tax expense for the third 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 of 2019 and 2018, respectively. The year-over-year increase for 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. Excluding this $30.1 million income tax expense recorded in the second quarter of 2019, the non-GAAP effective tax rates for the first nine months 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 with the same period a year ago, was due to a decrease in tax credits recognized from investments in renewable energy and historic rehabilitation tax credit projects.
73
The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. These investments were recorded in Investments in tax credit and other investments, net on the Consolidated Balance Sheet and were accounted for under the equity method of accounting. 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.
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. More discussion regarding the Company’s impairment evaluation and monitoring process of tax credit investments is provided in Note 4 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in 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.
74
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 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, 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 third quarters and first nine months of 2019 and 2018:
($ in thousands) | Three Months Ended September 30, 2019 | |||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||
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 | ||||||||
($ in thousands) | Three Months Ended September 30, 2018 | |||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||
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 | ||||||||
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($ in thousands) | Nine Months Ended September 30, 2019 | |||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||
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 | ||||||||
($ in thousands) | Nine Months Ended September 30, 2018 | |||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||
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 | ||||||||
Consumer and Business Banking
The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network. This segment offers consumer and commercial deposits, mortgage and home equity loans, and other products and services. It also originates commercial loans for small and medium-sized enterprises 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 segment net income of $67.6 million for the third quarter of 2019, compared with $76.7 million for the same period in 2018. The $9.1 million or 12% decrease in segment net income was primarily driven by a decrease in net interest income before provision for credit losses and an increase in provision for credit losses, partially offset by a corresponding decrease in income tax expense. Third quarter 2019 net interest income before provision for credit losses for this segment was $170.2 million, a decrease of $12.1 million or 7% compared with $182.3 million for the third 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 of 2019, compared with $246.6 million for the same period in 2018. The $23.1 million or 9% 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 of 2019, a decrease of $28.8 million or 40%, compared with $72.2 million for the same period in 2018. Noninterest income for the first nine months of 2018 included a non-recurring pre-tax gain of $31.5 million from the sale of the Bank’s eight DCB branches, recognized in the first quarter of 2018. The decrease in income tax expense reflected the decrease in segment income before income taxes.
76
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 segment net income of $74.1 million for the third quarter of 2019, compared with $79.3 million for the same period in 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 before provision for credit losses was $166.1 million for the third quarter of 2019, an increase of $16.3 million or 11% from $149.8 million for the same period in 2018, primarily driven by growth in this segment’s loan portfolio.
The Commercial Banking segment reported segment net income of $213.3 million for the first nine months of 2019, compared with $226.8 million for the same period in 2018. The $13.5 million or 6% 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 of 2019, an increase of $32.1 million or 82%, compared with $39.1 million for the same period in 2018. This increase was primarily due loan portfolio growth, increased charge-offs on C&I loans, and a deterioration in the credit risk ratings of C&I loans. Noninterest expense for this segment was $200.1 million for the first nine months of 2019, an increase of $20.8 million or 12% from $179.3 million for the same period in 2018, primarily due to an increase in compensation and employee benefits expense. Net interest income before provision for credit losses was $477.8 million for the first nine months of 2019, an increase of $29.6 million or 7% from $448.1 million for the same period in 2018, primarily driven by growth in this segment’s loan portfolio.
Other
Centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, the Consumer and Business Banking and the Commercial Banking segments.
The Other segment reported segment income before income taxes of $8.3 million and segment net income of $29.7 million for the third quarter of 2019, reflecting an income tax benefit of $21.5 million. The Other segment reported segment loss before income taxes of $12.6 million and segment net income of $15.2 million for the third quarter of 2018, reflecting an income tax benefit of $27.9 million. The increase in segment income before income taxes was primarily driven by an increase in net interest income before provision for credit losses and a decrease in noninterest expense. Net interest income before provision for credit losses was $33.5 million for the third quarter of 2019, an increase of $16.8 million or 101% from $16.7 million for the same period in 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 the inverted yield curve. Noninterest expense was $27.9 million for the third quarter of 2019, a $6.9 million or 20% decrease from $34.8 million for the third quarter of 2018, primarily due to a decrease in the amortization of tax credit and other investments. The decrease in the amortization of tax credit and other investments was due to fewer tax credit investments placed in service during this period, partially offset by $1.7 million in OTTI charges related to two historic tax credit investments.
The Other segment reported segment income before income taxes of $13.7 million and 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 segment 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 of 2019 from $30.4 million for the same period in 2018. This change reflected an increase in the net spread between the total internal FTP charges for loans and total internal FTP credits for deposits, which widened due to the inverted yield curve.
The income tax expense or benefit in the Other segment consists of the remaining unallocated income tax expense or benefit after allocating income tax expense to the two core segments. Income tax expense is allocated to the Consumer and Business Banking, as well as the Commercial Banking segments by applying segment effective tax rates to the segment income before income taxes.
77
Balance Sheet Analysis
The following table presents a discussion of the significant changes between September 30, 2019 and December 31, 2018:
Selected Consolidated Balance Sheet Data
($ in thousands) | September 30, 2019 | December 31, 2018 | Change | ||||||||||||
$ | % | ||||||||||||||
(Unaudited) | |||||||||||||||
ASSETS | |||||||||||||||
Cash and cash equivalents | $ | 3,042,281 | $ | 3,001,377 | $ | 40,904 | 1 | % | |||||||
Interest-bearing deposits with banks | 160,423 | 371,000 | (210,577 | ) | (57 | )% | |||||||||
Resale agreements | 860,000 | 1,035,000 | (175,000 | ) | (17 | )% | |||||||||
Available-for-sale investment securities, at fair value | 3,284,034 | 2,741,847 | 542,187 | 20 | % | ||||||||||
Restricted equity securities, at cost | 78,334 | 74,069 | 4,265 | 6 | % | ||||||||||
Loans held-for-sale | 294 | 275 | 19 | 7 | % | ||||||||||
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 | 190,000 | 184,873 | 5,127 | 3 | % | ||||||||||
Investments in tax credit and other investments, net | 211,603 | 231,635 | (20,032 | ) | (9 | )% | |||||||||
Premises and equipment | 120,859 | 119,180 | 1,679 | 1 | % | ||||||||||
Goodwill | 465,697 | 465,547 | 150 | 0 | % | ||||||||||
Operating lease right-of-use assets | 103,894 | — | 103,894 | 100 | % | ||||||||||
Other assets | 1,077,840 | 743,686 | 334,154 | 45 | % | ||||||||||
TOTAL | $ | 43,274,659 | $ | 41,042,356 | $ | 2,232,303 | 5 | % | |||||||
LIABILITIES | |||||||||||||||
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 | 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 and finance lease liabilities | 152,390 | 146,835 | 5,555 | 4 | % | ||||||||||
Operating lease liabilities | 112,142 | — | 112,142 | 100 | % | ||||||||||
Accrued expenses and other liabilities | 624,754 | 598,109 | 26,645 | 4 | % | ||||||||||
Total liabilities | 38,391,995 | 36,618,382 | 1,773,613 | 5 | % | ||||||||||
STOCKHOLDERS’ EQUITY | 4,882,664 | 4,423,974 | 458,690 | 10 | % | ||||||||||
TOTAL | $ | 43,274,659 | $ | 41,042,356 | $ | 2,232,303 | 5 | % | |||||||
As of September 30, 2019, total assets were $43.27 billion, an increase of $2.23 billion or 5% from December 31, 2018, primarily due to loan growth and an increase in available-for-sale investment securities. The loan growth was driven by strong increases in single-family residential, CRE, C&I, as well as construction and land loans. These increases were partially offset by decreases in interest-bearing deposits with banks and resale agreements.
As of September 30, 2019, total liabilities were $38.39 billion, an increase of $1.77 billion or 5% from December 31, 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 time deposits.
As of September 30, 2019, total stockholders’ equity was $4.88 billion, an increase of $458.7 million or 10% from December 31, 2018. This increase was primarily due to $485.8 million in net income and a $57.2 million increase in accumulated other comprehensive income, partially offset by $114.8 million of cash dividends declared on common stock.
78
Investment Securities
The Company maintains an investment securities portfolio that consists of high quality and liquid securities with relatively short durations to minimize overall interest rate and liquidity risks. The Company’s available-for-sale investment securities provide:
• | interest income for earnings and yield enhancement; |
• | availability for funding needs that arise during the normal course of business; |
• | the ability to execute interest rate risk management strategies in response to changes in economic or market conditions; and |
• | collateral to support pledging agreements as required and/or to enhance the Company’s borrowing capacity. |
Available-for-Sale Investment Securities
As of September 30, 2019 and December 31, 2018, the Company’s available-for-sale investment securities portfolio was primarily comprised of mortgage-backed securities and debt securities issued by U.S. government agency and U.S. government sponsored enterprises, foreign bonds, and U.S. Treasury securities. Investment securities classified as available-for-sale are carried at their fair value with the corresponding changes in fair value recorded in Accumulated other comprehensive loss, net of tax, as a component of Stockholders’ equity on the Consolidated Balance Sheet.
The following table presents the amortized cost and fair value by major categories of available-for-sale investment securities as of September 30, 2019 and December 31, 2018:
($ 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 totaled $3.28 billion as of September 30, 2019, compared with $2.74 billion as of December 31, 2018. The $542.2 million or 20% increase was primarily attributable to the purchases of U.S. government agency and U.S. government sponsored enterprise debt securities, U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, and U.S. Treasury securities, partially offset by the sales, repayments, and maturities of U.S. Treasury securities and U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities.
The Company’s investment securities portfolio had an effective duration of 2.4 as of September 30, 2019, which shortened from 4.1 as of December 31, 2018, primarily due to the decline 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.
79
Net unrealized gains on available-for-sale investment securities were $24.3 million as of September 30, 2019, which improved from net unrealized losses of $65.1 million as of December 31, 2018. This change was primarily due to the decrease in interest rates. Gross unrealized losses on available-for-sale investment securities totaled $8.1 million as of September 30, 2019, compared with $70.8 million as of December 31, 2018. Of the securities with gross unrealized losses, approximately 99% and 100% were rated investment grade as of September 30, 2019 and December 31, 2018, respectively, classified primarily based upon the lowest of the credit ratings issued by S&P, Moody’s, or Fitch. As of September 30, 2019, the Company had no intention to sell securities with unrealized losses and believed it is more-likely-than-not that it would not be required to sell such securities before recovery of their amortized cost.
The Company assesses individual securities for OTTI for each reporting period. There were no OTTI credit losses recognized in earnings for both the third quarters and first nine months of 2019 and 2018. For additional information on our accounting policies, valuation and composition, see Note 1 — Summary of Significant Accounting Policies in the Company’s 2018 Form 10-K, Note 4 — Fair Value Measurement and Fair Value of Financial Instruments and Note 6 — Securities to the Consolidated Financial Statements in this Form 10-Q.
80
The following table presents the weighted-average yields and contractual maturity distribution of the Company’s investment securities as of September 30, 2019 and December 31, 2018. Actual maturities of the investment securities can differ from contractual maturities due to prepayments or embedded call options. In addition, factors such as interest rate changes may affect the yields on the carrying value of the investment securities.
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||||||||||
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 | $ | 199,786 | $ | 199,711 | 1.80 | % | $ | 50,134 | $ | 49,773 | 1.08 | % | ||||||||||
Maturing after one year through five years | 227,749 | 226,402 | 1.35 | % | 527,427 | 515,042 | 1.69 | % | ||||||||||||||
Total | 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 | 406,381 | 406,572 | 2.17 | % | 26,955 | 26,909 | 3.51 | % | ||||||||||||||
Maturing after one year through five years | 133,500 | 133,713 | 2.71 | % | 10,181 | 10,037 | 2.18 | % | ||||||||||||||
Maturing after five years through ten years | 94,900 | 95,510 | 2.21 | % | 114,771 | 113,812 | 2.30 | % | ||||||||||||||
Maturing after ten years | 53,748 | 55,573 | 2.78 | % | 67,578 | 66,415 | 2.79 | % | ||||||||||||||
Total | 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 | 26,631 | 26,841 | 2.25 | % | 30,808 | 30,487 | 2.11 | % | ||||||||||||||
Maturing after five years through ten years | 78,533 | 81,705 | 2.74 | % | 96,822 | 95,365 | 2.68 | % | ||||||||||||||
Maturing after ten years | 1,346,186 | 1,363,651 | 2.64 | % | 1,247,442 | 1,226,844 | 2.74 | % | ||||||||||||||
Total | 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 | 35,580 | 35,720 | 2.65 | % | 29,167 | 28,974 | 2.60 | % | ||||||||||||||
Maturing after one year through five years | 24,777 | 25,080 | 2.47 | % | 48,398 | 47,681 | 2.39 | % | ||||||||||||||
Maturing after five years through ten years | 12,200 | 12,766 | 3.15 | % | 500 | 476 | 2.38 | % | ||||||||||||||
Maturing after ten years | 4,391 | 4,593 | 3.40 | % | 4,900 | 4,889 | 5.03 | % | ||||||||||||||
Total | 76,948 | 78,159 | 2.71 | % | 82,965 | 82,020 | 2.62 | % | ||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||
Maturing after one year through five years | 7,920 | 7,914 | 3.90 | % | — | — | — | % | ||||||||||||||
Maturing after ten years | 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 | 1,250 | 1,247 | 5.42 | % | 1,250 | 1,231 | 5.50 | % | ||||||||||||||
Maturing after one year through five years | 10,000 | 9,775 | 4.00 | % | 10,000 | 9,638 | 4.00 | % | ||||||||||||||
Total | 11,250 | 11,022 | 4.16 | % | 11,250 | 10,869 | 4.17 | % | ||||||||||||||
Foreign bonds: | ||||||||||||||||||||||
Maturing in one year or less | 454,431 | 453,179 | 2.33 | % | 439,378 | 414,065 | 2.19 | % | ||||||||||||||
Maturing after one year through five years | — | — | — | % | 50,000 | 48,983 | 3.12 | % | ||||||||||||||
Total | 454,431 | 453,179 | 2.33 | % | 489,378 | 463,048 | 2.28 | % | ||||||||||||||
Asset-backed securities: | ||||||||||||||||||||||
Maturing after ten years | 48,028 | 47,275 | 2.53 | % | 12,621 | 12,643 | 3.22 | % | ||||||||||||||
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 | $ | 1,100,414 | $ | 1,099,412 | 2.19 | % | $ | 549,517 | $ | 523,552 | 2.18 | % | ||||||||||
Maturing after one year through five years | 430,577 | 429,725 | 2.00 | % | 676,814 | 661,868 | 1.91 | % | ||||||||||||||
Maturing after five years through ten years | 185,633 | 189,981 | 2.50 | % | 212,093 | 209,653 | 2.47 | % | ||||||||||||||
Maturing after ten years | 1,543,160 | 1,564,916 | 2.68 | % | 1,368,476 | 1,346,774 | 2.78 | % | ||||||||||||||
Total available-for-sale investment securities | $ | 3,259,784 | $ | 3,284,034 | 2.42 | % | $ | 2,806,900 | $ | 2,741,847 | 2.43 | % | ||||||||||
(1) | Weighted-average yields are computed based on amortized cost balances. |
(2) | Yields on tax-exempt securities are not presented on a tax-equivalent basis. |
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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 commercial loans, which consist of C&I, CRE, multifamily residential, and construction and land loans; and consumer loans, which consist of single-family residential, home equity lines of credit (“HELOCs”) and other consumer loans. Total net loans, including loans held-for-sale, were $33.68 billion as of September 30, 2019, an increase of $1.61 billion or 5% from $32.07 billion as of December 31, 2018. This was primarily driven by year-to-date increases of $774.6 million or 13% in single-family residential loans, $489.4 million or 5% in CRE loans and $244.0 million or 2% in C&I loans. The composition of the loan portfolio was similar as of September 30, 2019 compared with December 31, 2018.
The following table presents the composition of the Company’s total loan portfolio by loan type as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 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 net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(39.8) million and $(48.9) million as of September 30, 2019 and December 31, 2018, respectively. |
(2) | Includes ASC 310-30 discount of $16.7 million and $22.2 million as of September 30, 2019 and December 31, 2018, respectively. |
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Commercial
The commercial loan portfolio, which comprised 75% of total loans as of both September 30, 2019 and December 31, 2018, is discussed as follows.
Commercial — Commercial and Industrial Loans. C&I loans totaled $12.30 billion or 36% of total loans, as of September 30, 2019, and $12.06 billion or 37% of total loans, as of December 31, 2018. The C&I loan portfolio is well-diversified by industry, with higher concentrations in the wholesale trade, energy, private equity, manufacturing, entertainment, and technology and 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 portfolios.The Company’s wholesale trade exposure largely consists of U.S. domiciled companies, many of which are based in California that import goods from Greater China for U.S. consumer consumption. The Company also had a portfolio of broadly syndicated C&I term loans, which totaled $876.5 million and $778.7 million as of September 30, 2019 and December 31, 2018, respectively. The majority of the C&I loans have variable interest rates.
Commercial — Commercial Real Estate Loans. CRE loans totaled $9.75 billion or 29% of total loans as of September 30, 2019, and $9.26 billion or 28% of total loans as of December 31, 2018. The Company focuses on providing financing to experienced real estate investors and developers who have moderate levels of leverage, many of whom are long-time customers. Loans are underwritten with conservative standards for cash flows, debt service coverage and loan-to-value. As of both September 30, 2019 and December 31, 2018, 21% of the total CRE loans were owner occupied properties; the remainder were non-owner occupied properties where 50% or more of the debt service for the loan is primarily provided by unaffiliated rental income from a third party. Interest rates on CRE loans may be fixed, variable or hybrid.
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The following tables provide a summary of the Company’s CRE, multifamily residential, and construction and land loans by geographic market as of September 30, 2019 and December 31, 2018:
($ 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, with a primary concentration in California accounting for 77% and 79% of the CRE loan portfolio as of September 30, 2019 and December 31, 2018, respectively. Changes in California’s economy and real estate values could have a significant impact on the collectability of these loans and the required level of allowance for loan losses.
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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 both dates. The multifamily residential loan portfolio is largely made up of loans secured by residential properties with five or more units in the Bank’s primary lending areas. As of September 30, 2019 and December 31, 2018, 84% and 86%, respectively, of the Company’s multifamily residential loans were concentrated in California. The Company offers a variety of first lien mortgages, including fixed- and variable-rate loans, as well as hybrid loans with interest rates that adjust annually after an initial fixed rate period of three to seven years.
Commercial — Construction and Land Loans. Construction and land loans totaled $719.9 million and $538.8 million as of September 30, 2019 and December 31, 2018, respectively, and accounted for 2% of total loans as of both dates. Included in the portfolio were construction loans of $630.5 million with additional unfunded commitments of $365.3 million as of September 30, 2019, and construction loans of $477.2 million with additional unfunded commitments of $525.1 million as of December 31, 2018. The construction loans provide financing for hotels, offices, and industrial structures. Similar to CRE and multifamily residential loans, the Company has a geographic concentration of construction and land loans in California.
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Consumer
The following tables summarize the Company’s single-family residential and HELOC loan portfolios by geographic market as of September 30, 2019 and December 31, 2018:
($ 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 in a first lien position for virtually all of the single-family residential loans as of both September 30, 2019 and December 31, 2018. Many of these loans 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. As of September 30, 2019 and December 31, 2018, 59% and 62% of the Company’s single-family residential loans, respectively, were concentrated in 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 period.
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Consumer — Home Equity Lines of Credit. HELOCs totaled $1.54 billion or 4% of total loans as of September 30, 2019, 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, 2018. Many of the loans within this 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. As of September 30, 2019 and December 31, 2018, 69% and 70% of the Company’s HELOCs, respectively, were concentrated in California. The HELOC portfolio is comprised largely of variable-rate loans.
All commercial and consumer loans originated are subject to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks associated with these products. The Company conducts a variety of quality control procedures and periodic audits, including the review of lending and legal requirements, to ensure that the Company is in compliance with these requirements.
Purchased Credit-Impaired Loans
Loans acquired with evidence of credit deterioration since their origination and where it is probable that the Company will not collect all contractually required principal and interest payments are PCI loans. PCI loans are recorded at fair value as of the date of acquisition. The carrying value of PCI loans totaled $240.7 million and $308.0 million as of September 30, 2019 and December 31, 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 in this Form 10-Q.
Loans Held-for-Sale
As of September 30, 2019 and December 31, 2018, loans held-for-sale of $294 thousand and $275 thousand, respectively, consisted of single-family residential loans. At the time of commitment to originate or purchase a loan, a loan is determined to be held-for-investment if it is the Company’s intent to hold the loan to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s evaluation processes, including asset/liability and credit risk management. If the Company subsequently changes its intent to hold certain loans, those loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value.
Loan Purchases, Transfers and Sales
During the third quarter and first nine months of 2019, the Company purchased loans held-for-investment of $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 the third quarter and first nine months of 2019 and 2018 were primarily comprised of broadly 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 $49.0 million and $78.0 million during the third quarters of 2019 and 2018, respectively, and $222.4 million and $363.6 million during the first nine months of 2019 and 2018, respectively. The transferred loans were primarily C&I loans for all periods. Related to these loan transfers, the Company recorded $36 thousand and $426 thousand in write-downs to the allowance for loan losses during the third quarter and first nine months of 2019, respectively, and $110 thousand and $13.5 million, respectively, during the same periods in 2018.
During the third quarter and first nine months of 2019, the Company sold $47.8 million and $180.0 million of originated loans, respectively, resulting in net gains of $2.0 million and $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 third quarter of 2018 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 of 2018 included $170.9 million of C&I loans.
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From time to time, the Company purchases and sells loans in the secondary market. During the third quarter and first nine months of 2019, the Company sold purchased loans of $7.9 million and $49.2 million, respectively, in the secondary market resulting in minimal net gains on sale of loans. In comparison, during the third quarter and first nine months of 2018, the Company sold purchased loans of $34.5 million and $134.5 million, respectively, in the secondary market, recording net gains on sale of $1 thousand and $33 thousand, respectively. These loans sold during the third quarters and first nine months of September 30, 2019 and 2018 were comprised of broadly syndicated C&I term loans.
Non-PCI Nonperforming Assets
Non-PCI nonperforming assets are comprised of nonaccrual loans, OREO, and other nonperforming assets. OREO and other nonperforming assets are repossessed assets and properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. Generally, loans are placed on nonaccrual status when they become 90 days past due or when the full collection of principal or interest becomes uncertain regardless of the length of past due status. Collectability is generally assessed based on economic and business conditions, the borrower’s financial conditions and the adequacy of collateral, if any. The following table presents information regarding non-PCI nonperforming assets as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Nonaccrual loans: | ||||||||
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 | 132,226 | 85,693 | ||||||
OREO, net | 1,122 | 133 | ||||||
Other nonperforming assets | 1,167 | 7,167 | ||||||
Total nonperforming assets | $ | 134,515 | $ | 92,993 | ||||
Non-PCI nonperforming assets to total assets (1) | 0.31 | % | 0.23 | % | ||||
Non-PCI nonaccrual loans to loans held-for-investment (1) | 0.39 | % | 0.26 | % | ||||
Allowance for loan losses to non-PCI nonaccrual loans | 261.35 | % | 363.30 | % | ||||
(1) | Total assets and loans held-for-investment include PCI loans of $240.7 million and $308.0 million as of September 30, 2019 and December 31, 2018, respectively. |
Period-over-period changes to nonaccrual loans represent loans that are placed on nonaccrual status in accordance with the Company’s accounting policy, offset by reductions for loans that are paid down, charged off, sold, foreclosed, or no longer classified as nonaccrual as a result of continued performance and improvement in the borrowers’ financial condition and loan repayments. Nonaccrual loans increased to $132.2 million as of September 30, 2019, an increase of $46.5 million or 54% from $85.7 million as of December 31, 2018. Nonaccrual loans as a percentage of loans held-for-investment increased to 0.39% as of September 30, 2019 from 0.26% as of December 31, 2018. C&I nonaccrual loans were 69% and 51% of total nonaccrual loans as of September 30, 2019 and December 31, 2018, respectively. Credit risks related to the C&I nonaccrual loans were partially mitigated by the collateral in place. As of September 30, 2019, $41.8 million or 32% of non-PCI nonaccrual loans were less than 90 days delinquent. In comparison, $23.8 million or 28% of non-PCI nonaccrual loans were less than 90 days delinquent as of December 31, 2018.
For additional details regarding the Company’s non-PCI nonaccrual loan policy, see Note 1 — Summary of Significant Accounting Policies — Loans Held-for-Investment to the Consolidated Financial Statements of the Company’s 2018 Form 10-K.
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A loan is classified as a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Loans with contractual terms that have been modified as a TDR and are current at the time of restructuring may remain on accrual status if there is demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, TDRs are placed on nonaccrual status and are reported as nonperforming, until the borrower demonstrates a sustained period of performance, generally six months, and the ability to repay the loan according to the contractual terms. If accruing TDRs cease to perform in accordance with their modified contractual terms, the loans are placed on nonaccrual status and reported as nonperforming TDRs.
The following table presents the performing and nonperforming TDRs by loan type as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||||
Performing TDRs | Nonperforming TDRs | Performing TDRs | Nonperforming TDRs | |||||||||||||
Commercial: | ||||||||||||||||
C&I | $ | 30,273 | $ | 62,261 | $ | 13,248 | $ | 10,715 | ||||||||
CRE | 5,934 | 12,044 | 6,134 | 17,272 | ||||||||||||
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 | $ | 50,485 | $ | 76,262 | $ | 33,225 | $ | 30,315 | ||||||||
Performing TDRs increased to $50.5 million as of September 30, 2019, 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 transfer of C&I, CRE and HELOC loans from nonperforming status. Nonperforming TDRs increased to $76.3 million as of September 30, 2019, an increase of $46.0 million or 152% from $30.3 million as of December 31, 2018. This increase reflects nonperforming C&I, single-family residential and HELOC loans that were newly designated as TDRs, partially offset by paydowns and payoffs of several nonperforming C&I and CRE loans, and the transfer of C&I, CRE and HELOC loans to performing status.
The Company’s impaired loans are predominantly made up of non-PCI loans held-for-investment on nonaccrual status and any non-PCI loans modified as a TDR, on either accrual or nonaccrual status. See Note 1 — Summary of Significant Accounting Policies — Troubled Debt Restructurings and Impaired Loans to the Consolidated Financial Statements of the Company’s 2018 Form 10-K for additional information regarding the Company’s TDR and impaired loan policies. The following table presents the recorded investment balances for non-PCI impaired loans as of September 30, 2019 and December 31, 2018:
($ 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.
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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, 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’s results of operations, and increased or decreased by the net amount of recoveries or charge-offs during the period. The allowance for unfunded credit reserves is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. Net adjustments to the allowance for unfunded credit reserves are included in Provision for credit losses on the Consolidated Statement of Income.
The Company is committed to maintaining the allowance for credit losses at a level that is commensurate with the estimated inherent losses in the loan portfolio, including unfunded credit reserves. In addition to regular quarterly reviews of the adequacy of the allowance for credit losses, the Company performs ongoing assessments of the risks inherent in the loan portfolio. While the Company believes that the allowance for loan losses is appropriate as of September 30, 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 about the Company’s allowance for credit losses, including the methodologies used, see Note 8 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-Q and Item 7. MD&A — Critical Accounting Policies and Estimates and Note 1 — Summary of Significant Accounting Policies — Allowance for Credit Losses to the Consolidated Financial Statements of the Company’s 2018 Form 10-K.
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The following table presents a summary of activities in the allowance for credit losses 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 | |||||||||||||
Allowance for loan losses, beginning of period | $ | 330,625 | $ | 301,550 | $ | 311,322 | $ | 287,128 | ||||||||
Provision for loan losses | 37,879 | 12,642 | 79,250 | 47,695 | ||||||||||||
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 loan losses, end of period | 345,576 | 310,041 | 345,576 | 310,041 | ||||||||||||
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 | ||||||||||||
Allowance for credit losses | $ | 359,000 | $ | 321,960 | $ | 359,000 | $ | 321,960 | ||||||||
Average loans held-for-investment | $ | 33,661,077 | $ | 30,488,140 | $ | 33,023,468 | $ | 29,762,719 | ||||||||
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 | 0.26 | % | 0.05 | % | 0.18 | % | 0.11 | % | ||||||||
As of September 30, 2019, the allowance for loan losses amounted to $345.6 million or 1.02% of loans held-for-investment. This compares with $311.3 million or 0.96% of loans held-for-investment as of December 31, 2018 and $310.0 million or 0.99% of loans held-for-investment as of September 30, 2018, respectively. The increase in allowance for loan losses was largely due to loan growth, as well as a deterioration in the credit risk ratings of C&I loans.
The provision for credit losses includes the provision for loan losses and unfunded credit reserves. A 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 its calculation methodology. The provision for credit losses was $38.3 million and $80.1 million for the third quarter and first nine months of 2019, respectively, compared with $10.5 million and $46.3 million for the same periods in 2018. The year-over-year increases in both periods, compared with the same periods in 2018, reflected loan growth, increased charge-offs in C&I loans and a deterioration in the credit risk ratings of C&I loans during the third quarter of 2019.
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The Company believes that the allowance for credit losses as of September 30, 2019 and December 31, 2018 was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments.
The following table presents the Company’s allocation of the allowance for loan losses by loan type and the ratio of each loan type to total loans held-for-investment as of September 30, 2019 and December 31, 2018:
($ in thousands) | September 30, 2019 | December 31, 2018 | ||||||||||||
Allowance Allocation | Loans as % of Total Loans | Allowance Allocation | Loans as % of Total Loans | |||||||||||
Commercial: | ||||||||||||||
C&I | $ | 218,869 | 36 | % | $ | 189,117 | 37 | % | ||||||
CRE | 37,473 | 29 | % | 40,666 | 28 | % | ||||||||
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 | $ | 345,576 | 100 | % | $ | 311,322 | 100 | % | ||||||
The Company maintains an allowance for loan losses for both non-PCI and PCI loans. An allowance for loan losses for PCI loans is based on the Company’s estimates of cash flows expected to be collected from PCI loans. PCI loan losses are estimated collectively for groups of loans with similar characteristics. As of September 30, 2019, the Company had no allowance for loan losses for $240.7 million of PCI loans. In comparison, the Company established an allowance for loan losses of $22 thousand for $308.0 million of PCI loans as of December 31, 2018, comprising of CRE loans.
Deposits and Other Sources of Funds
Deposits are the Company’s primary source of funding, the cost of which has a significant impact on the Company’s net interest income and net interest margin. Additional funding is provided by short and long-term borrowings, and long-term debt. See Item 2 — MD&A — Asset Liability and Market Risk Management — Liquidity in this Form 10-Q for a discussion of the Company’s liquidity management. The following table summarizes the Company’s sources of funds as of September 30, 2019 and December 31, 2018:
($ 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 | % | |||||||
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Deposits
The Company offers a wide variety of deposit products to both consumer and commercial customers. The Company’s deposit strategy is to grow and retain relationship-based deposits, which provides a stable and low-cost source of funding and liquidity to the Company.
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. Year-to-date change was primarily due to growth of $1.45 billion or 16% in time deposits. Noninterest-bearing demand deposits comprised 29% and 32% of total deposits as of September 30, 2019 and December 31, 2018, respectively. Additional information regarding the impact of deposits on net interest income and a comparison of average deposit balances and rates are provided in Item 2. MD&A — Results of Operations — Net Interest Income in this Form 10-Q.
Other Funds
The Company’s other sources of funding consist of short-term borrowings, long-term FHLB advances, repurchase agreements and long-term debt.
The Company had $47.7 million of short-term borrowings outstanding as of September 30, 2019, compared with $57.6 million as of December 31, 2018. This funding was entered into by the Company’s subsidiary, East West Bank (China) Limited, and will mature in the fourth quarter of 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 were $745.5 million as of September 30, 2019, an increase of $419.3 million or 129% from $326.2 million as of December 31, 2018. As of September 30, 2019, FHLB advances had fixed and floating interest rates ranging from 1.98% to 2.58% with remaining maturities between four months and 3.11 years.
Gross repurchase agreements totaled $450.0 million as of both September 30, 2019 and December 31, 2018. Resale and repurchase agreements are reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Net repurchase agreements totaled $50.0 million as of both September 30, 2019 and December 31, 2018, after netting $400.0 million of gross repurchase agreements against gross resale agreements. As of September 30, 2019, gross repurchase agreements had interest rates ranging from 4.33% to 4.55%, original terms between 4.0 years and 9.0 years and remaining maturities between 3.1 years and 3.9 years.
Repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the securities are sold. As of September 30, 2019, the collateral for the repurchase agreements was comprised of U.S. Treasury securities and U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities. To ensure the market value of the underlying collateral remains sufficient, the Company monitors the fair value of collateral pledged relative to the principal amounts borrowed under repurchase agreements. The Company manages liquidity risks related to the repurchase agreements by sourcing 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 in this Form 10-Q.
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The Company uses long-term debt to provide funding to acquire interest-earning assets, as well as to enhance liquidity and regulatory capital. Long-term debt totaled $147.0 million and $146.8 million as of September 30, 2019 and December 31, 2018, respectively. Long-term debt is comprised of junior subordinated debt, which qualifies as Tier 2 capital for regulatory purposes. The junior subordinated debt was issued in connection with the Company’s various pooled trust preferred securities offerings and includes the value of the common stock issued by six wholly-owned subsidiaries of the Company in conjunction with these offerings. The junior subordinated debt had a weighted-average interest rate of 4.11% and 3.67% for the first nine months of 2019 and 2018, respectively, with remaining maturities between 15.2 years and 18 years as of September 30, 2019.
Foreign Outstandings
The Company’s overseas offices, which include the branch in Hong Kong and the subsidiary bank in China, are subject to the general risks inherent in conducting business in foreign countries, such as regulations, or economic and political uncertainties. In addition, the Company’s financial assets held in the Hong Kong branch and the subsidiary bank in China may be affected by fluctuations in currency exchange rates or other factors. The Company’s country risk exposure is largely concentrated in China and Hong Kong. The following table presents the major financial assets held in the Company’s overseas offices as of September 30, 2019 and December 31, 2018:
($ 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 | % | ||||||||||||
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Capital
The Company maintains an adequate capital base to support its anticipated asset growth, operating needs and credit risks, and to ensure that the 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, allocating capital to existing and future business activities. Furthermore, the Company conducts capital stress tests as part of its capital planning process. The stress tests enable the Company to assess the impact of adverse changes in the economy and interest rates on its capital base.
The Company’s stockholders’ equity was $4.88 billion as of September 30, 2019, an increase of $458.7 million or 10% from $4.42 billion as of December 31, 2018. The Company’s primary source of capital is the retention of its operating earnings. Retained earnings were $3.55 billion as of September 30, 2019, an increase of $385.7 million or 12% from $3.16 billion as of December 31, 2018. The increase primarily reflected net income of $485.8 million, offset by $114.8 million of cash dividends declared during the first nine months of 2019. In addition, the beginning balance of retained earnings increased $14.7 million as of January 1, 2019, because the Company recognized a cumulative adjustment related to the deferred gains on the sale and leaseback transactions, which had occurred prior to the date of adoption of ASU 2016-02, Leases (Topic 842). For other factors that contributed to the changes in stockholders’ equity, refer to Item 1. Consolidated Financial Statements — Consolidated Statement of Changes in Stockholders’ Equity in this Form 10-Q.
Book value was $33.54 per common share as of September 30, 2019, compared with $30.52 per common share as of December 31, 2018. The Company paid a quarterly cash dividend of $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 for the first and second quarters of 2018, and $0.23 per common share for the third quarter of 2018. In October 2019, the Company’s Board of Directors declared fourth quarter 2019 cash dividends of $0.275 per common share. The dividend will be paid on November 15, 2019 to stockholders of record as of November 1, 2019.
Regulatory Capital and Ratios
The federal banking agencies have risk-based capital adequacy guidelines intended to ensure that banking organizations maintain capital that is commensurate with the degree of risk associated with a banking organization’s operations. See Item 1. Business — Supervision and Regulation — Capital Requirements of the Company’s 2018 Form 10-K for additional details.
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% to be considered adequately capitalized. In addition, the rules require banking organizations to maintain a capital conservation buffer of 2.5% above the capital minimums in 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. As of January 1, 2019, banking organizations are 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% in a fully phased-in basis.
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The Company is committed to maintaining capital at a level sufficient to assure the Company’s investors, customers and regulators that the Company and the Bank are financially sound. As of September 30, 2019 and December 31, 2018, both the Company and the Bank were considered “well-capitalized,” meeting 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, 2019 and December 31, 2018 under the Basel III Capital Rules, and those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
Basel III Capital Rules | |||||||||||||||||||||
September 30, 2019 | December 31, 2018 | Minimum Regulatory Requirements | Well- Capitalized Requirements | Fully Phased-in Minimum Regulatory Requirements | |||||||||||||||||
Company | East West Bank | Company | East West Bank | ||||||||||||||||||
CET1 risk-based capital | 12.8 | % | 12.7 | % | 12.2 | % | 12.1 | % | 4.5 | % | 6.5 | % | 7.0 | % | |||||||
Tier 1 risk-based capital | 12.8 | % | 12.7 | % | 12.2 | % | 12.1 | % | 6.0 | % | 8.0 | % | 8.5 | % | |||||||
Total risk-based capital | 14.2 | % | 13.7 | % | 13.7 | % | 13.1 | % | 8.0 | % | 10.0 | % | 10.5 | % | |||||||
Tier 1 leverage capital (1) | 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. |
During the first nine months of 2019, the Company’s CET1 and Tier 1 risk-based capital ratios increased 54 basis points, the total risk-based capital ratio increased 56 basis points, and the Tier 1 leverage capital ratio increased 41 basis points. Tier 1 risk-based capital of $4.39 billion as of September 30, 2019 increased $422.4 million or 11% from $3.97 billion as of December 31, 2018. 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, the 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 Company. The Company’s commercial and consumer businesses issue, trade, and hold various products that are currently indexed to LIBOR. A portion of the Company’s loans, derivatives, investment securities, resale agreements, FHLB advances, and deposits, as well as all the junior subordinated debt and repurchase agreements are indexed to LIBOR and mature after 2021. The volume of the Company’s products that are indexed to LIBOR is significant, and if not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks.
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 related to the transition of LIBOR include (1) establishing a cross-functional team to identify, assess and monitor risks associated with the transition of LIBOR and other benchmark rates, (2) developing an inventory of LIBOR indexed products, and (3) implementing more robust fallback contract language for new loans, which identifies LIBOR cessation trigger events, provides for an alternative index and permits an adjustment to the margin as applicable. The Company 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 Company appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruption during and after the LIBOR transition. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s business, see Item 1A. Risk Factors in the Company’s 2018 Form 10-K.
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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 Sheet and are considered to be off-balance sheet arrangements. Off-balance sheet arrangements are any contractual arrangements to which a nonconsolidated entity is a party and under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in a nonconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.
Commitments to extend credit
As a financial service provider, the Company routinely enters into commitments to extend credit such as loan commitments, commercial letters of credit for foreign and domestic trade, SBLCs and financial guarantees to meet the financing needs of our customers. Many of these commitments to extend credit may expire without being drawn upon. The credit policies used in underwriting loans to customers are also used to extend these commitments. Under some of these contractual agreements, the Company may also have liabilities contingent upon the occurrence of certain events. The Company’s liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of its lending activities. Information about the Company’s loan commitments, commercial letters of credit and SBLCs is provided in Note 12 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.
Guarantees
In the ordinary course of business, the Company enters into various guarantee agreements in which the Company sells or securitizes loans with recourse. Under these guarantee arrangements, the Company is contingently obligated to repurchase the recourse component of the loans when the loans default. Additional information regarding guarantees is provided in Note 12 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.
A discussion of significant contractual arrangements under which the Company may be held contingently liable is included in Note 12 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q. In addition, the Company has commitments and obligations under post-retirement benefit plans as described in Note 16 — Employee Benefit Plans to the Consolidated Financial Statements of the Company’s 2018 Form 10-K, and has contractual obligations for future payments on debts, borrowings and lease obligations as detailed in Item 7. MD&A — Off-Balance Sheet Arrangements and Contractual Obligations of the Company’s 2018 Form 10-K.
Asset Liability and Market Risk Management
Liquidity
Liquidity is a financial institution’s capacity to meet its deposit and other counterparties’ obligations as they come due, or to obtain adequate funding at a reasonable cost to meet those obligations. The objective of liquidity management is to manage the potential mismatch of asset and liability cash flows. Maintaining an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows, and collateral needs without adversely affecting daily operations or the financial condition of the institution. To achieve this objective, the Company analyzes its liquidity risk, maintains readily available liquid assets and utilizes diverse funding sources including its stable core deposit base. The 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 of Directors.
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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 $35.44 billion as of December 31, 2018, of which core deposits comprised 71% and 74% of total deposits as of September 30, 2019 and December 31, 2018, respectively. In addition, the Company has access to various sources of wholesale funding, and has borrowing capacity at the FHLB and Federal Reserve Bank of San Francisco (“FRB”) to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute its business strategy. Economic conditions and the stability of capital markets impact the Company’s access to and the cost of wholesale financing. The Company’s access to capital markets is also affected by the ratings received from various credit rating agencies. See Item 2 — MD&A — Balance Sheet Analysis — Deposits and Other Sources of Funds in this Form 10-Q for further detail related to the Company’s funding sources.
The Company’s liquid asset portfolio includes cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements and unencumbered available-for-sale investment securities. The following table presents the Company’s liquid asset portfolio as of September 30, 2019 and December 31, 2018:
($ 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 $6.05 billion as of September 30, 2019 and December 31, 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 lines of credit with various correspondent banks and several master repurchase agreements with major brokerage companies. The Company’s available borrowing capacity with the FHLB and FRB was $6.49 billion and $3.04 billion, respectively, as of September 30, 2019. Unencumbered loans and/or securities were pledged to the FHLB and FRB discount window as collateral. Eligibility of collateral is defined in guidelines from the FHLB and FRB and is subject to change at their discretion. The Bank’s unsecured federal funds lines of credit with correspondent banks, subject to availability, totaled $585.0 million as of September 30, 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 regulatory restrictions on its ability to pay dividends as discussed in Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds 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 $105.0 million to East West, respectively. East West’s cash flow obligations primarily consist of debt, operating expenses and dividends payments.
Liquidity Risk — Liquidity Stress Testing. Liquidity stress testing is performed at the Company level, as well as at the foreign subsidiary and foreign branch levels. Stress testing and scenario analysis are intended to quantify the potential impact of a liquidity event on the financial and liquidity position of the entity. These scenarios include assumptions about significant changes in key funding sources, market triggers and potential uses of funding and economic conditions in certain countries. In addition, Company specific events are incorporated into the stress testing. Liquidity stress tests are conducted to ascertain potential mismatches between liquidity sources and uses over a variety of time horizons, both immediate and longer term, and over a variety of stressed conditions. Given the range of potential stresses, the Company maintains a series of contingency funding plans on a consolidated basis and for individual entities. As of September 30, 2019, the Company was not aware of any trends, events or uncertainties that would or were reasonably likely to, have a material effect on its liquidity position. Furthermore, the Company is not aware of any material commitments for capital expenditures in the foreseeable future.
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Consolidated Cash Flows Analysis
The following table presents a summary of the Company’s Consolidated Statement of Cash Flows for the first nine months of 2019 and 2018. In addition to this cash flow analysis, the discussion in Item 2. MD&A — Asset Liability and Market Risk Management — Liquidity may provide additional context in evaluating the Company’s liquidity position and related activity.
($ 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 provided by operating activities was $389.0 million and $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 reconcile 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 of 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 other liabilities, partially offset by $38.2 million of net changes in accrued interest receivable and other assets.
Investing Activities — Net cash used in investing activities was $1.87 billion and $2.65 billion for the first nine months of 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. In addition, changes in interest rates can influence the rate of principal prepayments on loans and the speed of deposit withdrawals. Due to the pricing term mismatches and the embedded options inherent in certain products, changes in market interest rates not only affect expected near-term earnings, but also the economic value of these interest-earning assets and interest-bearing liabilities. Other market risks include foreign currency exchange risk and equity price risk. These risks are not considered significant to the Company and no separate quantitative information concerning these risks is presented herein.
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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 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 analyses under multiple interest rate scenarios. The model incorporates the Company’s cash instruments, loans, investment securities, resale agreements, deposits, borrowings and repurchase agreements, as well as financial instruments from the Company’s foreign operations. The Company incorporates both a static balance sheet and a forward growth balance sheet in order to perform these analyses. The simulated interest rate scenarios include a non-parallel shift in the yield curve (“rate shock”) and a gradual non-parallel shift in the yield curve (“rate ramp”). In addition, the Company also performs simulations using alternative interest rate scenarios, including various permutations of the yield curve flattening, steepening or inverting. Results of these various simulations are used to formulate and gauge strategies to achieve a desired risk profile within the Company’s capital and liquidity guidelines.
The net interest income simulation model is based on the actual maturity and re-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 deposit decay and deposit beta assumptions, derived from a regression analysis of the Company’s historical deposit data. Deposit beta commonly refers to the correlation of the change in interest rates paid on deposits to changes in benchmark market interest rates. The model is also sensitive to the loan and investment prepayment assumptions, based on an independent model and the Company’s historical prepayment data, which consider anticipated prepayments under different interest rate environments.
Simulation results are highly dependent on input assumptions. To the extent actual behavior is different from the assumptions in the models, there could be a material change in interest rate sensitivity. The assumptions applied in the model are documented and supported for reasonableness, and periodically back-tested to assess their effectiveness. The Company makes appropriate calibrations to the model as needed, continually refining the model, methodology and results. Changes to key model assumptions are reviewed by the ALCO. Scenario results do not reflect strategies that management could employ to limit the impact of changing interest rate expectations.
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 sensitivity, as of September 30, 2019 and December 31, 2018, to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions:
Change in Interest Rates (Basis Points) | Net Interest Income Volatility (1) | |||||
September 30, 2019 | December 31, 2018 | |||||
+200 | 15.4 | % | 16.6 | % | ||
+100 | 7.8 | % | 8.4 | % | ||
-100 | (6.6 | )% | (8.3 | )% | ||
-200 | (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. |
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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 | )% | ||
(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.
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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. |
The Company’s EVE sensitivity for the upward interest rate scenarios as of September 30, 2019 increased while the sensitivity for the downward interest rate scenarios as of September 30, 2019 decreased, as compared with the results as of December 31, 2018. The changes in EVE sensitivity during this period were primarily due to the shape of the yield curve being inverted.
The Company’s EVE profile as of September 30, 2019 reflects an asset sensitive EVE position. Given the uncertainty of the magnitude, timing and direction of future interest rate movements, and the shape of the yield curve, actual results may vary from those predicted by the Company’s model.
Derivatives
It is the Company’s policy not to speculate on the future direction of interest rates, foreign currency exchange rates and commodity prices. However, the Company will, from time to time, enter into derivative transactions in order to reduce its exposure to market risks, primarily interest rate risk and foreign currency risk. The Company believes that these derivative transactions, when properly structured and managed, may provide a hedge against inherent risk in certain assets and liabilities and against risk in specific transactions. Hedging transactions may be implemented using a variety of derivative instruments such as swaps, forwards and options. Prior to entering into any hedging activities, the Company analyzes the costs and benefits of the hedge in comparison to alternative strategies. In addition, the Company enters into derivative transactions in order to assist customers with their risk management objectives, primarily to manage 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.
The Company is subject to credit risk associated with the counterparties to the derivative contracts. This counterparty credit risk is a multidimensional form of risk, affected by both the exposure and credit quality of the counterparty, both of which are sensitive to market-induced changes. The Company’s Credit Risk Management Committee provides oversight of credit risks and the Company has guidelines in place to manage counterparty concentration, tenor limits and collateral. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, 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, 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 changes in fair value of the hedged brokered certificates of deposit are expected to be effectively offset by the changes in fair value of the swaps throughout the terms of these contracts.
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Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. The Company entered 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 East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange 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 fluctuation in foreign currency translation of the hedged exposure is expected to be offset by changes in the fair value of the forwards.
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 extent the central clearing organizations’ rulebooks legally characterize the variation margin as settlement. Derivative contracts allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are not linked to specific Company assets or liabilities on the Consolidated Balance Sheet or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements.
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forward, spot, swap and option contracts to accommodate the business needs of its customers. For a portion of the foreign exchange contracts entered into with its customers, 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 that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits 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 the Dodd-Frank Wall Street Reform and Consumer Protection Act (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.
Credit Contracts — The Company may periodically enter into RPAs to manage the credit exposure on interest rate contracts associated with its syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. Under the RPA, the Company will receive or make a payment if a borrower defaults on the related interest rate 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.
Equity Contracts — As part of the loan origination process, from time to time, the Company obtained warrants to purchase preferred and common stock of technology and life sciences companies. The warrants included on the Consolidated Financial Statements were from public and private companies.
Commodity Contracts — The Company entered into energy commodity contracts with its customers to allow them to hedge against the risk of fluctuation in energy commodity prices. To economically hedge against the risk of fluctuation in commodity prices in the products offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions including with central clearing organizations. Certain derivative contracts entered with central clearing organizations are settled to market daily to the extent the central clearing organizations’ rulebooks legally characterize the variation margin as settlement. The changes in fair values of the energy commodity contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the 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 2018 Form 10-K, Note 4 — Fair Value Measurement and Fair Value of Financial Instruments and Note 7 — Derivatives to the Consolidated Financial Statements of this report.
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Critical Accounting Policies and Estimates
The Company’s significant accounting policies and use of estimates (see Note 1 — Summary of Significant Accounting Policies and Item 7. MD&A — Critical Accounting Policies and Estimates of the Company’s 2018 Form 10-K) are fundamental to understanding its results of operations and financial condition. Some accounting policies, by their nature, are inherently subject to estimation methods, valuation assumptions and may require significant judgment in applying complex accounting principles to individual transactions. The Company has procedures and processes in place to facilitate making these judgments. The following accounting policies are critical to the Company’s Consolidated Financial Statements as they require management to make subjective and complex judgments about matters that are inherently uncertain where actual results could differ materially from the Company’s estimates:
• | fair value of financial instruments; |
• | 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 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 $31.5 million. Management believes that by adjusting for these non-recurring items from net income, diluted EPS, ROA, ROE and effective tax rate, will provide clarity to financial statement users regarding the ongoing performance of the Company and allows comparability to prior periods.
Non-GAAP efficiency ratio represents non-GAAP noninterest expense divided by non-GAAP revenue. Non-GAAP revenue represents the aggregate of net interest income and non-GAAP noninterest income, where non-GAAP noninterest income excludes the gain on the sale of the DCB branches that were sold in the first quarter of 2018. Non-GAAP noninterest expense excludes the amortization of tax credit and other investments and the amortization of core deposit intangibles. Non-GAAP tangible common equity represents stockholders’ equity, which has been reduced by goodwill and other intangible assets.
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The following tables present the reconciliations of GAAP to non-GAAP financial measures for the periods presented:
($ 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%. |
(3) | Annualized. |
($ 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 | % | |||||||||
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($ 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. |
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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; |
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• | 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.
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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 Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of September 30, 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, 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 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, 2019, that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 1. Consolidated Financial Statements — Note 12 — Commitments and Contingencies — Litigation in Part I of this report, incorporated herein by reference.
ITEM 1A. RISK FACTORS
The Company’s 2018 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 2018 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, 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 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | The instance document does not appear in the interactive data file because its XBRL 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.
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GLOSSARY OF ACRONYMS
ALCO | Asset/Liability Committee |
AOCI | Accumulated other comprehensive income (loss) |
ARRC | Alternative Reference Rates Committee |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
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 |
DCB | Desert Community Bank |
EPS | Earnings per share |
EVE | Economic value of equity |
EWIS | East West Insurance 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 |
FTP | Funds transfer pricing |
GAAP | United States generally accepted accounting principles |
HELOC | Home equity line 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 |
MMBTU | Million British thermal units |
MOODY’S | Moody’s Investors Service |
NAV | Net asset value |
OIS | Overnight Index Swap |
OREO | Other real estate owned |
OTTI | Other-than-temporary impairment |
PCI | Purchased credit-impaired |
ROA | Return on average assets |
ROE | Return on average equity |
RPA | Credit risk participation agreement |
RSU | Restricted stock unit |
S&P | Standard and Poor’s |
SBLC | Standby letter of credit |
SEC | U.S. Securities and Exchange Commission |
SOFR | Secured Overnight Financing Rate |
TDR | Troubled debt restructuring |
U.S. | United States |
USD | U.S. dollar |
VIE | Variable interest entity |
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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 8, 2019 | |||
EAST WEST BANCORP, INC. (Registrant) | ||||
By | /s/ IRENE H. OH | |||
Irene H. Oh | ||||
Executive Vice President and Chief Financial Officer | ||||
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