EAST WEST BANCORP INC - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-24939

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

95-4703316

(I.R.S. Employer Identification No.)

135 North Los Robles Ave., 7th Floor, Pasadena, California, 91101

(Address of principal executive offices) (Zip Code)

(626) 768-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 Par Value	EWBC	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐	Smaller reporting company	☐
Non-accelerated filer	☐			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $6,765,665,370 (based on the June 30, 2019 closing price of Common Stock of $46.77 per share). As of January 31, 2020, 145,625,565 shares of East West Bancorp, Inc. Common Stock were outstanding.

DOCUMENT INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

EAST WEST BANCORP, INC.

2019 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



			Page
PART I			3

	Forward-Looking Statements		3

	Item 1.	Business	5

	Item 1A.	Risk Factors	15

	Item 1B.	Unresolved Staff Comments	25

	Item 2.	Properties	25

	Item 3.	Legal Proceedings	25

	Item 4.	Mine Safety Disclosures	25

PART II			26

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26

	Item 6.	Selected Financial Data	28

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	78

	Item 8.	Financial Statements and Supplementary Data	79

	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	159

	Item 9A.	Controls and Procedures	159

	Item 9B.	Other Information	161

PART III			161

	Item 10.	Directors, Executive Officers and Corporate Governance	161

	Item 11.	Executive Compensation	161

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	162

	Item 13.	Certain Relationships and Related Transactions and Director Independence	162

	Item 14.	Principal Accountant Fees and Services	162

PART IV			163

	Item 15.	Exhibits and Financial Statement Schedules	163

	Item 16.	Form 10-K Summary	165

GLOSSARY OF ACRONYMS			166

SIGNATURES			167

PART I

Forward-Looking Statements

This Annual Report on Form 10-K (“this Form 10-K”) contains certain forward-looking information about us that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. 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 United States (“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 benchmark interest rate reform in the U.S. that resulted in the Secured Overnight Financing Rate (“SOFR”) selected as the preferred alternative reference rate to the London Interbank Offered Rate (“LIBOR”);


•	impact of failure in, or breach of, the Company’s operational or security systems or infrastructure, or those of third parties with whom the Company does business, including as a result of cyber attacks; and other similar matters which could result in, among other things, confidential and/or proprietary information being disclosed or misused;


•	adequacy of the Company’s risk management framework, disclosure controls and procedures and internal control over financial reporting;


•	future credit quality and performance, including the Company’s expectations regarding future credit losses and allowance levels;


•	impact of adverse changes to the Company’s credit ratings from major credit rating agencies;


•	impact of adverse judgments or settlements in litigation;


•	changes in the commercial and consumer real estate markets;


•	changes in consumer spending and savings habits;


•	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 on the Company’s international operations due to political developments, disease pandemics, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;

•

changes in laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission (“SEC”), the Consumer Financial Protection Bureau (“CFPB”) and the California Department of Business Oversight (“DBO”) - Division of Financial Institutions;


•	impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the Company’s business, business practices, cost of operations and executive compensation;


•	heightened regulatory and governmental oversight and scrutiny of the Company’s business practices, including dealings with consumers;


•	impact of reputational risk from negative publicity, fines and penalties and other negative consequences from regulatory violations and legal actions and from the Company’s interactions with business partners, counterparties, service providers and other third parties;


•	impact of regulatory enforcement actions;


•	changes in accounting standards as may be required by the Financial Accounting Standards Board (“FASB”) 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;


•	impact on the Company’s liquidity due to changes in the Company’s ability to receive dividends from its subsidiaries;


•	any future strategic acquisitions or divestitures;


•	continuing consolidation in the financial services industry;


•	changes in the equity and debt securities markets;


•	fluctuations in 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 other-than-temporary impairment (“OTTI”) on securities held in the Company’s available-for-sale (“AFS”) investment securities portfolio; and


•	impact of natural or man-made disasters or calamities, such as wildfires, or conflicts or other events that may directly or indirectly result in a negative impact on the Company’s financial performance.

For a more detailed discussion of some of the factors that might cause such differences, see Item 1A. Risk Factors presented elsewhere in this report. The Company does not undertake, and specifically disclaims any obligation to update or revise any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

ITEM 1. BUSINESS

Organization

East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”, “we”, or “EWBC”) is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of East West Bank (the “Bank”), which became its principal asset. In addition to the Bank, East West has six subsidiaries as of December 31, 2019 that were established as statutory business trusts for the purpose of issuing junior subordinated debt to third party investors. East West also owns East West Insurance Services, Inc. (“EWIS”). In 2017, the Company sold the insurance brokerage business of EWIS, and EWIS remains a subsidiary of East West and continues to maintain its insurance broker license. In 2019, East West acquired Enstream Capital Markets, LLC, a private broker dealer and also established East West Investment Management LLC, a registered investment adviser. Both Enstream Capital Markets, LLC (subsequently renamed as East West Markets, LLC) and East West Investment Management LLC are wholly-owned subsidiaries of East West.

East West’s principal business is to serve as a holding company for the Bank and other banking or banking-related subsidiaries that East West may establish or acquire. As a legal entity separate and distinct from its subsidiaries, East West’s principal source of funds is, and will continue to be, dividends that may be paid by its subsidiaries. As of December 31, 2019, the Company had $44.20 billion in total assets, $34.42 billion in total loans (including loans held-for-sale, net of allowance), $37.32 billion in total deposits and $5.02 billion in total stockholders’ equity.

As of December 31, 2019, the Bank has four wholly-owned subsidiaries. The first subsidiary, East-West Investment, Inc., primarily acts as a trustee in connection with real estate secured loans. The second subsidiary, E-W Services, Inc., is a California corporation organized by the Bank in 1977 to hold properties used by the Bank in its operations. The third subsidiary is East West Bank (China) Limited, a banking subsidiary in China. The remaining subsidiary is East West Velo Technology Service (Beijing) Limited Company, which provides technological support for the Bank’s global digital banking services.

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 sale resulted in a pretax gain of $31.5 million during the year ended December 31, 2018, which was reported as Net gain on sale of business on the Consolidated Statement of Income.

The Bank continues to develop its international banking presence with its network of overseas branches and representative offices that include five full-service branches in Greater China, located in Hong Kong, Shanghai, Shantou and Shenzhen. The Bank has two branches in Shanghai with one in the Shanghai Pilot Free Trade Zone. The Bank also has four representative offices in Greater China, located in Beijing, Chongqing, Guangzhou and Xiamen. In addition to facilitating traditional letters of credit and trade financing to businesses, these representative offices allow the Bank to assist existing clients and to develop new business relationships. Through these branches and offices, the Bank is focused on growing its cross-border client base between the U.S. and Greater China, helping U.S. based businesses expand in Greater China and companies based in Greater China pursue business opportunities in the U.S.

The Bank continues to explore opportunities to establish other foreign offices, subsidiaries, strategic investments and partnerships to expand its international banking capabilities and to capitalize on long-term cross-border business opportunities between the U.S. and Greater China.

Banking Services

As of December 31, 2019, the Bank was the fourth largest independent commercial bank headquartered in California based on total assets. The Bank is the largest bank in the U.S. focused on the financial service needs of individuals and businesses that operate both in the U.S. and Greater China. The Bank also has a strong focus on the Chinese-American community. Through its network of over 125 banking locations in the U.S. and Greater China, the Bank provides a wide range of personal and commercial banking services to businesses and individuals. The Bank provides multilingual services to its customers in English, Chinese, Spanish and Vietnamese. The Bank also offers a variety of deposit products that include personal and business checking and savings accounts, money market, time deposits and also offers foreign exchange and wealth management services. The Bank’s lending activities include commercial and residential real estate, lines of credit, construction, trade finance, letters of credit, commercial business, affordable housing lending, asset-based lending and equipment financing. In addition, the Bank is focused on providing financing to clients in need of a financial bridge to facilitate their business transactions between the U.S. and Greater China.

Operating Segments

The Bank’s three operating segments, (1) Consumer and Business Banking, (2) Commercial Banking and (3) Other, are based on the Bank’s core strategy. The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network. The Commercial Banking segment primarily generates commercial loans and deposits. The remaining centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment. For complete discussion and disclosure, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Operating Segment Results and Note 21 — Business Segments to the Consolidated Financial Statements.

Market Area and Competition

The Bank operates in a highly competitive environment. The Company faces competition from domestic and foreign lending institutions and numerous other providers of financial services. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, reputation, interest rates on loans and deposits, lending limits and customer convenience. Competition also varies based on the types of customers and locations served. The Company has the leading banking market share among the Chinese-American community, and maintains a differentiated presence within selected markets by providing cross-border expertise to customers in a number of industry specializations between the U.S and Greater China.

The Bank believes that its customers benefit from the Bank’s understanding of the Greater China markets through its physical presence, corporate and organizational ties in Greater China, as well as the Bank’s international banking products and services. The Bank believes that this approach, combined with its senior managements’ and Board of Directors’ extensive ties to Chinese business opportunities and Chinese-American communities, provides the Bank with a competitive advantage. The Bank utilizes its presence in Greater China to identify and build corporate relationships, which the Bank may leverage to create business opportunities in California and other U.S. markets.

While the Company believes it is well positioned within a highly competitive industry, the industry could become even more competitive as a result of legislative, regulatory, economic, and technological changes, as well as continuing consolidation.

Supervision and Regulation

Overview

East West and the Bank are subject to extensive and comprehensive regulation under U.S. federal and state laws. Regulation and supervision by the federal and state banking agencies are intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) administered by the FDIC, consumers and the banking system as a whole, and not for the protection of our investors. As a bank holding company, East West is subject to primary inspection, supervision, regulation, and examination by the Federal Reserve under the BHC Act. The Bank is regulated, supervised, and examined by the Federal Reserve, the DBO, and, with respect to consumer laws, the CFPB. As insurer of the Bank’s deposits, the FDIC has back-up examination authority as well. In addition, the Bank is regulated by certain foreign regulatory agencies in international jurisdictions where we now, or may in the future wish to conduct business, including Greater China and Hong Kong.

The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, both as administered by the SEC. Our common stock is listed on the NASDAQ Global Select Market under the trading symbol “EWBC” and is subject to NASDAQ rules for listed companies. The Company is also subject to the accounting oversight and corporate governance of the Sarbanes-Oxley Act of 2002.

Described below are material elements of selected laws and regulations applicable to East West and the Bank. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. A change in applicable statutes, regulations or regulatory policies may have a material effect on the Company’s business.

East West

As a bank holding company and pursuant to its election of the financial holding company status, East West is subject to regulations and examinations by the Federal Reserve under the BHC Act. The BHC Act provides a federal framework for the supervision and regulation of all domestic and foreign companies that control a bank and the subsidiaries of such companies. The BHC Act and other federal statutes grant the Federal Reserve authority to, among other things:


•	require periodic reports and such additional information as the Federal Reserve may require in its discretion;


•	require the Company to maintain certain levels of capital and, under the Dodd-Frank Act, limit the ability of bank holding companies to pay dividends or bonuses unless their capital levels exceed the capital conservation buffer (see Item 1. Business — Supervision and Regulation — Capital Requirements);

•

require bank holding companies to serve as a source of financial and managerial strength to subsidiary banks and commit resources, as necessary, to support each subsidiary bank, including at times when bank holding companies may not be inclined to do so, the failure to do so generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of Federal Reserve regulations or both;


•	restrict dividends and other distributions from subsidiary banks to their parent bank holding companies;

•

terminate an activity or terminate control of or liquidate or divest certain nonbank subsidiaries, affiliates or investments if the Federal Reserve believes that the activity or the control of the nonbank subsidiary or affiliate constitutes a serious risk to the financial safety, soundness or stability of the bank holding company; and if the activity, ownership, or control is inconsistent with the purposes of the BHC Act;


•	regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior approval to purchase or redeem the Company’s securities in certain situations;


•	approve in advance senior executive officer or director changes and prohibit (under certain circumstances) golden parachute payments to officers and employees, including change in control agreements and new employment agreements, that are contingent upon termination; and


•	approve in advance acquisitions of and mergers with bank holding companies, banks and other financial companies, and consider certain competitive, management, financial, financial stability and other factors in granting these approvals. DBO approvals may also be required for certain acquisitions and mergers.

East West’s election to be a financial holding company as permitted under the Gramm-Leach-Bliley Act of 1999 (“GLBA”), allows East West generally to engage in any activity, or acquire and retain the shares of a company engaged in any activity that the Federal Reserve has determined to be financial in nature or incidental or complementary to activities that are financial in nature without prior Federal Reserve approval. Activities that are considered to be financial in nature include securities underwriting and dealing, insurance agency and underwriting, merchant banking activities and activities that the Federal Reserve, in consultation with the Secretary of the U.S. Treasury, determines to be financial in nature or incidental to such financial activity. “Complementary activities” are activities that the Federal Reserve determines upon application to be complementary to a financial activity and do not pose a safety and soundness risk. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized”, “well managed” and in satisfactory compliance with the Community Reinvestment Act (“CRA”). A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the sections captioned “Capital Requirements” and “Prompt Corrective Action,” included elsewhere under this item. A depository institution subsidiary is considered “well managed” if it received a composite rating and a management rating of at least “satisfactory” in its most recent examination. See the section captioned “Community Reinvestment Act” included elsewhere under this item. As of December 31, 2019, East West is a financial holding company and has financial subsidiaries, as discussed in Item 1. Business — Organization.

The Bank and its Subsidiaries

East West Bank is a California state-chartered bank, a member of the Federal Reserve and a bank whose deposits are insured by the FDIC. The Bank’s foreign operations are regulated and supervised by the Federal Reserve and the DBO, as well as by regulatory authorities in the host countries in which the Bank’s overseas offices reside. Specific federal and state laws and regulations that are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, and the nature and amount of collateral for certain loans. The regulatory structure also gives the bank regulatory agencies extensive discretion to impose various restrictions on management or operations and to issue policies and guidance in connection with their supervisory and enforcement activities and examination policies. California law permits state chartered commercial banks to engage in any activity permissible for national banks, unless such activity is expressly prohibited by state law. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries, and further, pursuant to the GLBA, the Bank may conduct certain “financial” activities in a subsidiary to the same extent permitted for a national bank, provided the Bank is and remains “well capitalized,” “well managed” and in “satisfactory” compliance with the CRA.

Regulation of Subsidiaries/Branches

The Bank’s foreign-based subsidiary, East West Bank (China) Limited, is subject to applicable foreign laws and regulations, such as those implemented by the China Banking and Insurance Regulatory Commission. Nonbank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. The East West Bank Hong Kong branch is subject to applicable foreign laws and regulations, such as those implemented by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong.

Economic Growth, Regulatory Relief, and Consumer Protection Act

The Dodd-Frank Act, enacted in 2010, enhanced regulation and supervision of the financial services industry and made other sweeping changes in the U.S. financial system. In May 2018, the U.S. Congress enacted the Economic Growth, Regulatory Relief, and Consumer Protection Act, (“EGRRCPA”), which amended provisions in the Dodd-Frank Act and other statutes administered by the Federal Reserve. The changes can be grouped into several areas that impact us:

Regulatory relief for bank holding companies and state member banks with assets between $10 billion and $50 billion. We are among the bank holding companies and banks in this range. Dodd-Frank required that bank holding companies in this size range establish a risk committee that satisfied certain requirements and conduct an annual stress-test. The stress-test requirement was extended to state member banks (and other insured depository institutions) as well. EGRRCPA lifted the size threshold for a formal risk committee from $10 billion to $50 billion, but the Federal Reserve will still examine the risk management practices of companies with assets in the $10 billion to $50 billion range for consistency with safety and soundness and prudent practices. With respect to stress-testing by the Bank, EGRRCPA raised the asset size threshold for required testing from $10 billion to $250 billion. Regarding the Company, the Federal Reserve in rulemaking (based on broad EGRRCPA authority) lifted the asset size threshold from $10 billion to $100 billion for required stress-testing bank holding companies. Accordingly, neither the Company nor the Bank is now required to conduct stress-tests.

Regulatory relief for community banking organizations. Banks and bank holding companies with less than $10 billion in assets — that is, institutions smaller than the Company and the Bank — receive additional relief under EGRRCPA that may give them competitive advantages. Among other things, these banks and bank holding companies are generally exempt from the Volcker Rule, and they may maintain a new Community Bank Leverage Ratio of 9% in lieu of meeting existing risk-based capital ratio and leverage ratio requirements.

Regulatory relief for larger bank holding companies. Our larger competitors also receive a degree of regulatory relief from previous requirements. Bank holding companies designated as global systemically important banking organizations and those with more than $250 billion in assets are still automatically subject to enhanced regulation. However, bank holding companies with between $100 billion and $250 billion in assets are automatically subject only to supervisory stress tests, while the Federal Reserve has discretion to apply other individual enhanced prudential provisions to these companies. Bank holding companies with assets between $50 billion and $100 billion will no longer be subject to enhanced regulation, except for the risk committee requirement. In addition, EGRRCPA relaxes leverage requirements for large custody banks and allows certain municipal bonds to be counted toward large bank holding companies’ liquidity requirements.

Capital Requirements

The federal banking agencies have imposed risk-based capital adequacy guidelines intended to ensure that banking organizations maintain capital that is commensurate with the degree of risk associated with their operations. In July 2013, the federal banking agencies adopted final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules revised the definitions and the components of regulatory capital, in part through the introduction of a Common Equity Tier 1 (“CET1”) capital requirement and a related regulatory capital ratio of CET1 to risk-weighted assets, restricted the type of instruments that may be recognized in Tier 1 and 2 capital (including the phase out of trust preferred securities from Tier 1 capital for bank holding companies). The Basel III Capital Rules also prescribed a new standardized approach for risk weighting assets and expanded the risk weighting categories to a larger and more risk-sensitive number of categories that affect the denominator in banking institutions’ regulatory capital ratios.

Under the Basel III Capital Rules, to be considered adequately capitalized, the Company and the Bank are required to maintain minimum capital ratios of 4.5% CET1 to risk-weighted assets, 6.0% Tier 1 capital to risk-weighted assets, 8.0% total capital (Tier 1 plus Tier 2) to risk-weighted assets and a 4.0% Tier 1 leverage ratio. The Basel III Capital Rules also introduced a “capital conservation buffer” of 2.5% that fully phased in on January 1, 2019, that is composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments based on the amount of the shortfall. To avoid constraints, a banking organization must maintain the following capital ratios (after any distribution): (i) CET1 to risk-weighted assets more than 7.0%, (ii) Tier 1 capital to risk-weighted assets more than 8.5% and (iii) total capital to risk-weighted assets more than 10.5%.

With respect to the Bank, the Basel III Capital Rules also resulted in changes to the Prompt Corrective Action (“PCA”) regulations pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), as discussed below under the Prompt Corrective Action section.

As of December 31, 2019, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel III capital rules on a fully phased-in basis. For additional discussion and disclosure see Item 7. MD&A — Regulatory Capital and Ratios and Note 20 — Regulatory Requirements and Matters to the Consolidated Financial Statements in this Form 10-K.

Recent Regulatory Capital-Related Developments

From time to time, the regulatory agencies propose changes and amendments to, and issue interpretations of, risk-based capital guidelines and related reporting instructions. Such proposals and interpretations could, if implemented in the future, affect our reported capital ratios.

Pursuant to the EGRRCPA, the federal banking agencies issued a final rule in July 2019 (the “Simplified Capital Rule”) to reduce regulatory compliance burden by simplifying certain risk-based and leverage capital requirements of the Basel III Capital Rule for non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank. Among other things, the final rule simplified the existing Basel III Capital Rules by: (1) setting a 25% CET1 capital reduction threshold for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, resulting in potentially fewer deductions from CET1, together with revisions to the risk-weight treatment for investments in the capital of unconsolidated financial institutions; and (2) simplifying the limits on the amount of a third-party minority interest in a consolidated subsidiary that could be included in regulatory capital. The Simplified Capital Rule also makes technical amendments to, and clarifies certain aspects of, the agencies’ capital rule for non-advanced approaches banking organizations. The Simplified Capital rule is effective on January 1, 2020. Application of the Simplified Capital Rule to our consolidated balance sheet did not have a significant impact on the capital ratios of the Company and the Bank.

EGRRCPA also amended the capital requirements for certain acquisition, development and construction (“ADC”) loans. The Basel III Capital Rule required that an institution risk weight commercial real estate (“CRE”) loans that did not meet certain prerequisites, among them a requirement that a borrower contribute cash or marketable securities or pay development expenses out of pocket equal to at least 15% of the equity in the financed project, at 150%, rather than 100%. EGRRCPA narrowed the scope of ADC loans subject to the higher risk weight in several ways, including a provision that allows a borrower to make the 15% equity contribution in the form of real estate or improvements.

In December 2018, the regulatory agencies approved a final rule to address changes to credit loss accounting, including banking organizations’ implementation of the new Accounting Standards Update (“ASU”) 2016-13 Financial Instruments— Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which introduces the current expected credit losses (“CECL”) methodology. See Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-K for additional information. The final rule provides banking organizations with the option to phase in over a three-year period the day-one adverse effects on regulatory capital upon the adoption of ASU 2016-13. In addition, it revises the regulatory capital rule, stress testing rules, disclosure requirements to reflect CECL and amends other regulations that reference credit loss allowances. The final rule is applicable to banking organizations that are subject to the regulatory capital rule, including the Company and the Bank, and is effective on April 1, 2019 upon banking organizations’ adoption of ASU 2016-13.

In December 2017, the Basel Committee on Banking Supervision completed updates to the Basel III Capital Rules, a process sometimes referred to as Basel IV. These changes to the regulatory framework are intended to restore credibility in the calculation of risk weighted assets. Changes potentially applicable to us include: (1) enhancement of the robustness and risk sensitivity of the standardized approaches for credit risk, credit valuation adjustment and operational risk, which will facilitate the comparability of banks’ capital ratios; and (2) constraints on the use of internally modeled approaches. Other changes apply to advanced approaches institutions and global systemically important banks. The Basel Committee on Banking Supervision intends that these standards become effective on January 1, 2022. The federal banking agencies have announced their support for these changes and have said that they will consider appropriate application of these revisions to the regulatory capital rules. Any changes to Basel III Capital Rules that are based on the Basel Committee’s reforms must go through the federal banking agencies’ standard notice-and-comment rulemaking process. The agencies have not begun the process and have not indicated when they may do so.

Prompt Corrective Action

The FDIA, as amended, requires federal banking agencies to take PCA with respect to depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The Basel III Capital Rules revised the PCA requirements effective January 1, 2015. Under the revised PCA provisions of the FDIA, an insured depository institution generally is classified in the following categories based on the capital measures indicated:




	Risk-Based Capital Ratios
PCA Category	Total Capital	Tier 1 Capital	CET1 Leverage	Tier 1 Leverage
Well capitalized	≥ 10%	≥ 8%	≥ 6.5%	≥ 5%
Adequately capitalized	≥ 8%	≥ 6%	≥ 4.5%	≥ 4%
Undercapitalized	< 8%	< 6%	< 4.5%	< 4%
Significantly undercapitalized	< 6%	< 4%	< 3.0%	< 3%
Critically undercapitalized	Tangible Equity/Total Assets ≤ 2%

An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of any dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized”. “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets, cessation of receipt of deposits from correspondent banks and/or restrictions on interest rates paid on deposits. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. The FDIA also permits only “well capitalized” insured depository institutions to accept brokered deposits, but an “adequately capitalized” institution may apply to the FDIC for a waiver of this restriction.

Consumer Financial Protection Bureau Supervision

The Dodd-Frank Act established the CFPB, which has the authority to implement, examine and enforce compliance with federal consumer financial laws that apply to banking institutions and certain other companies. The CFPB has exclusive authority to examine insured depository institutions with assets exceeding $10 billion (such as the Bank) and their affiliates and may also take enforcement action. The CFPB is focused on:


•	risks to consumers and compliance with federal consumer financial laws when it evaluates the policies and practices of a financial institution;


•	unfair, deceptive, or abusive acts or practices, which the Dodd-Frank Act empowers the CFPB to prevent through rulemaking, enforcement and examination;


•	rulemaking to implement various federal consumer statutes such as the Home Mortgage Disclosure Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Electronic Fund Transfer Act, Equal Credit Opportunity Act and Fair Credit Billing Act; and


•	the markets in which firms operate and risks to consumers posed by activities in those markets.

The statutes and regulations that the CFPB enforces mandate certain disclosure and other requirements, and regulate the manner in which financial institutions must deal with consumers when taking deposits, making loans, collecting payments on loans and providing other services. Failure to comply with these laws can subject the Bank to various penalties, including, but not limited to, enforcement actions, injunctions, fines or criminal penalties, punitive damages or restitution to consumers, and the loss of certain contractual rights. The Bank and the Company are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.

Federal Home Loan Bank and the Federal Reserve’s Reserve Requirements

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. As a FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. The Bank may also access the FHLB for both short-term and long-term secured credit.

The Federal Reserve requires all depository institutions to maintain reserves at specified levels against their transaction accounts either in the form of vault cash or an interest-bearing account at the Federal Reserve Bank, or a pass-through account as defined by the Federal Reserve. The Bank is also a member bank and stockholder of the Federal Reserve Bank of San Francisco (“FRB”). As of December 31, 2019, the Bank was in compliance with these requirements.

Dividends and Other Transfers of Funds

The principal source of income of East West is dividends received from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends. In addition, the banking agencies have an authority to prohibit or limit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. Furthermore, under the federal PCA regulations, the Federal Reserve or FDIC may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized” or below. It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only if the organization’s net income available to common stockholders over the past year has been sufficient to fully fund the dividends, and if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine the company’s ability to be a financial source of strength to its banking subsidiaries. The Federal Reserve requires bank holding companies to continuously review their dividend policy in light of their organizations’ financial condition and compliance with regulatory capital requirements, and has discouraged payment ratios that are at maximum allowable levels, unless both asset quality and capital are very strong.

Transactions with Affiliates and Insiders

Pursuant to Sections 23A and 23B of the Federal Reserve Act, as implemented by the Federal Reserve’s Regulation W, banks are subject to restrictions that strictly limit their ability to engage in transactions with their affiliates, including their parent bank holding companies. Regulations promulgated by the Federal Reserve limit the types, terms and amounts of these transactions and generally require the transactions to be on an arm's-length basis. In general, these regulations require that “covered transactions” typically transactions that create credit risk for a bank between a subsidiary bank and any one affiliate (e.g., its parent company or the non-bank subsidiaries of the bank holding company) are limited to 10% of the subsidiary bank's capital and surplus and, with respect to the aggregate of all covered transactions with all affiliates, the limit is 20% of the subsidiary bank's capital and surplus. The Dodd-Frank Act treats derivative transactions resulting in credit exposure to an affiliate as covered transactions. In addition, East West and other affiliates may not borrow from, or enter into other credit transactions with the Bank or its operating subsidiaries, unless the loans or other credit transactions are secured by specified amounts of collateral. In addition, the Volcker Rule under the Dodd-Frank Act establishes certain prohibitions, restrictions and requirements (known as “Super 23A” and “Super 23B”) on transactions between a covered fund and a banking entity that serves as an investment manager, investment adviser, organizer and offeror, or sponsor with respect to that covered fund, regardless of whether the banking entity has an ownership interest in the fund.

Federal law also limits a bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. The terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital.

Community Reinvestment Act

Under the terms of the CRA as implemented by Federal Reserve regulations, an insured depository institution has a continuing and affirmative obligation to help serve the credit needs of its communities, including the extension of credit to low to moderate-income neighborhoods. When evaluating a bank’s performance under the applicable performance criteria, the FDIC assigns a rating of “outstanding”, “satisfactory”, “needs to improve” or “substantial noncompliance”. The Federal Reserve periodically evaluates the CRA performance of state member banks and takes this performance into account when reviewing applications to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions. Unsatisfactory CRA performance may result in the denial of such applications.

FDIC Deposit Insurance Assessments

The FDIC insures the Bank’s customer deposits through the DIF up to $250,000 for each depositor, per FDIC-insured bank, per ownership category. The DIF is funded mainly through quarterly assessments on member banks. The Dodd-Frank Act revised the FDIC's fund management authority by setting requirements for the Designated Reserve Ratio (reserve ratio or “DRR”) that the DIF must meet and redefining the assessment base, which is used to calculate banks' quarterly assessments. The reserve ratio is the DIF balance divided by estimated insured deposits. The Bank’s DIF quarterly assessment is calculated by multiplying its assessment base, which is defined as the average consolidated total assets less the average tangible equity of the Bank by the applicable assessment rate. The initial base assessment rate is assigned based on an institution’s capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk ratings, certain financial measures to assess an institution’s ability to withstand asset related stress and funding related stress, and a measure of loss severity that estimates the relative magnitude of potential losses to the FDIC in the event of the Bank’s failure. Assessment rates are subject to adjustment from the initial base assessment rate.

In addition to the quarterly assessment, the Bank has in the past been required to pay a quarterly surcharge, along with many other banks. The Dodd-Frank Act established a minimum DRR of 1.35% and required that the FDIC return the reserve ratio to that level by September 30, 2020. In order to do so, the FDIC in 2016 required insured depository institutions with $10 billion or more in total assets, such as the Bank, to pay a quarterly surcharge equal to an annual rate of 4.5 basis points applied to the Bank’s assessment base (with certain adjustments), in addition to regular assessments. The DRR first reached 1.36% in September 2018 which exceeded the statutory required minimum of 1.35%. The temporary surcharge imposed on large banks was lifted on October 1, 2018. As of December 31, 2019, the DRR was 1.41%. The FDIA requires the FDIC's Board to set a target or DRR for the DIF annually. The FDIC views the 2.0% DRR as a long-term goal and the minimum level needed to withstand future crises of the magnitude of past crises. The FDIC has adopted a set of progressively lower assessment rates when the reserve ratios exceeds 2.0% and 2.5%.

The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound, that the institution has engaged in unsafe or unsound practices, or has violated any applicable rule, regulation, condition, or order imposed by the FDIC.

Anti-Money Laundering and Office of Foreign Assets Control Regulation

The Bank Secrecy Act (“BSA”) and its implementing regulations and parallel requirements of the federal banking regulators require the Bank to maintain a risk-based Anti-Money Laundering (“AML”) program reasonably designed to prevent and detect money laundering and terrorist financing and to comply with the recordkeeping and reporting requirements of the BSA, including the requirement to report suspicious activities. The Federal Reserve expects that the Bank will have an effective governance structure for the program which includes effective oversight by our Board of Directors and management. The program must include, at a minimum, a designated compliance officer, written policies, procedures and internal controls, training of appropriate personnel, and independent testing of the program and risk-based customer due diligence procedures. The U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and the federal banking agencies continue to issue regulations and guidance with respect to the application and requirements of the BSA and their expectations for effective AML programs. Banking regulators also examine banks for compliance with regulations administered by the Office of Foreign Assets Control (“OFAC”) for economic sanctions against targeted foreign countries, nationals and others. Failure of a financial institution to maintain and implement adequate BSA/AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Privacy and Cybersecurity

Several Federal statutes and regulations require state nonmember banks (and other insured depository institutions) to take several steps to protect nonpublic consumer financial information. The Bank has prepared a privacy policy, which it must disclose to consumers annually. In some cases, the Bank must obtain a consumer's consent before sharing information with an unaffiliated third party, and the Bank must allow a consumer to opt out of the Bank's sharing of information with its affiliates for marketing and certain other purposes. Additional conditions come into play in the Bank's information exchanges with credit reporting agencies. The Bank's privacy practices and the effectiveness of its systems to protect consumer privacy are one of the subjects covered in the Federal Reserve’s periodic compliance examinations.

Consumer data privacy and data protection are also the subject of state laws. For example, on January 1, 2020, the Bank became subject to the California Consumer Privacy Act (“CCPA”). This statute grants consumers several rights, including the right to request disclosure of information collected about them and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), and the right to opt out of the sale of their personal information. However, a consumer does not have these rights with respect to information that is collected, processed, sold, or disclosed pursuant to the GLBA. The California Attorney General has proposed but not yet finalized regulations to implement the CCPA.

The Federal Reserve pays close attention to the cybersecurity practices of state nonmember banks and their holding companies and affiliates. The interagency council of the agencies, the Federal Financial Institutions Examination Council, has issued several policy statements and other guidance for banks as new cybersecurity threats arise. FFIEC has recently focused on such matters as compromised customer credentials, cyber resilience and business continuity planning. Examinations by the banking agencies now include review of an institution’s information technology and its ability to thwart or mitigate cyber attacks.

Future Legislation and Regulation

From time to time, legislators, presidential administrations and regulators may enact rules, laws, and policies to regulate the financial services industry and public companies. Further legislative changes and additional regulations may change the Company’s operating environment in substantial and unpredictable ways. Such legislation and regulations could increase the cost of conducting business, impede the efficiency of the internal business processes, and restrict or expand the activities in which the Company may engage. The Company cannot predict whether future legislative proposals will be enacted and, if enacted, the impact they would have on the business strategy, results of operations or financial condition of the Company.

Employees

As of December 31, 2019, the Company had approximately 3,300 full-time equivalent employees. None of the Company’s employees are subject to a collective bargaining agreement.

Available Information

The Company’s website is https://www.eastwestbank.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and other filings with the SEC are available free of charge at http://investor.eastwestbank.com under the heading “SEC Filings”, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. These reports are also available for free on the SEC’s website at http://www.sec.gov. In addition, the Company’s Code of Conduct, Corporate Governance Guidelines, charters of the Audit Committee, Compensation Committee, Executive Committee, Risk Oversight Committee and Nominating/Corporate Governance Committee, and other corporate governance materials are available on the Investor Relations section of the Company’s website. The information contained on the Company’s website as referenced in this report is not part of this report.

Shareholders may also request a copy of any of the above-referenced reports and corporate governance documents free of charge by writing to: Investor Relations, East West Bancorp, Inc., 135 N. Los Robles Avenue, 7th Floor, Pasadena, California 91101; by calling (626) 768-6000; or by sending an e-mail to InvestorRelations@eastwestbank.com.

ITEM 1A. RISK FACTORS

In the course of conducting the Company’s businesses, the Company is exposed to a variety of risks, some of which are inherent in the financial services industry and others which are more specific to the Company’s businesses. The Company’s Enterprise Risk Management (“ERM”) program incorporates risk management throughout the organization in identifying, managing, monitoring, and reporting risks. Our ERM program identifies EWBC’s major risk categories as market risk, capital and liquidity risks, credit risk, operational risk, regulatory, compliance and legal risks, accounting and tax risks, strategic, and reputational risks. The ERM is comprised of senior management of the Company and is headed by the Chief Risk Officer.

The discussion below addresses the most significant factors, of which we are currently aware, that could have a material and adverse effect on our businesses, results of operations and financial condition. These risks and uncertainties should not be considered a complete discussion of all the risks and uncertainties the Company may face.

Market Risks

Unfavorable general economic, political or industry conditions, either domestically or internationally, may adversely affect our business and operating results. Our businesses and results of operations are affected by the financial markets and general economic conditions in the U.S. and Greater China, including factors such as the level and volatility of short-term and long-term interest rates, inflation, deflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets and currencies, liquidity of the global financial markets, availability and cost of capital and credit, investor sentiment and confidence in the financial markets, and sustainability of economic growth in the U.S. and Greater China. The deterioration of any of these conditions could adversely affect our consumer and commercial businesses, our securities and derivatives portfolios, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations. In addition, because the Company’s operations and the collateral securing its real estate lending portfolio are concentrated in Northern and Southern California, the Company may be particularly susceptible to the adverse economic conditions in the state of California. Any unfavorable changes in the economic and market conditions could lead to the following risks:

•

the process the Company uses to estimate losses inherent in the Company’s credit exposure requires difficult, subjective and complex judgments, including consideration of how these economic conditions might impair the ability of the borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of the Company’s estimates of losses inherent in the Company’s credit exposure which may, in turn, adversely impact the Company’s operating results and financial condition;


•	the Company’s commercial and residential borrowers may not be able to make timely repayments of their loans, or a decrease in the value of real estate collateral securing the payment of such loans could result in credit losses, delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on the Company’s operating results;


•	a decrease in the demand for loans and other products and services;


•	a decrease in deposit balances;


•	future disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions;


•	the value of the AFS investment securities portfolio that the Company holds may be adversely affected by defaults by debtors; and


•	a loss of confidence in the financial services industry, our market sector and the equity markets by investors, placing pressure on the Company’s stock price.

Changes in the U.S. and Greater China trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely impact the Company’s business, financial condition and results of operations. There has been ongoing discussion regarding potential changes to trade policies, legislation, treaties and tariffs between the U.S. and Greater China. Tariffs and retaliatory tariffs have been imposed and proposed. Changes in tariffs, retaliatory tariffs or other trade restrictions on products and materials that the Company’s customers import or export could cause the prices of their products to increase and possibly reduce demand and hence may negatively impact the Company’s customer margins and their ability to service debt. The Company may also experience a decrease in the demand for loans and other financial products, or experience a deterioration in the credit quality of the loans extended to the customers whose industry sectors that are most sensitive to the tariffs.

A portion of the Company’s loan portfolio is secured by real estate and thus the Company has a higher degree of risk from a downturn in real estate markets. Because many of the Company’s loans are secured by real estate, a decline in real estate markets could impact the Company’s business and financial condition. Real estate values and real estate markets are generally affected by changes in general economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and natural disasters, such as wildfires and earthquakes, which are particular to California, where a significant portion of the Company’s real estate collateral is located. If real estate values decline, the value of real estate collateral securing the Company’s loans could be significantly reduced. The Company’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and the Company would be more likely to suffer losses on defaulted loans. Furthermore, CRE and multifamily loans typically involve large balances to single borrowers or groups of related borrowers. Since payments on these loans are often dependent on the successful operation or management of the properties, as well as the business and financial condition of the borrower, repayment of such loans may be subject to adverse conditions in the real estate market, adverse economic conditions, or changes in applicable government regulations. Borrowers’ inability to repay such loans may have an adverse effect on the Company’s businesses, results of operations and financial condition.

The Company’s businesses are subject to interest rate risk and variations in interest rates may have a material adverse effect on the Company’s financial performance. Our financial results depend substantially on net interest income, which is the difference between the interest income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Interest-earning assets primarily include loans extended, securities held in our investment portfolio and excess cash held to manage short-term liquidity. We fund our assets using deposits and borrowings. While we offer interest-bearing deposit products, a portion of our deposit balances are from noninterest-bearing products. Overall, the interest rates we receive on our interest-earning assets and pay on our interest-bearing liabilities could be affected by a variety of factors, including market interest rate changes, competition, regulatory requirements and a change in our product mix. Changes in key variable market interest rates such as the Federal Funds, National Prime, LIBOR or Treasury rates generally impact our interest rate spread. Because of the differences in maturities and repricing characteristics of the Company’s interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Increases in interest rates may result in a change in the mix of noninterest and interest-bearing deposit accounts. Rising interest rates may cause our funding costs to increase at a faster pace than the yield we earn on our assets, ultimately causing our net interest margin to decrease. Higher interest rates may also result in lower mortgage production income and increased charge-offs in certain segments of the loan portfolio, such as CRE and home equity. In contrast, declining interest rates would increase the Bank’s lending capacity, decrease funding cost, increase prepayments of loans and mortgage related securities, as borrowers refinance to reduce borrowing costs. Accordingly, changes in levels of interest rates could materially and adversely affect our net interest income, net interest margin, cost of deposits, loan origination volume, average loan portfolio balance, asset quality, liquidity and overall profitability.

Reforms to and uncertainty regarding LIBOR may adversely affect our business. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it will no longer compel banks to submit rates for the calculation of LIBOR by the end of 2021. This indicates that LIBOR will be discontinued on December 31, 2021. In June 2017, U.S. Federal Reserve Bank's Alternative Reference Rates Committee (“ARRC”) selected the SOFR as the preferred alternative rate to LIBOR. SOFR differs from LIBOR in two respects: SOFR is a single overnight rate, while LIBOR includes rates of several tenors; and SOFR is deemed a credit risk-free rate while LIBOR incorporates an evaluation of credit risk. The ARRC and other entities intend for the transition to be economically neutral. The Federal Reserve Bank of New York has proposed a methodology for generating SOFRs of three different tenors and plans to publish an index on a daily basis beginning in the first half of 2020. The ARRC has developed a methodology for adjusting SOFR to reflect the risk considerations that underlie LIBOR. On July 12, 2019, the SEC issued a statement on LIBOR transition, indicating the significant impact that the discontinuation of LIBOR could have on financial markets and market participants. Since the volume of our products that are indexed to LIBOR is significant, the transition, if not sufficiently planned for and managed by our cross-functional teams, could adversely affect the Company’s financial condition and results of operations. Although implementation of the SOFR benchmark is intended to have minimal economic effect on the parties to a LIBOR-based contract, the transition from LIBOR to a new benchmark rate could result in significant operational, systems, increased compliance, legal and operational costs. This transition may also result in our customers challenging the determination of their interest payments or entering into fewer transactions or postponing their financing needs, which could reduce the Company’s revenue and adversely impact our business. In addition, the uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates could have adverse impacts on floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect the Company’s financial condition and results of operations.

The monetary policies of the federal government and its agencies could have a material adverse effect on our earnings. The Federal Reserve Board regulates the supply of money and credit in the U.S. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin. They can also materially decrease the value of financial assets we hold. Federal Reserve policies may also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans, or could adversely create asset bubbles which result from prolonged periods of accommodative policy. This, in turn, may result in volatile markets and rapidly declining collateral values. Changes in Federal Reserve policies are beyond our control and difficult to predict. Consequently, the impact of these changes on our business and results of operations is difficult to predict.

We face risks associated with international operations. A substantial number of our customers have economic and cultural ties to Asia. The Bank’s international presence includes five full-service branches in Greater China, located in Hong Kong, Shanghai, Shantou and Shenzhen. The Bank has two branches in Shanghai, including one in the Shanghai Pilot Free Trade Zone. The Bank also has four representative offices in Greater China located in Beijing, Chongqing, Guangzhou and Xiamen. Our efforts to expand our business in Greater China carries certain risks, including risks arising from the uncertainty regarding our ability to generate revenues from foreign operations, risks associated with leveraging and conducting business on an international basis, including among others, legal, regulatory and tax requirements and restrictions, cross-border trade restrictions or tariffs, uncertainties regarding liability, trade barriers, difficulties in staffing and managing foreign operations, political and economic risks, and financial risks including currency and payment risks. Additionally, our business could be adversely affected by the effects of a widespread outbreak of disease pandemics, including the recent outbreak of respiratory illness caused by a coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of disease pandemics, and other adverse public health developments, particularly in Asia, could have a material and adverse effect on our business operations. These could include temporary closures of our branches and offices and reduced consumer spending in the impacted regions or in the U.S., depending upon the severity, globally, which could adversely impact our operating results and the performance of loans to impacted borrowers in Greater China or in the U.S. In addition, a significant outbreak of disease pandemics in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could adversely affect our customers’ financial results. Further, volatility in the Shanghai and Hong Kong stock exchanges and/or a potential fall in real estate prices in China, among other things, may negatively impact asset values and the profitability and liquidity of the Company’s customers operating in this region. These risks could adversely affect the success of our international operations and could have a material adverse effect on our overall business, results of operations and financial condition. In addition, we face risks that our employees and affiliates may fail to comply with applicable laws and regulations governing our international operations, including the U.S. Foreign Corrupt Practices Act, anti-corruption laws, and other foreign laws and regulations. Failure to comply with such laws and regulations could, among other things, result in enforcement actions and fines against us, as well as limitations on our conduct, any of which could have a material adverse effect on our businesses, results of operations and financial condition.

The Company is subject to fluctuations in foreign currency exchange rates. The Company’s foreign currency translation exposure relates primarily to its China subsidiary that has its functional currency denominated in Chinese Renminbi (“RMB”). In addition, as the Company continues to expand its businesses in China and Hong Kong, certain transactions are conducted in currencies other than the U.S. Dollar (“USD”). Although the Company has entered into derivative instruments to offset the impact of the foreign exchange fluctuations, given the volatility of exchange rates, there is no assurance that the Company will be able to effectively manage foreign currency translation risk. Fluctuations in foreign currency exchange rates could have a material unfavorable impact on the Company’s net income, therefore adversely affecting the Company’s business, results of operations and financial condition.

Capital and Liquidity Risks

As a regulated entity, we are subject to capital requirements, and a failure to meet these standards could adversely affect our financial condition. The Company and the Bank are subject to certain capital and liquidity rules, including the Basel III Capital Rules, which establish the minimum capital adequacy requirements and may require us to increase our regulatory capital or liquidity targets, increase regulatory capital ratios, or change how we calculate regulatory capital. We may be required to increase our capital levels, even in the absence of actual adverse economic conditions or forecasts, and enhance capital planning based on hypothetical future adverse economic scenarios. As of January 1, 2020, we met the requirements of the Basel III Capital Rules, including the capital conservation buffer. Compliance with these capital requirements may limit capital-intensive operations and increase operational costs, and we may be limited or prohibited from distributing dividends or repurchasing stocks. This could adversely affect our ability to expand or maintain present business levels, which may adversely affect our businesses, results of operations and financial condition. Additional information on the regulatory capital requirements applicable to the Company and the Bank is set forth in Item 1. Business — Supervision and Regulation — Capital Requirements in this Form 10-K.

The Company’s dependence on dividends from the Bank could affect the Company’s liquidity and ability to pay dividends. East West is dependent on the Bank for dividends, distributions and other payments. Our principal source of cash flows, including cash flows to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividend income from the Bank. The ability of the Bank to pay dividends to East West is limited by federal and California law. Subject to the Bank meeting or exceeding regulatory capital requirements, regulatory approval is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net income for that year and its retained earnings for the preceding two years. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits. In addition, Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with the Federal Reserve in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for the period.

The Company is subject to liquidity risk, which could negatively affect the Company’s funding levels. Market conditions or other events could negatively affect the level of or cost of funding, which in turn could affect the Company’s ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences. Although the Company has implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, a substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on the Company’s businesses, results of operations and financial condition. If the cost effectiveness or the availability of supply in the credit markets is reduced for a prolonged period of time, the Company’s funding needs may require the Company to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, and further managing loan growth and investment opportunities. These alternative means of funding may not be available under stressed market conditions or realized in a timely fashion.

Any downgrades in our credit ratings could have a material adverse effect on our liquidity, cost of funding, cash flows, results of operations and financial condition. Credit rating agencies regularly evaluate us, and their ratings are based on a number of factors, including our financial strength, capital adequacy, liquidity, asset quality and ability to generate earnings. Some of these factors are not entirely within our control, such as conditions affecting the financial services industry. Severe downgrades in credit ratings could impact our business and reduce the Company’s profitability in different ways, including a reduction in the Company’s access to capital markets, triggering additional collateral or funding obligations which could negatively affect our liquidity. In addition, our counterparties, as well as our clients, rely on our financial strength and stability and evaluate the risks of doing business with us. If we experience a decline in our credit rating, this could result in a decrease in the number of counterparties and clients who may be willing to transact with us. Our borrowing costs may also be affected by various external factors, including market volatility and concerns or perceptions about the financial services industry. There can be no assurance that we can maintain our credit ratings nor that they will be lowered in the future.

Credit Risks

The Company’s allowance for credit losses level may not be adequate to cover actual losses. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we maintain an allowance for loan losses to provide for loan defaults and non-performance, and an allowance for unfunded credit commitments which, when combined, are referred to as the allowance for credit losses. Our allowance for loan losses is based on our evaluation of risks associated with our loans held-for-investment portfolio, including historical loss experience, expected loss calculations, delinquencies, performing status, the size and composition of the loan portfolio, economic conditions, and concentrations within the portfolio. The allowance estimation process requires subjective and complex judgments, including analysis of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. Current economic conditions in the U.S. and in the international markets could deteriorate, which could result in, among other things, greater than expected deterioration in credit quality of our loan portfolio or in the value of collateral securing these loans. Our allowance for credit losses may not be adequate to absorb actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. The amount of future losses is influenced by changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates.

Additionally, in order to maximize the collection of loan balances, we sometimes modify loan terms when there is a reasonable chance that an appropriate modification would allow the borrower to continue servicing the debt. If such modifications ultimately are less effective at mitigating loan losses than we expect, we may incur losses in excess of the specific amount of allowance for loan losses associated with a modified loan, and this would result in additional provision for loan losses. In addition, we establish a reserve for losses associated with our unfunded credit commitments. The level of the allowance for unfunded credit commitments is determined by following a methodology similar to that used to establish our allowance for loan losses in our loans held-for-investment portfolio. There can be no assurance that our allowance for unfunded credit commitments will be adequate to provide for the actual losses associated with our unfunded credit commitments. An increase in the allowance for unfunded credit commitments in any period may result in a charge to earnings.

We may be subject to increased credit risk and higher credit losses to the extent that our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral. Our credit risk and credit losses can increase if our loans are concentrated in borrowers affected by the same or similar economic conditions in the markets in which we operate or elsewhere, which could result in materially higher credit losses. For example, the Bank has a concentration of real estate loans in California. Potential deterioration in the California real estate market could result in additional loan charge-offs and provision for loan losses, which could have a material adverse effect on the Company’s business, results of operations and financial condition. If any particular industry or market sector were to experience economic difficulties, loan collectability from customers operating in those industries or sectors may differ from what we expected, which could have a material adverse impact on our results of operations and financial condition.

Operational Risks

A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, financial condition, cash flows, and liquidity, as well as cause reputational harm. The potential for operational risk exposure exists throughout our organization and from our interactions with third parties. Our operational and security systems, infrastructure, including our computer systems, network infrastructure, data management and internal processes, as well as those of third parties, are integral to our performance. In addition, we rely on our employees and third parties in our ongoing operations, who may, as a result of human error or malfeasance or failure or breach of third-party systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to the third parties with whom we interact. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup or other operating or security systems and infrastructure may fail to operate properly or may become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control which could adversely affect our ability to process transactions or provide certain services. There could be electrical, telecommunications or other major physical infrastructure outages, natural disasters such as wildfires, disease pandemics, earthquakes, tornadoes, hurricanes and floods, and events arising from local or larger scale political or social matters, including terrorist acts. We continuously update these systems to support our operations and growth, and this entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational risk exposures could adversely impact our results of operations, financial condition, cash flows, and liquidity, and may result in loss of confidence, significant litigation exposure and harm to our reputation.

A cyber-attack, information or security breach, or a technology failure of our systems or of a third party’s systems could adversely affect our ability to conduct businesses, manage our exposure to risk or expand our businesses. This could also result in the misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, financial condition, cash flows and liquidity, as well as result in reputational harm. The Company offers various internet-based services to its clients, including online banking services. The secure transmission of confidential information over the internet is essential in maintaining our clients’ confidence in the Company’s online services. In addition, our business is highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact. Cyber security risks, including ransomware and malware attacks, for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunication technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states and other external parties. Our businesses rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. We rely on digital technologies, computer, database and email systems, software and networks. Notwithstanding our defensive systems and processes that are designed to prevent security breaches and periodically test the Company’s security. The Company utilizes combination of preventative and detective controls such as Firewalls, Intrusion Detection Systems, Data Loss Prevention, anti-malware, Endpoint Detection and Response solutions to safeguard against cyber-attacks. There is no assurance that all of our security measures will be effective, especially as the threat from cyber-attacks is continuous and severe, attacks are becoming more sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Failure to mitigate breaches of security, or to comply with frequent imposition of increasingly demanding new and changing industry standards and regulatory requirements, could result in violation of applicable privacy laws, reputational damage, regulatory fines, litigation exposure, increase security compliance costs, affect the Company’s ability to offer and grow the online services, and could have an adverse effect on the Company’s businesses, results of operations and financial condition. We have not experienced any known attacks on our information technology systems that have resulted in any material system failure, incident or security breach to date.

Failure to keep pace with technological change could adversely affect the Company’s businesses. The Company may face risks associated with the ability to utilize information technology systems to support our operations effectively. The financial services industry is continuously undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s businesses and, in turn, the Company’s results of operations and financial condition. In addition, if we do not implement systems effectively or if our outsourcing business partners do not perform their functions properly, there could be an adverse effect on us. There can be no assurance that we will be able to effectively maintain or improve our systems and processes, or utilize outsourced talent, to meet our business needs efficiently. Any such failure could adversely affect our businesses, results of operations, financial condition, and reputation.

Natural disasters and geopolitical events beyond the Company’s control could adversely affect the Company. Natural disasters such as wildfires, earthquakes, extreme weather conditions, hurricanes, floods, disease pandemics and other acts of nature and geopolitical events involving political unrest, terrorism or military conflict could adversely affect the Company’s business operations and those of the Company’s customers and cause substantial damage and loss to real and personal property. For example, California, in which the Company’s operations and the collateral securing its real estate lending portfolio are concentrated, contains active earthquake zones and have been subject to numerous devastating wildfires. These natural disasters and geopolitical events could impair the borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, erode the value of loan collateral, and result in an increase in the amount of nonperforming assets, net charge-offs, and provision for loan losses, which could adversely affect the Company’s businesses, results of operations and financial condition.

The actions and soundness of other financial institutions could affect the Company. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company executes transactions with various counterparties in the financial industry, including brokers and dealers, commercial banks and investment banks. Defaults by financial services institutions and uncertainty in the financial services industry in general could lead to market-wide liquidity problems and may expose the Company to credit risk in the event of default of its counterparties or clients. Further, the Company’s credit risk may increase when the underlying collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to the Company. Any such losses could materially and adversely affect the Company’s businesses, results of operations and financial condition.

The Company’s controls and procedures could fail or be circumvented. Management regularly reviews and updates the Company’s internal controls, reporting controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of the Company’s controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect the Company’s businesses, results of operations and financial condition.

The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company’s prospects. Competition for qualified personnel in the banking industry is intense and there is a limited number of qualified persons with knowledge of, and experience in, the regional banking industry, especially in the West Coast market. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. The Company’s success depends, to a significant degree, upon its ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel, as well as upon the continued contributions of its management and personnel. In particular, the Company’s success has been and continues to be highly dependent upon the abilities of certain key executives.

We face strong competition in the financial services industry and we could lose business or suffer margin declines as a result. The Company operates in a highly competitive environment. The Company conducts the majority of its operations in California. Our competitors include commercial banks, savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other regional, national, and global financial institutions. Some of the major competitors include multinational financial service companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates on loans and deposits, customer services, and a range of price and quality of products and services, including new technology-driven products and services. Failure to attract and retain banking customers may adversely impact the Company’s loan and deposit growth.

The Company has engaged in and may continue to engage in further expansion through acquisitions, which could negatively affect the Company’s businesses and earnings. There are risks associated with expanding through acquisitions. These risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance from customers or employees, and being unable to profitably deploy assets acquired in the transaction. Additional country or region-specific risks are associated with transactions outside the U.S., including in Greater China. To the extent the Company issues capital stock in connection with additional transactions, these transactions and related stock issuances may have a dilutive effect on earnings per share (“EPS”) and share ownership.

Regulatory, Compliance and Legal Risks

Changes in current and future legislation and regulation may require the Company to change its business practices, increase costs, limit the Company’s ability to make investments and generate revenue, or otherwise adversely affect business operations and/or competitiveness. EWBC is subject to extensive regulation under federal and state laws, as well as supervisions and examinations by the DBO, FDIC, Federal Reserve, FHLB, SEC, CFPB, U.S. and State Attorneys General, and other government bodies. Our overseas operations in Greater China are subject to extensive regulation under the laws of those jurisdictions as well as supervision and examinations by financial regulators for those jurisdictions. Moreover, regulation of the financial services industry continues to undergo major changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies could affect the manner in which EWBC conducts business. In addition, such changes could also subject us to additional costs and may limit the types of financial services and products we offer, and the investments we make.

Good standing with our regulators is of fundamental importance to the continuation and growth of our businesses given that banks operate in an extensively regulated environment under state and federal law. In the performance of their supervisory and enforcement duties, federal, state and non-U.S. regulators have significant discretion and power to initiate enforcement actions for violations of laws and regulations, and unsafe and unsound practices. Further, regulators and bank supervisors continue to exercise qualitative supervision and regulation of our industry and specific business operations and related matters. Violations of laws and regulations or deemed deficiencies in risk management or other qualitative practices also may be incorporated into the Company’s bank supervisory ratings. A downgrade in these ratings, or other regulatory actions and settlements could limit the Company’s ability to pursue acquisitions or conduct other expansionary activities and require new or additional regulatory approvals before engaging in certain other business activities.

Failure to comply with laws, regulations or policies could result in civil or criminal sanctions by state, federal and non-U.S. agencies, the loss of FDIC insurance, the revocation of our banking charter, civil or criminal monetary penalties and/or reputational damage, which could have a material adverse impact on the Company’s businesses, results of operations and financial condition. We continue to make adjustments to our business and operations, capital, policies, procedures and controls to comply with these laws and regulations, final rulemaking, and interpretations from the regulatory authorities. See Item 1. Business — Supervision and Regulation for more information about the regulations to which we are subject.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. The BSA, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective AML program and file suspicious activity and currency transaction reports when appropriate. We are also required to ensure our third party vendors adhere to the same laws and regulations. FinCEN is authorized to implement, administer, and enforce compliance with the BSA and associated regulation. It has the authority to impose significant civil money penalties for violations of those requirements and has been engaging in coordinated enforcement efforts with the state and federal banking regulators, as well as the Department of Justice, CFPB, Drug Enforcement Administration, and the Internal Revenue Service (“IRS”).

We are also required to comply with U.S. economic and trade sanctions administered by OFAC regarding, among other things, the prohibition of transacting business with, and the need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign policy or economy of the U.S. A violation of any anti-corruption or AML laws and regulations could subject us to significant civil and criminal penalties as well as regulatory enforcement actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any acquisition plans. Any violation also could damage our reputation. Any of these results could have a material adverse effect on our business, results of operations, financial condition and future prospects.

We are subject to significant financial and reputational risk arising from lawsuits and other legal proceedings. We face significant risk from lawsuits and claims brought by consumers, borrowers and counterparties. These actions include claims for monetary damages, penalties and fines, as well as demands for injunctive relief. If these lawsuits or claims, whether founded or unfounded, are not resolved in a favorable manner to us, they could lead to significant financial obligations for the Company, as well as restrictions or changes to how we conduct our businesses. Although we establish accruals for legal matters when and as required by GAAP and certain expenses and liabilities in connection with such matters may or may not be covered by insurance, the amount of loss ultimately incurred in relation to those matters may be substantially higher than the amounts accrued and/or insured. Substantial legal liability could adversely affect our business, financial condition, results of operations, and reputation. In addition, we may suffer significant reputational harm as a result of lawsuits and claims, adversely impacting our ability to attract and retain customers and investors. Moreover, it may be difficult to predict the outcome of certain legal proceedings, which may present additional uncertainty to our business prospects.

Accounting and Tax Risks

Changes in accounting standards or changes in how the accounting standards are interpreted or applied could materially impact the Company’s financial statements. The preparation of the Company’s financial statements is based on accounting standards established by the FASB and the SEC. From time to time, these accounting standards may change and such changes may have a material impact on the Company’s financial statements. In addition, the FASB, SEC, banking regulators and the Company’s independent registered public accounting firm may amend or reverse their previous interpretations or positions on how various standards should be applied. These changes may be difficult to predict and could impact how we prepare and report the Company’s financial statements. In some cases, the Company could be required to adopt a new or revised standard retroactively, potentially resulting in restatements to the prior period’s financial statements. ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) issued by the FASB in June 2016, referred to as CECL, requires the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. The Company adopted ASU 2016-13 on January 1, 2020. For more information related to the impacts of ASU 2016-13, see Note 1 — Summary of Significant Accounting Policies — Recent Accounting Pronouncements — Standards Adopted in 2020 to the Consolidated Financial Statements in this Form 10-K.

The Company’s consolidated financial statements are based in part on assumptions and estimates which, if incorrect, could cause unexpected losses in the future. Pursuant to GAAP, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. Accounting policies related to these estimates and assumptions are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain. If these estimates and assumptions are incorrect, we may be required to restate prior-period financial statements. For a description of these policies, refer to Note 1 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-K.

Changes to fiscal policies and tax legislation may adversely affect our business. From time to time, the U.S. government may introduce new fiscal policies and tax laws or make substantial changes to existing tax legislation. These changes could have a material impact on the Company’s businesses, results of operations and financial condition. The Company’s positions or its actions taken prior to such changes, may be compromised by such changes. In addition, the Company’s actions taken in response to, or in reliance upon, such changes in the tax laws may impact our tax position in a manner that may result in adverse financial conditions. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted and made significant changes to the U.S. Internal Revenue Code. The Tax Act reformed a broad range of tax legislation affecting businesses, among other things, reducing the statutory corporate income tax rate from 35% to 21%, limiting on net interest expense deduction and accelerating expensing of investment in certain qualified property. It is possible that the U.S. government could further introduce new tax legislation or amend current tax laws that would adversely affect the Company. In addition, the President’s proposed budget, negotiations with Congress over the details of the budget, and the terms of the approved budget could create uncertainty about the U.S. economy, ultimately having an adverse effect on our business.

The Company’s investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on the Company’s results of operations. The Company invests in certain tax-advantaged investments that support qualified affordable housing projects, community development and renewable energy resources. The Company’s investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. Due diligence review is performed both prior to the initial investment and on an ongoing basis, however, there may be assessments that we failed or were unable to discover or identify in the course of performing due diligence review. The Company is subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, may fail to meet certain government compliance requirements and may not be able to be realized. The possible inability to realize these tax credits and other tax benefits may have a negative impact on the Company’s financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside the Company’s control, including changes in the applicable tax code and the ability of the projects to be completed.

Other Risks

Anti-takeover provisions could negatively impact the Company’s stockholders. Provisions of Delaware law and of the Company’s certificate of incorporation, as amended, and bylaws could make it more difficult for a third party to acquire control of the Company or could have the effect of discouraging a third party from attempting to acquire control of the Company. For example, the Company’s certificate of incorporation requires the approval of the holders of at least two-thirds of the outstanding shares of voting stock to approve certain business combinations. The Company is also subject to Section 203 of the Delaware General Corporation Law, which would make it more difficult for another party to acquire the Company without the approval of the Board of Directors. Additionally, the Company’s certificate of incorporation, as amended, authorizes the Board of Directors to issue preferred stock which could be issued as a defensive measure in response to a takeover proposal. These and other provisions could make it more difficult for a third party to acquire the Company, even if an acquisition might be in the best interest of the stockholders.

Managing reputational risk is important to attracting and maintaining customers, investors and employees. Threats to the Company’s reputation can come from many sources, including unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of the Company’s customers. The Company has policies and procedures in place to protect its reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding the Company’s businesses, employees or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

The price of the Company’s common stock may be volatile or may decline. The price of the Company’s common stock may fluctuate in response to a number of factors that are outside the Company’s control. These factors include, among other things:


•	actual or anticipated quarterly fluctuations in the Company’s results of operations and financial condition;


•	changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;


•	failure to meet analysts’ revenue or earnings estimates;


•	speculation in the press or investment community;


•	strategic actions by the Company or its competitors, such as acquisitions or restructurings;


•	actions by institutional stockholders;


•	addition or departure of key personnel;


•	fluctuations in the stock price and operating results of the Company’s competitors;


•	general market conditions and, in particular, developments related to market conditions in the financial services industry;


•	proposed or adopted regulatory changes or developments;


•	cyclical fluctuations;


•	trading volume of the Company’s common stock; and


•	anticipated or pending investigations, proceedings or litigation that involve or affect the Company.

Industry factors, general economic and political conditions and events, such as cyber or terrorist attacks, economic downturn or recessions, interest rate changes, credit loss trends, currency fluctuations, changes to trade policies or disease pandemics could also cause our stock price to decline regardless of our operating results. A significant decline in the Company’s stock price could result in substantial losses for stockholders.

If the Company’s goodwill was determined to be impaired, it would result in a charge against earnings and thus a reduction in stockholders’ equity. The Company tests goodwill for impairment on an annual basis, or more frequently, if necessary. Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measuring impairment, when available. Other acceptable valuation methods include present value measurements based on multiples of earnings or revenues, or similar performance measures. If the Company were to determine that the carrying amount of the goodwill exceeded its implied fair value, the Company would be required to write down the value of the goodwill on the balance sheet, adversely affecting earnings as well as capital.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

East West’s corporate headquarters is located at 135 North Los Robles Avenue, Pasadena, California, an eight-story office building that it owns. The Company operates in 119 locations in the U.S. and 9 locations in Greater China. In the U.S., the Bank’s corporate headquarters and main administrative offices are located in California, and branches are located in California, Texas, New York, Washington, Georgia, Massachusetts and Nevada. In Greater China, East West’s presence includes full service branches in Hong Kong, Shanghai, Shantou and Shenzhen, and representative offices in Beijing, Chongqing, Guangzhou and Xiamen.

As of December 31, 2019, the Bank owns approximately 162 thousand square feet of property at 20 U.S. locations and leases approximately 780 thousand square feet in the remaining U.S. locations. Expiration dates for these leases range from 2020 to 2030, exclusive of renewal options. The Bank leases all of its branches and offices in Greater China, totaling approximately 84 thousand square feet. Expiration dates for these leases range from 2020 to 2022. All properties occupied by the Bank are used across all business segments and for corporate purposes. For further information concerning leases, see Note 10 — Leases to the Consolidated Financial Statements in this Form 10-K.

On an ongoing basis, the Company evaluates its current and projected space requirements and, from time to time, it may determine that certain premises or facilities are no longer necessary for its operations. The Company believes that, if necessary, it could secure alternative properties on similar terms without adversely affecting its operations.

ITEM 3. LEGAL PROCEEDINGS

See Note 15 — Commitments, Contingencies and Related Party Transactions — Litigation to the Consolidated Financial Statements in this Form 10-K, which is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Holders of Common Stock and Dividends

The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “EWBC”. As of January 31, 2020, 145,625,565 shares of the Company’s common stock were held by 737 stockholders of record and by approximately 88,033 additional stockholders whose common stock were held for them in street name or nominee accounts.

Holders of the Company’s common stock are entitled to receive cash dividends when declared by the Company’s Board of Directors out of legally available funds. The Board of Directors presently intends to continue the policy of paying quarterly cash dividends, however, there can be no assurance as to future dividends because they are dependent on the Company’s future earnings, capital requirements and financial condition.

Securities Authorized for Issuance under Equity Compensation Plans

For information regarding securities authorized for issuance under the Company’s equity compensation plans, see Note 16 — Stock Compensation Plans to the Consolidated Financial Statements and Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters presented elsewhere in this report, which are incorporated herein by reference.

Five-Year Stock Performance

The following graph and table compare the Company’s cumulative total return on its common stock with the cumulative total return of the Standard & Poor’s (“S&P”) 500 Index and the Keefe, Bruyette and Woods NASDAQ Regional Banking Index (“KRX”) over the five-year period through December 31, 2019. The S&P 500 Index is utilized as a benchmark against performance and is a commonly referenced U.S. equity benchmark consisting of leading companies from different economic sectors. The KRX is used to align EWBC with those companies of a relatively similar size. This index seeks to reflect the performance of publicly traded U.S. companies that do business as regional banks or thrifts, and is composed of 50 companies. The graph and table below assume that on December 31, 2014, $100 was invested in EWBC’s common stock, the S&P 500 Index and the KRX, and that all dividends were reinvested. Historical stock price performance shown on the graph is not necessarily indicative of future price performance. The information set forth under the heading “Five-Year Stock Performance” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that such information to be treated as soliciting material or specifically to be incorporated by reference into a filing under the Securities Act or the Exchange Act.




	December 31,
Index	2014	2015	2016	2017	2018	2019
East West Bancorp, Inc.	$100.00	$109.40	$136.60	$165.80	$120.50	$138.00
KRX	$100.00	$105.90	$147.20	$149.80	$123.60	$153.00
S&P 500 Index	$100.00	$101.40	$113.50	$138.30	$132.20	$173.90

Repurchases of Equity Securities by the Issuer and Affiliated Purchasers

On July 17, 2013, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $100.0 million of the Company’s common stock. The Company did not repurchase any shares under this program thereafter, including during 2019 and 2018. Although this program has no stated expiration date, the Company does not intend to repurchase any stock pursuant to this program absent further action of the Company’s Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA

For selected financial data information, see Item 7. MD&A — Five-Year Summary of Selected Financial Data, which is incorporated herein by reference.

EAST WEST BANCORP, INC.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS



		Page
Overview		30
Five-Year Summary of Selected Financial Data		31
2019 Financial Highlights		32
Results of Operations		33
	Net Interest Income	33
	Noninterest Income	36
	Noninterest Expense	38
	Income Taxes	39
	Operating Segment Results	41
Balance Sheet Analysis		44
	Selected Consolidated Balance Sheet Data	44
	Investment Securities	45
	Loan Portfolio	48
	Deposits and Other Sources of Funds	55
	Foreign Outstandings	57
	Capital	57
	Regulatory Capital and Ratios	58
Other Matters		59
Off-Balance Sheet Arrangements and Contractual Obligations		59
	Off-Balance Sheet Arrangements	59
	Contractual Obligations	60
Risk Management		60
	Credit Risk Management	61
	Liquidity Risk Management	67
	Market Risk Management	69
Critical Accounting Policies and Estimates		73
Supplemental Information-Explanation of GAAP and Non-GAAP Financial Measures		76

Overview

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West, 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.

Company Overview

East West is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the BHC Act. The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of the Bank, which became its principal asset. The Bank is an independent commercial bank headquartered in California that has a strong focus on the financial service needs of the Chinese-American community. Through over 125 locations in the U.S. and Greater China, the Company provides a full range of consumer and commercial products and services through three business segments: Consumer and Business Banking, Commercial Banking, with the remaining operations included in Other. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primary source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and investment securities and interest paid on deposits and other funding sources. As of December 31, 2019, the Company had $44.20 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.

Corporate Strategy

We are committed to enhancing long-term shareholder value by executing on the fundamentals of growing loans, deposits and revenue, improving profitability, and investing for the future while managing risk, 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.

Five-Year Summary of Selected Financial Data




($ and shares in thousands, except per share, ratio and headcount data)	2019			2018			2017			2016			2015
Summary of operations:
Interest and dividend income	$	1,882,300		$	1,651,703		$	1,325,119		$	1,137,481		$	1,053,815
Interest expense	414,487			265,195			140,050			104,843			103,376
Net interest income before provision for credit losses	1,467,813			1,386,508			1,185,069			1,032,638			950,439
Provision for credit losses	98,685			64,255			46,266			27,479			14,217
Net interest income after provision for credit losses	1,369,128			1,322,253			1,138,803			1,005,159			936,222
Noninterest income ⁽¹⁾	209,377			210,909			257,748			182,278			182,779
Noninterest expense	734,588			714,466			661,451			615,249			540,280
Income before income taxes	843,917			818,696			735,100			572,188			578,721
Income tax expense ⁽²⁾	169,882			114,995			229,476			140,511			194,044
Net income	$	674,035		$	703,701		$	505,624		$	431,677		$	384,677
Per common share:
Basic earnings	$	4.63		$	4.86		$	3.50		$	3.00		$	2.67
Diluted earnings	$	4.61		$	4.81		$	3.47		$	2.97		$	2.66
Dividends declared	$	1.06		$	0.86		$	0.80		$	0.80		$	0.80
Book value	$	34.46		$	30.52		$	26.58		$	23.78		$	21.70
Non-GAAP tangible common equity per share ⁽³⁾	$	31.15		$	27.15		$	23.13		$	20.27		$	18.15
Weighted-average number of shares outstanding:
Basic	145,497			144,862			144,444			144,087			143,818
Diluted	146,179			146,169			145,913			145,172			144,512
Common shares outstanding at period-end	145,625			144,961			144,543			144,167			143,909
At year end:
Total assets ⁽⁴⁾	$	44,196,096		$	41,042,356		$	37,121,563		$	34,788,840		$	32,350,922
Total loans ⁽⁴⁾	$	34,778,973		$	32,385,464		$	29,053,935		$	25,526,215		$	23,675,706
Investment securities	$	3,317,214		$	2,741,847		$	3,016,752		$	3,335,795		$	3,773,226
Total deposits, excluding held-for-sale deposits	$	37,324,259		$	35,439,628		$	31,615,063		$	29,890,983		$	27,475,981
Long-term debt and finance lease liabilities	$	152,270		$	146,835		$	171,577		$	186,327		$	206,084
FHLB advances	$	745,915		$	326,172		$	323,891		$	321,643		$	1,019,424
Stockholders’ equity	$	5,017,617		$	4,423,974		$	3,841,951		$	3,427,741		$	3,122,950
Non-GAAP tangible common equity ⁽³⁾	$	4,535,841		$	3,936,062		$	3,343,693		$	2,922,638		$	2,611,919
Head count (full-time equivalent)	3,294			3,196			2,933			2,838			2,804
Performance metrics:
Return on average assets (“ROA”)	1.59		%	1.83		%	1.41		%	1.30		%	1.27		%
Return on average equity (“ROE”)	14.16		%	17.04		%	13.71		%	13.06		%	12.74		%
Net interest margin	3.64		%	3.78		%	3.48		%	3.30		%	3.35		%
Efficiency ratio ⁽⁵⁾	43.80		%	44.73		%	45.84		%	50.64		%	47.68		%
Non-GAAP efficiency ratio ⁽³⁾	38.43		%	39.55		%	41.44		%	44.21		%	41.75		%
Credit quality metrics:
Allowance for loan losses	$	358,287		$	311,322		$	287,128		$	260,520		$	264,959
Allowance for loan losses to loans held-for-investment ⁽⁴⁾	1.03		%	0.96		%	0.99		%	1.02		%	1.12		%
Non-purchased credit-impaired (“PCI”) nonperforming assets to total assets ⁽⁴⁾	0.27		%	0.23		%	0.31		%	0.37		%	0.40		%
Net charge-offs to average loans held-for-investment	0.16		%	0.13		%	0.08		%	0.15		%	0.01		%
Selected metrics:
Total average equity to total average assets	11.21		%	10.72		%	10.30		%	9.97		%	9.95		%
Common dividend payout ratio	23.04		%	17.90		%	23.14		%	27.01		%	30.21		%
Loan-to-deposit ratio ⁽⁴⁾	93.18		%	91.38		%	90.17		%	85.40		%	86.17		%
EWBC capital ratios:
CET1 capital	12.9		%	12.2		%	11.4		%	10.9		%	10.5		%
Tier 1 capital	12.9		%	12.2		%	11.4		%	10.9		%	10.7		%
Total capital	14.4		%	13.7		%	12.9		%	12.4		%	12.2		%
Tier 1 leverage capital	10.3		%	9.9		%	9.2		%	8.7		%	8.5		%

(1)

Includes $31.5 million of pretax gain recognized from the sale of the DCB branches for 2018. Includes $71.7 million and $3.8 million of pretax gains recognized from the sales of a commercial property in California and EWIS’s insurance brokerage business, respectively, for 2017. Includes changes in FDIC indemnification asset and receivable/payable charges of $38.0 million for 2015. The Company terminated the United Commercial Bank and Washington First International Bank shared-loss agreements during 2015.


(2)	Includes $30.1 million of additional tax expense to reverse certain previously claimed tax credits related to DC Solar and affiliates (“DC Solar”) tax credit investments during 2019. Includes an additional $41.7 million in income tax expense recognized during 2017 due to the enactment of the Tax Act.


(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 7. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-K.


(4)	Total assets and loans held-for-investment include PCI loans of $222.9 million, $308.0 million, $482.3 million, $642.4 million and $970.8 million as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.


(5)	The efficiency ratio is noninterest expense divided by total revenue (net interest income before provision for credit losses and noninterest income).

2019 Financial Highlights

Noteworthy items about the Company’s performance for 2019 included:


•	Earnings: 2019 net income was $674.0 million and diluted EPS was $4.61, compared with 2018 net income of $703.7 million and diluted EPS of $4.81. This $29.7 million or 4% decrease in net income was primarily due to increases in income tax expense, provision for credit losses and noninterest expense, partially offset by net interest income growth.

•

Adjusted Earnings: Adjusting for non-recurring items, 2019 non-GAAP net income and non-GAAP diluted EPS were $707.9 million and $4.84, respectively, compared with $681.5 million and $4.66 for 2018, respectively, a year-over-year increase of 4%. During 2019, the Company recorded a $5.4 million net pre-tax impairment charge (equivalent to $3.8 after-tax) and $30.1 million in additional income tax expense to reverse certain previously claimed tax credits related to DC Solar. (Refer to Item 7. MD&A — Results of Operations — Income Taxes in this Form 10-K for a more detailed discussion related to the Company’s investment in DC Solar.) During 2018, the Company recognized a $31.5 million pre-tax gain from the sale of its DCB branches, equivalent to $22.2 million after-tax. (See reconciliations of non-GAAP measures presented under Item 7. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-K.)


•	Revenue: Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $1.68 billion in 2019, compared with $1.60 billion in 2018, an increase of $79.8 million or 5%. This increase was primarily due to an increase in net interest income.

•

Net Interest Income and Net Interest Margin: 2019 net interest income was $1.47 billion, compared with 2018 net interest income of $1.39 billion, an increase of $81.3 million or 6%. 2019 net interest margin of 3.64% contracted by 14 basis points, compared with 2018 net interest margin of 3.78%. Net interest income growth was primarily driven by loan growth, partially offset by a higher cost of deposits.

•

Operating Efficiency: Efficiency ratio, calculated as noninterest expense divided by revenue, was 43.80% in 2019, an improvement of 93 basis points compared with 44.73% in 2018. Adjusting for non-recurring items, amortization of tax credit and other investments, and the amortization of core deposit intangibles in both 2019 and 2018, non-GAAP efficiency ratio was 38.43% in 2019, a 112 basis point improvement from 39.55% in 2018. (See reconciliations of non-GAAP measures presented under Item 7. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-K.)


•	Tax: The 2019 annual effective income tax rate was 20.1%, compared with 14.0% in 2018. The higher effective tax rate in 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 2019 and 2018 were 1.59% and 1.83%, respectively. ROE for 2019 and 2018 were 14.16% and 17.04%, respectively. Adjusting for non-recurring items, non-GAAP ROA was 1.67% for 2019, compared with 1.77% for 2018. For 2019, non-GAAP ROE was 14.87%, compared with 16.50% for 2018. (See reconciliations of non-GAAP measures presented under Item 7. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-K.)


•	Loans: Total loans were $34.78 billion as of December 31, 2019, an increase of $2.39 billion or 7% from $32.39 billion as of December 31, 2018. The largest increase in loans was in single-family residential loans, followed by CRE loans.


•	Deposits: Total deposits were $37.32 billion as of December 31, 2019, an increase of $1.88 billion or 5% from $35.44 billionas of December 31, 2018. This increase was primarily due to the $1.15 billion or 13% increase in time deposits.

•

Asset Quality Metrics: The allowance for loan losses was $358.3 million or 1.03% of loans held-for-investment as of December 31, 2019, compared with $311.3 million or 0.96% of loans held-for-investment as of December 31, 2018. Non-PCI nonperforming assets were $121.5 million or 0.27% of total assets as of December 31, 2019, an increase from $93.0 million or 0.23% of total assets as of December 31, 2018. For 2019, net charge-offs were $52.8 million or 0.16% of average loans held-for-investment, compared with $40.1 million or 0.13% of average loans held-for-investment for 2018.


•	Capital Levels: Our capital levels are strong. As of December 31, 2019, all of the Company’s and the Bank’s regulatory capital ratios were well above the required well-capitalized levels. See Item 7. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-K for more information regarding capital.


•	Cash Dividend: Our annual cash dividend on common stock was $1.055 per share in 2019, compared with $0.86 per share in 2018, an increase of $0.195 or 23%. The Company returned $155.1 million and $126.0 million in cash dividends to stockholders during 2019 and 2018, respectively.

Results of Operations

Net Interest Income

The Company’s primary source of revenue is net interest income, which is the difference between interest income earned on interest-earning assets less interest expense paid on interest-bearing liabilities. Net interest margin is the ratio of net interest income to average interest-earning assets. Net interest income and net interest margin are impacted by several factors, including changes in average balances and composition of interest-earning assets and funding sources, market interest rate fluctuations and slope of the yield curve, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities, volume of noninterest-bearing sources of funds and asset quality.

Net interest income for 2019 was $1.47 billion, an increase of $81.3 million or 6%, compared with $1.39 billion in 2018. The increase in net interest income for 2019 was primarily driven by loan growth and higher loan yields, partially offset by a higher cost of deposits. Net interest income for 2018 was $1.39 billion, an increase of $201.4 million or 17%, compared with $1.19 billion in 2017. The increase in net interest income for 2018 was primarily due to the expansion of loan yields and loan growth, partially offset by a higher cost of funds. Net interest margin for 2019 was 3.64%, a 14 basis point decrease from 3.78% in 2018. Net interest margin for 2018 increased 30 basis points from 3.48% in 2017.

Average loan yield for 2019 was 5.15%, an 18 basis point increase from 4.97% in 2018. Average loan yield in 2018 increased 57 basis points from 4.40% in 2017. The increases in the average loan yield in 2019 and 2018 reflected the upward repricing of the Company’s loan portfolio in response to higher short-term interest rates during the periods. Approximately 64%, 66% and 69% of total loans were variable-rate or hybrid that were in their adjustable rate periods as of December 31, 2019, 2018 and 2017, respectively. The increase in the 2019 average loan yield was primarily due to the higher prime rate during the first half of 2019, which increased the yield on prime-based loans. Approximately 32% of loans were tied to the prime index as of December 31, 2019. Average loans were $33.37 billion in 2019, an increase of $3.14 billion or 10% from $30.23 billion in 2018. Average loans in 2018 increased $2.98 billion or 11% from $27.25 billion in 2017. Loan growth in both 2019 and 2018 was broad-based across single-family residential, commercial and industrial (“C&I”) and CRE loan portfolios.

Average interest-earning assets were $40.32 billion in 2019, an increase of $3.61 billion or 10% from $36.71 billion in 2018. This was primarily due to increases of $3.14 billion in average loans and $441.5 million in average interest-bearing cash and deposits with banks. Average interest-earning assets were $36.71 billion in 2018, an increase of $2.67 billion or 8% from $34.03 billion in 2017. This was primarily due to increases of $2.98 billion in average loans and $367.2 million in average interest-bearing cash and deposits with banks, partially offset by decreases of $417.9 million in average securities purchased under resale agreements (“resale agreements”) and $253.5 million in average investment securities.

Deposits are an important source of funds and impact both net interest income and net interest margin. Average noninterest-bearing demand deposits totaled $10.50 billion in 2019, compared with $11.09 billion in 2018, a decrease of $586.9 million or 5%. Average noninterest-bearing demand deposits in 2018 increased $461.8 million or 4% from $10.63 billion in 2017. Average noninterest-bearing demand deposits made up 29%, 33% and 34% of average total deposits in 2019, 2018 and 2017, respectively. Average interest-bearing deposits of $25.54 billion in 2019 increased $3.40 billion or 15% from $22.14 billion in 2018. Average interest-bearing deposits in 2018 increased $1.95 billion or 10% from $20.19 billion in 2017.

The average cost of funds was 1.12%, 0.78% and 0.44% in 2019, 2018 and 2017, respectively. The year-over-year increases in the average cost of funds were primarily due to increases in the cost of interest-bearing deposits. The average cost of interest-bearing deposits increased 41 basis points to 1.47% in 2019, and 48 basis points to 1.06% in 2018, up from 0.58% in 2017. Other sources of funding included in the calculation of the average cost of funds primarily consist of FHLB advances, long-term debt and securities sold under repurchase agreements (“repurchase agreements”).

The Company utilizes various tools to manage interest rate risk. Refer to the “Interest Rate Risk Management” section of Item 7. MD&A — Risk Management — Market Risk Management for details.

The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component in 2019, 2018 and 2017:




($ in thousands)	Year Ended December 31,
	2019							2018							2017
	Average Balance			Interest		Average Yield/ Rate		Average Balance			Interest		Average Yield/ Rate		Average Balance			Interest		Average Yield/ Rate
ASSETS
Interest-earning assets:
Interest-bearing cash and deposits with banks	$	3,050,954		$	66,760	2.19	%	$	2,609,463		$	54,804	2.10	%	$	2,242,256		$	33,390	1.49	%
Resale agreements ⁽¹⁾	969,384			27,819		2.87	%	1,020,822			29,328		2.87	%	1,438,767			32,095		2.23	%
Investment securities ⁽²⁾⁽³⁾	2,850,476			67,838		2.38	%	2,773,152			60,911		2.20	%	3,026,693			58,670		1.94	%
Loans ⁽⁴⁾⁽⁵⁾	33,373,136			1,717,415		5.15	%	30,230,014			1,503,514		4.97	%	27,252,756			1,198,440		4.40	%
Restricted equity securities	76,854			2,468		3.21	%	73,691			3,146		4.27	%	73,593			2,524		3.43	%
Total interest-earning assets	$	40,320,804		$	1,882,300	4.67	%	$	36,707,142		$	1,651,703	4.50	%	$	34,034,065		$	1,325,119	3.89	%
Noninterest-earning assets:
Cash and due from banks	471,060							445,768							395,092
Allowance for loan losses	(330,125		)					(298,600		)					(272,765		)
Other assets	2,023,146							1,688,259							1,631,221
Total assets	$	42,484,885						$	38,542,569						$	35,787,613
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Checking deposits ⁽⁶⁾	$	5,244,867		$	58,168	1.11	%	$	4,477,793		$	34,657	0.77	%	$	3,951,930		$	18,305	0.46	%
Money market deposits ⁽⁶⁾	8,220,236			111,081		1.35	%	7,985,526			83,696		1.05	%	8,026,347			44,181		0.55	%
Saving deposits ⁽⁶⁾	2,118,060			9,626		0.45	%	2,245,644			8,621		0.38	%	2,369,398			6,431		0.27	%
Time deposits ⁽⁶⁾	9,961,289			196,927		1.98	%	7,431,749			107,778		1.45	%	5,838,382			47,474		0.81	%
Federal funds purchased and other short-term borrowings	44,881			1,763		3.93	%	32,222			1,398		4.34	%	34,546			1,003		2.90	%
FHLB advances	592,257			16,697		2.82	%	327,435			10,447		3.19	%	391,480			7,751		1.98	%
Repurchase agreements ⁽¹⁾	74,926			13,582		18.13	%	50,000			12,110		24.22	%	140,000			9,476		6.77	%
Long-term debt and finance lease liabilities	152,445			6,643		4.36	%	159,185			6,488		4.08	%	178,882			5,429		3.03	%
Total interest-bearing liabilities	$	26,408,961		$	414,487	1.57	%	$	22,709,554		$	265,195	1.17	%	$	20,930,965		$	140,050	0.67	%
Noninterest-bearing liabilities and stockholders’ equity:
Demand deposits ⁽⁶⁾	10,502,618							11,089,537							10,627,718
Accrued expenses and other liabilities	812,461							612,656							541,717
Stockholders’ equity	4,760,845							4,130,822							3,687,213
Total liabilities and stockholders’ equity	$	42,484,885						$	38,542,569						$	35,787,613
Interest rate spread						3.10	%						3.33	%						3.22	%
Net interest income and net interest margin				$	1,467,813	3.64	%				$	1,386,508	3.78	%				$	1,185,069	3.48	%

(1)

Average balances of resale and repurchase agreements are 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 2.65%, 2.63% and 2.19% for 2019, 2018 and 2017, respectively. The weighted-average interest rates of gross repurchase agreements were 4.74%, 4.46% and 3.48% for 2019, 2018 and 2017, respectively.


(2)	Yields on tax-exempt securities are not presented on a tax-equivalent basis.


(3)	Includes the amortization of premiums on investment securities of $10.9 million, $16.1 million and $21.2 million for 2019, 2018 and 2017, respectively.


(4)	Average balances include nonperforming loans and loans held-for-sale.


(5)	Includes the accretion of net deferred loan fees, unearned fees, ASC 310-30 discounts and amortization of premiums, which totaled $36.8 million, $39.2 million and $30.8 million for 2019, 2018 and 2017, respectively.


(6)	Average balance of deposits for 2018 and 2017 includes average deposits held-for-sale related to the sale of the DCB branches.

The following table summarizes the extent to which changes in (1) interest rates; and (2) average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and interest rates. 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)	Year Ended December 31,
	2019 vs. 2018									2018 vs. 2017
	Total Change			Changes Due to						Total Change			Changes Due to
	Total Change			Volume			Yield/Rate			Total Change			Volume			Yield/Rate
Interest-earning assets:
Interest-bearing cash and deposits with banks	$	11,956		$	9,584		$	2,372		$	21,414		$	6,108		$	15,306
Resale agreements	(1,509		)	(1,476		)	(33		)	(2,767		)	(10,671		)	7,904
Investment securities	6,927			1,734			5,193			2,241			(5,167		)	7,408
Loans	213,901			160,392			53,509			305,074			138,724			166,350
Restricted equity securities	(678		)	130			(808		)	622			3			619
Total interest and dividend income	$	230,597		$	170,364		$	60,233		$	326,584		$	128,997		$	197,587
Interest-bearing liabilities:
Checking deposits	$	23,511		$	6,666		$	16,845		$	16,352		$	2,706		$	13,646
Money market deposits	27,385			2,526			24,859			39,515			(226		)	39,741
Saving deposits	1,005			(511		)	1,516			2,190			(351		)	2,541
Time deposits	89,149			43,130			46,019			60,304			15,579			44,725
Federal funds purchased and other short-term borrowings	365			507			(142		)	395			(71		)	466
FHLB advances	6,250			7,590			(1,340		)	2,696			(1,432		)	4,128
Repurchase agreements	1,472			5,028			(3,556		)	2,634			(9,226		)	11,860
Long-term debt	155			(282		)	437			1,059			(648		)	1,707
Total interest expense	$	149,292		$	64,654		$	84,638		$	125,145		$	6,331		$	118,814
Change in net interest income	$	81,305		$	105,710		$	(24,405	)	$	201,439		$	122,666		$	78,773

Noninterest Income

The following table presents the components of noninterest income for the periods indicated:




($ in thousands)	Year Ended December 31,
($ in thousands)	2019		2018		2017		2019 vs. 2018 % Change		2018 vs. 2017 % Change
Lending fees	$	63,670	$	59,758	$	58,395	7	%	2	%
Deposit account fees	38,648		39,176		40,299		(1	)%	(3	)%
Foreign exchange income	26,398		21,259		9,908		24	%	115	%
Wealth management fees	16,668		13,785		13,974		21	%	(1	)%
Interest rate contracts and other derivative income	39,865		18,980		17,671		110	%	7	%
Net gains on sales of loans	4,035		6,590		8,870		(39	)%	(26	)%
Net gains on sales of AFS investment securities	3,930		2,535		8,037		55	%	(68	)%
Net gains on sales of fixed assets	114		6,683		77,388		(98	)%	(91	)%
Net gain on sale of business	—		31,470		3,807		(100	)%	NM
Other investment income	5,249		1,207		3,903		335	%	(69	)%
Other income	10,800		9,466		15,496		14	%	(39	)%
Total noninterest income	$	209,377	$	210,909	$	257,748	(1	)%	(18	)%

NM — Not meaningful

Noninterest income represented 12%, 13% and 18% of total revenue for 2019, 2018 and 2017, respectively. 2019 noninterest income was $209.4 million, a decrease of $1.5 million or 1%, compared with $210.9 million in 2018. This decrease was primarily due to a decrease in net gain on sale of business and a decrease in net gains on sales of fixed assets, partially offset by increases in interest rate contracts and other derivative income, and foreign exchange income. 2018 noninterest income was $210.9 million, a decrease of $46.8 million or 18%, compared with $257.7 million in 2017. This decrease was primarily due to decreases in net gains on sales of fixed assets, other income, and net gains on sales of AFS investment securities, partially offset by increases in net gain on sale of business and foreign exchange income.

Foreign exchange income increased $5.1 million or 24% to $26.4 million in 2019, primarily driven by an increased volume of foreign exchange transactions, partially offset by revaluation losses of certain foreign currency-denominated balance sheet items. The $11.4 million or 115% increase in foreign exchange income to $21.3 million in 2018 was primarily due to the favorable revaluation of certain foreign currency-denominated balance sheet items, partially offset by a decrease in foreign exchange derivative gains.

Interest rate contracts and other derivative income increased $20.9 million or 110% to $39.9 million in 2019, which primarily reflected strong customer demand for interest rate swaps in response to the inverted yield curve and overall low level of interest rates. This increase was partially offset by the fair value changes of the interest rate derivative contracts that were primarily driven by the decline in long-term interest rates. The $1.3 million or 7% increase in interest rate contracts and other derivative income from $17.7 million in 2017 to $19.0 million in 2018 was primarily related to energy commodity contracts which the Bank began offering during the year.

Net gains on sales of AFS investment securities increased $1.4 million or 55% to $3.9 million in 2019, and decreased $5.5 million or 68% from $8.0 million in 2017 to $2.5 million in 2018. These changes were primarily due to the quantities of AFS investment securities sold each year.

Net gains on sales of fixed assets decreased to $114 thousand in 2019, down from $6.7 million in 2018. This was due to the Company’s adoption of 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. In 2017, net gains on sales of fixed assets included the $71.7 million pre-tax gain recognized from the sale of a commercial property in California. During 2017, East West Bank completed the sale and leaseback of a commercial property in California for cash consideration of $120.6 million and entered into a lease agreement for part of the property, consisting of a retail branch and office facilities.

Net gain on sale of business in 2018 reflected the $31.5 million pre-tax gain recognized from the sale of the Bank’s eight DCB branches while the net gain on sale of business in 2017 reflected the $3.8 million pre-tax gain recognized from the sale of the EWIS insurance brokerage business, as discussed in Note 2 — Dispositions to the Consolidated Financial Statements in this Form 10-K.

Other income increased $1.3 million or 14% to $10.8 million in 2019, primarily due to interest earned on cash collateral. The $6.0 million or 39% decrease in other income to $9.5 million in 2018 was primarily due to a decrease in rental income due to the aforementioned sale of the commercial property in California.

Noninterest Expense

The following table presents the components of noninterest expense for the periods indicated:




	Year Ended December 31,
($ in thousands)	2019		2018		2017		2019 vs. 2018 % Change		2018 vs. 2017 % Change
Compensation and employee benefits	$	401,700	$	379,622	$	335,291	6	%	13	%
Occupancy and equipment expense	69,730		68,896		64,921		1	%	6	%
Deposit insurance premiums and regulatory assessments	12,928		21,211		23,735		(39	)%	(11	)%
Legal expense	8,441		8,781		11,444		(4	)%	(23	)%
Data processing	13,533		13,177		12,093		3	%	9	%
Consulting expense	9,846		11,579		14,922		(15	)%	(22	)%
Deposit related expense	14,175		11,244		9,938		26	%	13	%
Computer software expense	26,471		22,286		18,183		19	%	23	%
Other operating expense	92,249		88,042		82,974		5	%	6	%
Amortization of tax credit and other investments	85,515		89,628		87,950		(5	)%	2	%
Total noninterest expense	$	734,588	$	714,466	$	661,451	3	%	8	%

2019 noninterest expense was $734.6 million, an increase of $20.1 million or 3%, compared with $714.5 million in 2018. This increase was primarily due to increases in compensation and employee benefits, computer software expense, deposit related expenses and other operating expense, partially offset by lower deposit insurance premiums and regulatory assessments and a decrease in amortization of tax credit and other investments. 2018 noninterest expense of $714.5 million, increased $53.0 million or 8%, compared with $661.5 million in 2017. This increase was primarily due to increases in compensation and employee benefits, other operating expense and computer software expense.

Compensation and employee benefits increased $22.1 million or 6% to $401.7 million in 2019 from $379.6 million in 2018, and increased $44.3 million or 13% from $335.3 million in 2017. These increases were primarily attributable to the annual employee merit increases and staffing growth to support the Company’s growing business. The larger increase in 2018, compared with 2017, was primarily due to an increase in stock-based compensation and severance costs recognized in 2018 as a result of the departure of one of the Company’s executives.

Deposit insurance premiums and regulatory assessments decreased $8.3 million or 39% to $12.9 million in 2019, and decreased $2.5 million or 11% to $21.2 million in 2018. These decreases were primarily due to lower FDIC assessment rates. Effective October 1, 2018, the FDIC eliminated the temporary surcharge applied on the larger banks’ assessment base.

Computer software expense increased $4.2 million or 19% to $26.5 million in 2019, and increased $4.1 million or 23% to $22.3 million in 2018. The increases in both 2019 and 2018 were due to new system implementations and software upgrades to support the Company’s growing business.

Other operating expense primarily consists of marketing, travel, telecommunication and postage expenses, charitable contributions, loan related expenses and other miscellaneous expense categories. The $4.2 million or 5% increase to $92.2 million in 2019, was primarily due to an increase in marketing expense and a decrease in gains on sale of other real estate owned (“OREO”), partially offset by a decrease in charitable contributions. Other operating expense increased $5.1 million or 6% to $88.0 million in 2018 primarily due to increases in charitable contributions, marketing, travel, and telecommunication and postage expenses, partially offset by an increase in gains on sale of OREO.

Amortization of tax credit and other investments decreased $4.1 million or 5% from $89.6 million in 2018 to $85.5 million in 2019. This decrease in 2019 compared with 2018, was primarily due to fewer tax credit investments placed in service during 2019, partially offset by $7.6 million of OTTI charges related to five historic tax credit investments and a CRA investment and the $5.4 million net write-off of the DC Solar tax credit investments. The $1.7 million or 2% increase in amortization of tax credit and other investments to $89.6 million in 2018, compared with 2017, was primarily due to an increase in renewable energy tax credit investments placed in service in 2018, partially offset by a reduction in historical tax credit investments.

Income Taxes




($ in thousands)	Year Ended December 31,
($ in thousands)	2019			2018			2017
Income before income taxes	$	843,917		$	818,696		$	735,100
Income tax expense	$	169,882		$	114,995		$	229,476
Effective tax rate	20.1		%	14.0		%	31.2		%

The increase in 2019 effective tax rate and income tax expense, compared with 2018, was primarily due to $30.1 million of income tax expense recorded to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar, as well as $14.7 million decrease in tax credits recognized from investments in renewable energy and historic rehabilitation tax credit projects as further discussed below. Excluding the $30.1 million income tax expense, 2019 non-GAAP effective tax rate was 16.6%. The 2018 effective tax rate of 14.0%, compared to 2017 effective tax rate of 31.2%, reflected the reduction of the U.S. federal income tax rate from 35% in 2017 to 21% in 2018 as a result of the Tax Act enactment in December 2017. GAAP requires companies to recognize the effect of tax law changes on deferred tax assets and liabilities and other recognized assets in the period of enactment. During the year ended December 31, 2017, the Company recorded $41.7 million in income tax expense related to the impact of the Tax Act, of which this amount was primarily related to the remeasurements of certain deferred tax assets and liabilities of $33.1 million, as well as the remeasurements of tax credits and other tax benefits related to qualified affordable housing partnerships of $7.9 million, resulting in an effective tax rate of 31.2% during 2017. Excluding the $41.7 million in income tax expense related to the impact of the Tax Act, 2017 non-GAAP effective tax rate was 25.5%. See reconciliations of non-GAAP measures presented under Item 7. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-K. In December 2017, the SEC staff issued Staff Accounting Bulletin No.118 (“SAB 118”). SAB 118 allows the recording of a provisional estimate to reflect the income tax impact of the U.S. tax legislation and provides a measurement period up to one year from the enactment date. During 2018, management finalized its assessment of the initial impact of the Tax Act, which resulted in an increase in income tax expense by $985 thousand during the same period ensuing from the remeasurements of deferred tax assets and liabilities. The overall impact of the Tax Act was a one-time increase in income tax expense of $42.7 million.

Management regularly reviews the Company’s tax positions and deferred tax balances. Factors considered in this analysis include the Company’s ability to generate future taxable income, implement tax-planning strategies (as defined in ASC 740, Income Taxes) and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized and settled. Net deferred tax assets decreased $11.2 million or 9% to $106.5 million as of December 31, 2019, compared with $117.6 million as of December 31, 2018, mainly attributable to the decreases in tax credit carryover and unrealized loss on securities, offset by the write-off of deferred tax liabilities related to DC Solar.

A valuation allowance is used, as needed, to reduce the deferred tax assets to the amount that is more-likely-than-not to be realized. To determine whether a valuation allowance is needed, the Company considers evidence such as the Company’s ability to generate future taxable income, implement tax-planning strategies (as defined in ASC 740, Income Taxes), and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. The Company expects to have sufficient taxable income in future years to fully realize its deferred tax assets. The Company also performed an overall assessment by weighing all positive evidence against all negative evidence and concluded that it is more-likely-than-not that all of the benefits of the deferred tax assets will be realized, with the exception of the deferred tax assets related to certain state net operating losses (“NOL”) carryforwards. For states other than California, Georgia, Massachusetts and New York, because management believes that the state NOL carryforwards may not be fully utilized, a valuation allowance of $21 thousand and $128 thousand was recorded for such carryforwards as of December 31, 2019 and 2018, respectively. For additional details on the components of net deferred tax assets, see Note 14 — Income Taxes to the Consolidated Financial Statements.

Impact of Investment in DC Solar Tax Credit Funds

The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. These investments were recorded in Investments in tax credit and other investments, net on the Consolidated Balance Sheet and were accounted for under the equity method of accounting. DC Solar had its assets frozen in December 2018 and filed for bankruptcy protection in February 2019. In February 2019, an affidavit from 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 have 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. During the fourth quarter of 2019, the Company recorded a $1.6 million pre-tax impairment recovery related to DC Solar. There were no balances recorded in Accrued expenses and other liabilities — Unfunded commitments related to DC Solar as of December 31, 2019 and December 31, 2018. More discussion on the Company’s impairment evaluation and monitoring process of tax credit investments is provided in Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-K.

ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. The Company received a “should” level legal opinion from an external law firm supporting the legal structure of these investments for tax credit purposes. A subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the latest quarterly reporting date. A change in judgment that results in a subsequent derecognition or change in measurement of a tax position is recognized as a discrete item in the period in which the change occurs.

Investors in DC Solar funds, including the Company, received tax credits for making renewable energy investments. Between 2014 and 2018, the Company had invested in four DC Solar energy tax credit funds and claimed tax credits of approximately $53.9 million, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact of $48.2 million to the Consolidated Financial Statements.

The Company, in coordination with other fund investors, engaged an unaffiliated third party inventory firm to investigate the actual number of mobile solar generators in existence. Based on the inventory report, none of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Based on the inventory information, as well as management’s best judgments regarding the future settlement of the related tax positions with the IRS, the Company concluded that a portion of the previously claimed tax credits would be recaptured. During the year ended December 31, 2019, the Company reversed $33.6 million out of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional income tax expense. The Company continues to conduct an ongoing investigation related to this matter. For additional information on the risks surrounding the Company’s investments in tax-advantaged projects, see Item 1A. Risk Factors in this Form 10-K. Management regularly reviews the Company’s tax positions and deferred tax balances. Factors considered in this analysis include the Company’s ability to generate future taxable income, implement tax-planning strategies (as defined in ASC 740, Income Taxes) and utilize taxable income from prior carryback years (if such carryback is permitted under the applicable tax law), as well as future reversals of existing taxable temporary differences. The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized and settled. Net deferred tax assets decreased $11.2 million or 9% to $106.5 million as of December 31, 2019, compared to $117.6 million as of December 31, 2018, mainly attributable to a decrease in tax credit carryforwards. For additional details on the components of net deferred tax assets, see Note 14 — Income Taxes to the Consolidated Financial Statements.

Operating Segment Results

The Company organizes its operations into three reportable operating segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These segments are defined by the type of customers 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 21 — Business Segments to the Consolidated Financial Statements in this Form 10-K.

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 years ended December 31, 2018 and 2017 have been restated to conform to the current presentation. During the third quarter of 2019, the Company enhanced its funds transfer pricing (“FTP”) methodology related to deposits by setting a minimum floor rate for the FTP credits for deposits in consideration of the flattened and inverted yield curve. This methodology has been retrospectively applied to segment financial results throughout the year of 2019. This change in FTP methodology related to deposits had no impact on 2018 and 2017 segment results.

The following tables present the selected segment information in 2019, 2018 and 2017:




($ in thousands)	Year Ended December 31, 2019
($ in thousands)	Consumer and Business Banking		Commercial Banking		Other		Total
Net interest income before provision for credit losses	$	696,551	$	651,413	$	119,849	$	1,467,813
Provision for credit losses	14,178		84,507		—		98,685
Noninterest income	57,920		134,622		16,835		209,377
Noninterest expense	343,001		263,064		128,523		734,588
Segment income before income taxes	397,292		438,464		8,161		843,917
Segment net income	$	284,161	$	313,833	$	76,041	$	674,035
Average loans	$	10,647,814	$	22,725,322	$	—	$	33,373,136
Average deposits	$	25,124,827	$	8,591,285	$	2,330,958	$	36,047,070




($ in thousands)	Year Ended December 31, 2018
($ in thousands)	Consumer and Business Banking		Commercial Banking		Other			Total
Net interest income before provision for credit losses	$	727,215	$	605,650	$	53,643		$	1,386,508
Provision for credit losses	9,364		54,891		—			64,255
Noninterest income	85,607		110,287		15,015			210,909
Noninterest expense	341,396		237,520		135,550			714,466
Segment income (loss) before income taxes	462,062		423,526		(66,892		)	818,696
Segment net income	$	330,683	$	303,553	$	69,465		$	703,701
Average loans	$	9,469,764	$	20,760,250	$	—		$	30,230,014
Average deposits	$	24,700,474	$	6,897,424	$	1,632,351		$	33,230,249




($ in thousands)	Year Ended December 31, 2017
($ in thousands)	Consumer and Business Banking		Commercial Banking		Other			Total
Net interest income before provision for credit losses	$	590,821	$	553,817	$	40,431		$	1,185,069
Provision for credit losses	1,812		44,454		—			46,266
Noninterest income	54,451		110,089		93,208			257,748
Noninterest expense	323,318		200,153		137,980			661,451
Segment income (loss) before income taxes	320,142		419,299		(4,341		)	735,100
Segment net income	$	187,571	$	246,404	$	71,649		$	505,624
Average loans	$	8,107,502	$	19,145,254	$	—		$	27,252,756
Average deposits	$	24,647,741	$	4,893,341	$	1,272,693		$	30,813,775

Consumer and Business Banking

The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network. This segment offers consumer and commercial deposits, mortgage and home equity loans, and other products and services. It also originates commercial loans for 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 net income of $284.2 million in 2019, compared with $330.7 million in 2018. The $46.5 million or 14% decrease in segment income reflected decreases in net interest income before provision for credit losses and noninterest income, partially offset by a decrease in income tax expense. Net interest income before provision for credit losses for this segment was $696.6 million in 2019, a decrease of $30.7 million or 4%, compared with $727.2 million in 2018. This decrease was primarily due to an increase in deposit cost of funds, partially offset by the impact of loan growth. Noninterest income was $57.9 million in 2019, a decrease of $27.7 million or 32%, compared with $85.6 million in 2018. Noninterest income in 2018 included a pre-tax gain of $31.5 million recognized in 2018 from the sale of the Bank’s eight DCB branches. Excluding the impact of this non-recurring item, Consumer and Business Banking’s noninterest income in 2019 increased $3.8 million or 7% from $54.1 million in 2018. The decrease in income tax expense reflected the decrease in segment income before income taxes between 2019 and 2018. Average loans for this segment was $10.65 billion in 2019, an increase of $1.18 billion or 12% from $9.47 billion in 2018, which was primarily driven by an increase in single-family residential loans. Average deposits for this segment was $25.12 billion in 2019, which remained relatively flat as compared with average deposits of $24.7 billion in 2018.

The Consumer and Business Banking segment reported net income of $330.7 million in 2018, compared with $187.6 million in 2017. The $143.1 million or 76% increase in segment net income reflected increases in net interest income before provision for credit losses and noninterest income, partially offset by an increase in noninterest expense. Net interest income before provision for credit losses was $727.2 million in 2018, an increase of $136.4 million or 23%, compared with $590.8 million in 2017. This increase was primarily attributable to higher FTP credits received for deposits, partially offset by the impact of an increase in deposit cost of funds. Noninterest income was $85.6 million in 2018, an increase of $31.2 million or 57%, compared with $54.5 million in 2017. Excluding the impact of the aforementioned non-recurring sale of the Bank’s eight DCB branches, noninterest income in 2018 remained relatively flat compared with 2017. Noninterest expense was $341.4 million in 2018, an increase of $18.1 million or 6%, compared with $323.3 million in 2017. The increase was primarily due to an increase in compensation and employee benefits driven by increased investment in human capital and technology. Average loans for this segment were $9.47 billion in 2018, an increase of $1.36 billion or 17% from $8.11 billion in 2017, which was primarily driven by an increase in single-family residential loans. Average deposits for this segment were $24.70 billion in 2018 which remained relatively flat as compared with average deposits of $24.65 billion in 2017.

Commercial Banking

The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction 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 risk hedging.

The Commercial Banking segment reported net income of $313.8 million in 2019, compared with $303.6 million in 2018. The $10.3 million or 3% increase in segment net income reflected increases in net interest income before provision for credit losses and noninterest income, partially offset by increases in provision for credit losses and noninterest expense. Net interest income before provision for credit loss was $651.4 million in 2019, an increase of $45.7 million or 8%, compared with $605.7 million in 2018. This increase was primarily due to loan growth. Noninterest income was $134.6 million in 2019, an increase of $24.3 million or 22%, compared with $110.3 million in 2018. This increase was mainly attributable to an increase in interest rate contracts and other derivative income driven by strong customer demand for interest rate swaps. Provision for credit losses was $84.5 million in 2019, an increase of $29.6 million or 54%, compared with $54.9 million in 2018. This increase was primarily due to loan portfolio growth, increased charge-offs, and a downward migration in the credit risk ratings of C&I loans. Noninterest expense was $263.1 million in 2019, an increase of $25.6 million or 11%, compared with $237.5 million in 2018. The increase was primarily due to increases in compensation and employee benefits driven by increased investments in human capital to support the business growth. Average Loans for this segment were $22.73 billion in 2019, an increase of $1.97 billion or 9% from $20.76 billion in 2018, which was primarily driven by growth in C&I and CRE loans. Average deposits for this segment was $8.59 billion in 2019, an increase of $1.69 billion or 25% from $6.90 billion in 2018, which was primarily driven by growth in time deposits and interest-bearing checking deposits.

The Commercial Banking segment reported net income of $303.6 million in 2018, compared with $246.4 million in 2017. The $57.2 million or 23% increase in segment net income reflected a decrease in income tax expense and an increase in net interest income before provision for credit losses, partially offset by an increase in noninterest expense. The decrease in income tax expense was primarily due to the decrease of the effective income tax rate as a result of the enactment of the Tax Act. Net interest income before provision for credit losses was $605.7 million in 2018, an increase of $51.9 million or 9%, compared with $553.8 million in 2017. This increase was primarily attributable to loan growth and higher FTP credits received for deposits, partially offset by higher FTP charges on loans. Noninterest expense was $237.5 million in 2018, an increase of $37.3 million or 19% from $200.2 million in 2017. The increase was primarily due to increases in compensation and employee benefits driven by increased investments in human capital. Average loans for this segment were $20.76 billion in 2018, an increase of $1.61 billion or 8% from $ 19.15 billion in 2017, which was primarily driven by increases in CRE and C&I loans. Average deposits for this segment was $6.90 billion in 2018, an increase of $2.01 billion or 41% from $4.89 billion in 2017, which was primarily driven by growth in noninterest-bearing demand deposits, money market accounts and time deposits.

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 $8.2 million and segment net income of $76.0 million in 2019, reflecting an income tax benefit of $67.9 million. The Other segment reported segment loss before income taxes of $66.9 million and segment net income of $69.5 million in 2018, reflecting income tax benefit of $136.4 million. The increase in segment income before income taxes between 2019 and 2018 was primarily driven by an increase in net interest income before provision for credit losses and a decrease in noninterest expense. Net interest income before provision for credit loss was $119.8 million in 2019, an increase of $66.2 million or 123%, compared with $53.6 million in 2018. This increase reflected an increase in the net spread between the total internal FTP charges for loans and the total internal FTP credits for deposits, which widened due to the flattened and inverted yield curve in 2019. Noninterest expense was $128.5 million in 2019, a decrease of $7.0 million or 5%, compared with $135.6 million in 2018, primarily due to a decrease in compensation and employee benefits. This decrease reflected a one-time stock-based compensation and severance expense recognized in 2018.

The Other segment reported segment loss before income taxes of $66.9 million and segment net income of $69.5 million in 2018, reflecting income tax benefit of $136.4 million. The Other segment reported segment loss before income taxes of $4.3 million and segment net income of $71.6 million in 2017, reflecting income tax benefit of $76.0 million. This change in segment loss before income taxes was primarily driven by a decrease in noninterest income, partially offset by an increase in net interest income before provision for credit loss. Noninterest income was $15.0 million in 2018, a decrease of $78.2 million or 84%, compared with $93.2 million in 2017. Noninterest income in 2017 included a pre-tax gain of $71.7 million from the sale of a commercial property in California. Excluding the impact of this nonrecurring item, noninterest income for this segment decreased $6.5 million or 30% during 2018. This $6.5 million decrease was primarily driven by decreases in rental income and lower net gains on sales of AFS investment securities, partially offset by an increase in foreign exchange income due to remeasurement of balance sheet items denominated in foreign currencies. Net interest income before provision for credit loss was $53.6 million in 2018, an increase of $13.2 million or 33%, compared with $40.4 million in 2017. This increase reflected an increase in the net spread between the total internal FTP charges for loans and the total internal FTP credits for deposits provided to the Consumer and Business Banking and Commercial Banking segments.

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.

Balance Sheet Analysis

The following table presents a discussion of the significant changes between December 31, 2019 and 2018:

Selected Consolidated Balance Sheet Data




($ in thousands)	December 31,				Change
($ in thousands)	2019		2018		$			%
ASSETS
Cash and cash equivalents	$	3,261,149	$	3,001,377	$	259,772		9	%
Interest-bearing deposits with banks	196,161		371,000		(174,839		)	(47	)%
Resale agreements	860,000		1,035,000		(175,000		)	(17	)%
AFS investment securities, at fair value	3,317,214		2,741,847		575,367			21	%
Restricted equity securities, at cost	78,580		74,069		4,511			6	%
Loans held-for-sale	434		275		159			58	%
Loans held-for-investment (net of allowance for loan losses of $358,287 in 2019 and $311,322 in 2018)	34,420,252		32,073,867		2,346,385			7	%
Investments in qualified affordable housing partnerships, net	207,037		184,873		22,164			12	%
Investments in tax credit and other investments, net	254,140		231,635		22,505			10	%
Premises and equipment	118,364		119,180		(816		)	(1	)%
Goodwill	465,697		465,547		150			0	%
Operating lease right-of-use assets	99,973		—		99,973			100	%
Other assets	917,095		743,686		173,409			23	%
TOTAL	$	44,196,096	$	41,042,356	$	3,153,740		8	%
LIABILITIES
Noninterest-bearing	$	11,080,036	$	11,377,009	$	(296,973	)	(3	)%
Interest-bearing	26,244,223		24,062,619		2,181,604			9	%
Total deposits	37,324,259		35,439,628		1,884,631			5	%
Short-term borrowings	28,669		57,638		(28,969		)	(50	)%
FHLB advances	745,915		326,172		419,743			129	%
Repurchase agreements	200,000		50,000		150,000			300	%
Long-term debt and finance lease liabilities	152,270		146,835		5,435			4	%
Operating lease liabilities	108,083		—		108,083			100	%
Accrued expenses and other liabilities	619,283		598,109		21,174			4	%
Total liabilities	39,178,479		36,618,382		2,560,097			7	%
STOCKHOLDERS’ EQUITY	5,017,617		4,423,974		593,643			13	%
TOTAL	$	44,196,096	$	41,042,356	$	3,153,740		8	%

As of December 31, 2019, total assets were $44.20 billion, an increase of $3.15 billion or 8% from December 31, 2018, primarily due to loan growth and an increase in AFS investment securities. The loan growth was primarily driven by strong increases in single-family residential and CRE loans. These increases were partially offset by decreases in resale agreements and interest-bearing deposits with banks.

As of December 31, 2019, total liabilities were $39.18 billion, an increase of $2.56 billion or 7% from December 31, 2018, primarily due to an increase in deposits, which was largely driven by an increase in time deposits.

As of December 31, 2019, total stockholders’ equity was $5.02 billion, an increase of $593.6 million or 13% from December 31, 2018. This increase was primarily due to $674.0 million in net income and a $39.8 million increase in accumulated other comprehensive income, partially offset by $155.3 million of cash dividends declared on common stock.

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 AFS investment securities provide:


•	interest income for earnings and yield enhancement;


•	availability for funding needs arising during the normal course of business;


•	the ability to execute interest rate risk management strategies 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 December 31, 2019 and 2018, the Company’s AFS 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. The portfolio also included collateralized loan obligations (“CLOs”) as of December 31, 2019. Investment securities classified as AFS 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 of AFS investment securities by major categories as of December 31, 2019, 2018 and 2017:




($ in thousands)	December 31,
	2019				2018				2017
	Amortized Cost ⁽¹⁾		Fair Value ⁽¹⁾		Amortized Cost ⁽¹⁾		Fair Value ⁽¹⁾		Amortized Cost		Fair Value
AFS investment securities:
U.S. Treasury securities	$	177,215	$	176,422	$	577,561	$	564,815	$	651,395	$	640,280
U.S. government agency and U.S. government sponsored enterprise debt securities	584,275		581,245		219,485		217,173		206,815		203,392
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities	1,598,261		1,607,368		1,377,705		1,355,296		1,528,217		1,509,228
Municipal securities	101,621		102,302		82,965		82,020		99,636		99,982
Non-agency mortgage-backed securities	133,439		135,098		35,935		35,983		9,136		9,117
Corporate debt securities	11,250		11,149		11,250		10,869		37,585		37,003
Foreign bonds ⁽¹⁾	354,481		354,172		489,378		463,048		505,396		486,408
Asset-backed securities	66,106		64,752		12,621		12,643		—		—
CLOs	294,000		284,706		—		—		—		—
Other securities ⁽²⁾	—		—		—		—		31,887		31,342
Total AFS investment securities	$	3,320,648	$	3,317,214	$	2,806,900	$	2,741,847	$	3,070,067	$	3,016,752


(1)	There were no securities of a single non-governmental agency issuer that exceeded 10% of stockholder’s equity as of December 31, 2019. As of December 31, 2018, securities issued by the International Bank for Reconstruction and Development with an amortized cost of $474.9 million and a fair value of $448.6 million, exceeded 10% of stockholders’ equity.

(2)

Other securities are comprised of mutual funds, which are equity securities with readily determinable fair value. Prior to the adoption of ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, these securities were reported as AFS investment securities with changes in fair value recorded in other comprehensive income (loss). Upon adoption of ASU 2016-01, which became effective January 1, 2018, these securities were reclassified from AFS investment securities, at fair value to Investments in tax credit and other investments, net, on the Consolidated Balance Sheet with changes in fair value recorded in net income.

The fair value of AFS investment securities totaled $3.32 billion as of December 31, 2019, compared with $2.74 billion as of December 31, 2018. The $575.4 million or 21% increase was primarily attributable to 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 CLOs, partially offset by the sales, repayments and redemptions of U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities and U.S. government agency and U.S. government sponsored enterprise debt securities, and maturities and sales of U.S. Treasury securities.

The Company’s investment securities portfolio had an effective duration of 3.1 years as of December 31, 2019, which shortened from 4.1 years as of December 31, 2018, primarily due to the decline in interest rates. As of December 31, 2019 and 2018, 97% and 99%, respectively, 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 S&P and Fitch Ratings (“Fitch”), or Baa3 or higher by Moody’s Investors Service (“Moody’s”), are considered investment grade.

The Company’s AFS investment securities are carried at fair value with changes in fair value reflected in Other comprehensive income (loss) unless a security is deemed to be OTTI. Net unrealized losses on AFS investment securities were $3.4 million as of December 31, 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 AFS investment securities totaled $23.2 million as of December 31, 2019, compared with $70.8 million as of December 31, 2018. Of the securities with gross unrealized losses, substantially all were rated investment grade as of both December 31, 2019 and 2018, classified primarily based upon the lowest of the credit ratings issued by S&P, Moody’s, or Fitch. As of December 31, 2019, the Company had no intention to sell securities with unrealized losses and believed it was 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 2019 and 2018. For a complete discussion and disclosure related to the Company’s investment securities, see Note 1 — Summary of Significant Accounting Policies, Note 3 — Fair Value Measurement and Fair Value of Financial Instruments, and Note 5 — Securities to the Consolidated Financial Statements in this Form 10-K.

The following table presents the weighted-average yields and contractual maturity distribution, excluding periodic principal payments, of the Company’s investment securities as of December 31, 2019 and 2018. Actual maturities of mortgage-backed securities can differ from contractual maturities as the borrowers have the right to prepay obligations with or without prepayment penalties. In addition, factors such as prepayments and interest rates may affect the yields on the carrying values of mortgage-backed securities.




	December 31,
($ in thousands)	2019						2018
($ in thousands)	Amortized Cost		Fair Value		Yield⁽¹⁾		Amortized Cost		Fair Value		Yield⁽¹⁾
AFS investment securities:
U.S. Treasury securities:
Maturing in one year or less	$	—	$	—	—	%	$	50,134	$	49,773	1.08	%
Maturing after one year through five years	177,215		176,422		1.33	%	527,427		515,042		1.69	%
Total	177,215		176,422		1.33	%	577,561		564,815		1.64	%
U.S. government agency and U.S. government sponsored enterprise debt securities:
Maturing in one year or less	328,628		326,341		2.62	%	26,955		26,909		3.51	%
Maturing after one year through five years	158,490		156,431		2.69	%	10,181		10,037		2.18	%
Maturing after five years through ten years	44,908		45,189		2.38	%	114,771		113,812		2.30	%
Maturing after ten years	52,249		53,284		2.78	%	67,578		66,415		2.79	%
Total	584,275		581,245		2.63	%	219,485		217,173		2.59	%
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Maturing in one year or less	112		113		2.72	%	2,633		2,600		1.62	%
Maturing after one year through five years	23,144		23,289		2.29	%	30,808		30,487		2.11	%
Maturing after five years through ten years	85,970		88,261		2.72	%	96,822		95,365		2.68	%
Maturing after ten years	1,489,035		1,495,705		2.66	%	1,247,442		1,226,844		2.74	%
Total	1,598,261		1,607,368		2.66	%	1,377,705		1,355,296		2.72	%
Municipal securities ⁽²⁾:
Maturing in one year or less	37,136		37,291		2.67	%	29,167		28,974		2.60	%
Maturing after one year through five years	18,699		18,948		2.52	%	48,398		47,681		2.39	%
Maturing after five years through ten years	12,151		12,451		3.15	%	500		476		2.38	%
Maturing after ten years	33,635		33,612		2.63	%	4,900		4,889		5.03	%
Total	101,621		102,302		2.69	%	82,965		82,020		2.62	%
Non-agency mortgage-backed securities:
Maturing after one year through five years