EAST WEST BANCORP INC - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-24939
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-4703316
(I.R.S. Employer Identification No.)
135 North Los Robles Ave., 7th Floor, Pasadena, California 91101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(626) 768-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||
Common Stock, $0.001 Par Value | EWBC | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 141,486,780 shares as of July 31, 2020.
TABLE OF CONTENTS
Page | |||||||||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
June 30, 2020 | December 31, 2019 | |||||||||||||
(Unaudited) | ||||||||||||||
ASSETS | ||||||||||||||
Cash and due from banks | $ | 602,974 | $ | 536,221 | ||||||||||
Interest-bearing cash with banks | 3,930,528 | 2,724,928 | ||||||||||||
Cash and cash equivalents | 4,533,502 | 3,261,149 | ||||||||||||
Interest-bearing deposits with banks | 531,591 | 196,161 | ||||||||||||
Securities purchased under resale agreements (“resale agreements”) | 1,260,000 | 860,000 | ||||||||||||
Securities: | ||||||||||||||
Available-for-sale (''AFS'') debt securities, at fair value (amortized cost of $3,823,714 in 2020; includes assets pledged as collateral of $745,163 in 2020 and $479,432 in 2019) | 3,884,574 | 3,317,214 | ||||||||||||
Restricted equity securities, at cost | 78,963 | 78,580 | ||||||||||||
Loans held-for-sale | 3,875 | 434 | ||||||||||||
Loans held-for-investment (net of allowance for loan losses of $632,071 in 2020 and $358,287 in 2019; includes assets pledged as collateral of $27,408,027 in 2020 and $22,431,092 in 2019) | 36,597,341 | 34,420,252 | ||||||||||||
Investments in qualified affordable housing partnerships, net | 201,888 | 207,037 | ||||||||||||
Investments in tax credit and other investments, net | 251,318 | 254,140 | ||||||||||||
Premises and equipment (net of accumulated depreciation of $122,372 in 2020 and $116,790 in 2019) | 110,709 | 118,364 | ||||||||||||
Goodwill | 465,697 | 465,697 | ||||||||||||
Operating lease right-of-use assets | 94,898 | 99,973 | ||||||||||||
Other assets | 1,393,237 | 917,095 | ||||||||||||
TOTAL | $ | 49,407,593 | $ | 44,196,096 | ||||||||||
LIABILITIES | ||||||||||||||
Deposits: | ||||||||||||||
Noninterest-bearing | $ | 13,940,420 | $ | 11,080,036 | ||||||||||
Interest-bearing | 26,732,258 | 26,244,223 | ||||||||||||
Total deposits | 40,672,678 | 37,324,259 | ||||||||||||
Short-term borrowings | 252,851 | 28,669 | ||||||||||||
Federal Home Loan Bank (“FHLB”) advances | 656,759 | 745,915 | ||||||||||||
Securities sold under repurchase agreements (“repurchase agreements”) | 300,000 | 200,000 | ||||||||||||
Long-term debt and finance lease liabilities | 1,580,442 | 152,270 | ||||||||||||
Operating lease liabilities | 102,708 | 108,083 | ||||||||||||
Accrued expenses and other liabilities | 854,912 | 619,283 | ||||||||||||
Total liabilities | 44,420,350 | 39,178,479 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized; 167,143,278 and 166,621,959 shares issued in 2020 and 2019, respectively | 167 | 167 | ||||||||||||
Additional paid-in capital | 1,841,748 | 1,826,345 | ||||||||||||
Retained earnings | 3,755,649 | 3,689,377 | ||||||||||||
Treasury stock, at cost — 25,656,881 shares in 2020 and 20,996,574 shares in 2019 | (633,455) | (479,864) | ||||||||||||
Accumulated other comprehensive income (loss) (“AOCI”), net of tax | 23,134 | (18,408) | ||||||||||||
Total stockholders’ equity | 4,987,243 | 5,017,617 | ||||||||||||
TOTAL | $ | 49,407,593 | $ | 44,196,096 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
3
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands, except per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||||||||||||||||
Loans receivable, including fees | $ | 367,393 | $ | 434,450 | $ | 779,262 | $ | 857,984 | ||||||||||||||||||
AFS debt securities | 21,004 | 15,685 | 41,146 | 31,433 | ||||||||||||||||||||||
Resale agreements | 5,514 | 7,404 | 11,139 | 15,310 | ||||||||||||||||||||||
Restricted equity securities | 301 | 505 | 747 | 1,218 | ||||||||||||||||||||||
Interest-bearing cash and deposits with banks | 4,564 | 16,800 | 15,672 | 32,210 | ||||||||||||||||||||||
Total interest and dividend income | 398,776 | 474,844 | 847,966 | 938,155 | ||||||||||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||||
Deposits | 46,399 | 97,964 | 122,802 | 189,969 | ||||||||||||||||||||||
Short-term borrowings | 265 | 361 | 821 | 977 | ||||||||||||||||||||||
FHLB advances | 3,343 | 4,011 | 7,509 | 6,990 | ||||||||||||||||||||||
Repurchase agreements | 3,540 | 3,469 | 7,531 | 6,961 | ||||||||||||||||||||||
Long-term debt and finance lease liabilities | 1,454 | 1,713 | 2,821 | 3,471 | ||||||||||||||||||||||
Total interest expense | 55,001 | 107,518 | 141,484 | 208,368 | ||||||||||||||||||||||
Net interest income before provision for credit losses | 343,775 | 367,326 | 706,482 | 729,787 | ||||||||||||||||||||||
Provision for credit losses | 102,443 | 19,245 | 176,313 | 41,824 | ||||||||||||||||||||||
Net interest income after provision for credit losses | 241,332 | 348,081 | 530,169 | 687,963 | ||||||||||||||||||||||
NONINTEREST INCOME | ||||||||||||||||||||||||||
Lending fees | 21,946 | 16,423 | 37,719 | 31,392 | ||||||||||||||||||||||
Deposit account fees | 10,872 | 9,607 | 21,319 | 19,075 | ||||||||||||||||||||||
Foreign exchange income | 4,562 | 7,286 | 12,381 | 12,301 | ||||||||||||||||||||||
Wealth management fees | 3,091 | 3,800 | 8,444 | 7,574 | ||||||||||||||||||||||
Interest rate contracts and other derivative income | 6,107 | 10,398 | 13,180 | 13,614 | ||||||||||||||||||||||
Net gains on sales of loans | 132 | 15 | 1,082 | 930 | ||||||||||||||||||||||
Gains on sales of AFS debt securities | 9,640 | 1,447 | 11,169 | 3,008 | ||||||||||||||||||||||
Other investment income | 966 | 706 | 2,887 | 1,908 | ||||||||||||||||||||||
Other income | 1,321 | 3,077 | 4,505 | 5,088 | ||||||||||||||||||||||
Total noninterest income | 58,637 | 52,759 | 112,686 | 94,890 | ||||||||||||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||||||||||||
Compensation and employee benefits | 96,955 | 100,531 | 198,915 | 202,830 | ||||||||||||||||||||||
Occupancy and equipment expense | 16,217 | 17,362 | 33,293 | 34,680 | ||||||||||||||||||||||
Deposit insurance premiums and regulatory assessments | 3,700 | 2,919 | 7,127 | 6,007 | ||||||||||||||||||||||
Legal expense | 1,530 | 2,355 | 4,727 | 4,580 | ||||||||||||||||||||||
Data processing | 4,480 | 3,460 | 8,306 | 6,617 | ||||||||||||||||||||||
Consulting expense | 1,413 | 2,069 | 2,630 | 4,128 | ||||||||||||||||||||||
Deposit related expense | 3,353 | 3,338 | 6,916 | 6,842 | ||||||||||||||||||||||
Computer software expense | 7,301 | 6,211 | 13,467 | 12,289 | ||||||||||||||||||||||
Other operating expense | 19,248 | 22,679 | 40,367 | 44,968 | ||||||||||||||||||||||
Amortization of tax credit and other investments | 24,759 | 16,739 | 42,084 | 41,644 | ||||||||||||||||||||||
Repurchase agreements’ extinguishment cost | 8,740 | — | 8,740 | — | ||||||||||||||||||||||
Total noninterest expense | 187,696 | 177,663 | 366,572 | 364,585 | ||||||||||||||||||||||
INCOME BEFORE INCOME TAXES | 112,273 | 223,177 | 276,283 | 418,268 | ||||||||||||||||||||||
INCOME TAX EXPENSE | 12,921 | 72,797 | 32,107 | 103,864 | ||||||||||||||||||||||
NET INCOME | $ | 99,352 | $ | 150,380 | $ | 244,176 | $ | 314,404 | ||||||||||||||||||
EARNINGS PER SHARE (“EPS”) | ||||||||||||||||||||||||||
BASIC | $ | 0.70 | $ | 1.03 | $ | 1.71 | $ | 2.16 | ||||||||||||||||||
DILUTED | $ | 0.70 | $ | 1.03 | $ | 1.70 | $ | 2.15 | ||||||||||||||||||
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||||||||||||||||||||
BASIC | 141,486 | 145,546 | 143,150 | 145,402 | ||||||||||||||||||||||
DILUTED | 141,827 | 146,052 | 143,560 | 146,016 | ||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
4
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Net income | $ | 99,352 | $ | 150,380 | $ | 244,176 | $ | 314,404 | ||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
Net changes in unrealized gains on AFS debt securities | 17,816 | 29,027 | 45,269 | 51,038 | ||||||||||||||||||||||
Net changes in unrealized losses on cash flow hedges | (1,333) | — | (1,333) | — | ||||||||||||||||||||||
Foreign currency translation adjustments | (230) | (6,016) | (2,394) | (2,836) | ||||||||||||||||||||||
Other comprehensive income | 16,253 | 23,011 | 41,542 | 48,202 | ||||||||||||||||||||||
COMPREHENSIVE INCOME | $ | 115,605 | $ | 173,391 | $ | 285,718 | $ | 362,606 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except shares)
(Unaudited)
Common Stock and Additional Paid-in Capital | Retained Earnings | Treasury Stock | AOCI, Net of Tax | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||
BALANCE, APRIL 1, 2019 | 145,501,301 | $ | 1,799,124 | $ | 3,305,054 | $ | (479,265) | $ | (32,983) | $ | 4,591,930 | |||||||||||||||||||||||||||
Net income | — | — | 150,380 | — | — | 150,380 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 23,011 | 23,011 | ||||||||||||||||||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | 45,268 | 9,938 | — | (133) | — | 9,805 | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.275 per share) | — | — | (40,533) | — | — | (40,533) | ||||||||||||||||||||||||||||||||
BALANCE, JUNE 30, 2019 | 145,546,569 | $ | 1,809,062 | $ | 3,414,901 | $ | (479,398) | $ | (9,972) | $ | 4,734,593 | |||||||||||||||||||||||||||
BALANCE, APRIL 1, 2020 | 141,435,099 | $ | 1,833,784 | $ | 3,695,759 | $ | (633,439) | $ | 6,881 | $ | 4,902,985 | |||||||||||||||||||||||||||
Net income | — | — | 99,352 | — | — | 99,352 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 16,253 | 16,253 | ||||||||||||||||||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | 51,298 | 8,131 | — | (16) | — | 8,115 | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.275 per share) | — | — | (39,462) | — | — | (39,462) | ||||||||||||||||||||||||||||||||
BALANCE, JUNE 30, 2020 | 141,486,397 | $ | 1,841,915 | $ | 3,755,649 | $ | (633,455) | $ | 23,134 | $ | 4,987,243 | |||||||||||||||||||||||||||
Common Stock and Additional Paid-in Capital | Retained Earnings | Treasury Stock | AOCI, Net of Tax | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2019 | 144,961,363 | $ | 1,789,977 | $ | 3,160,132 | $ | (467,961) | $ | (58,174) | $ | 4,423,974 | |||||||||||||||||||||||||||
— | — | 14,668 | — | — | 14,668 | |||||||||||||||||||||||||||||||||
Net income | — | — | 314,404 | — | — | 314,404 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 48,202 | 48,202 | ||||||||||||||||||||||||||||||||
Warrants exercised | 180,226 | 1,711 | — | 2,732 | — | 4,443 | ||||||||||||||||||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | 404,980 | 17,374 | — | (14,169) | — | 3,205 | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.505 per share) | — | — | (74,303) | — | — | (74,303) | ||||||||||||||||||||||||||||||||
BALANCE, JUNE 30, 2019 | 145,546,569 | $ | 1,809,062 | $ | 3,414,901 | $ | (479,398) | $ | (9,972) | $ | 4,734,593 | |||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2020 | 145,625,385 | $ | 1,826,512 | $ | 3,689,377 | $ | (479,864) | $ | (18,408) | $ | 5,017,617 | |||||||||||||||||||||||||||
— | — | (97,967) | — | — | (97,967) | |||||||||||||||||||||||||||||||||
Net income | — | — | 244,176 | — | — | 244,176 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 41,542 | 41,542 | ||||||||||||||||||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | 332,694 | 15,403 | — | (7,625) | — | 7,778 | ||||||||||||||||||||||||||||||||
Repurchase of common stock pursuant to the Stock Repurchase Program | (4,471,682) | — | — | (145,966) | — | (145,966) | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.550 per share) | — | — | (79,937) | — | — | (79,937) | ||||||||||||||||||||||||||||||||
BALANCE, JUNE 30, 2020 | 141,486,397 | $ | 1,841,915 | $ | 3,755,649 | $ | (633,455) | $ | 23,134 | $ | 4,987,243 | |||||||||||||||||||||||||||
(1) Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and subsequent related ASUs in the first quarter of 2019.
(2) Represents the impact of the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020. Refer to Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q (“this Form 10-Q”) for additional information.
See accompanying Notes to Consolidated Financial Statements.
6
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
Net income | $ | 244,176 | $ | 314,404 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | 68,926 | 72,113 | ||||||||||||
Accretion of discount and amortization of premiums, net | (18,901) | (9,817) | ||||||||||||
Stock compensation costs | 14,280 | 15,525 | ||||||||||||
Deferred income tax benefit | (111) | (2,110) | ||||||||||||
Provision for credit losses | 176,313 | 41,824 | ||||||||||||
Net gains on sales of loans | (1,082) | (930) | ||||||||||||
Gains on sales of AFS debt securities | (11,169) | (3,008) | ||||||||||||
Loans held-for-sale: | ||||||||||||||
Originations and purchases | (21,791) | (3,339) | ||||||||||||
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | 18,386 | 3,632 | ||||||||||||
Proceeds from distributions received from equity method investees | 1,107 | 1,538 | ||||||||||||
Net change in accrued interest receivable and other assets | (456,374) | (150,154) | ||||||||||||
Net change in accrued expenses and other liabilities | 257,397 | 10,320 | ||||||||||||
Other net operating activities | (241) | 3 | ||||||||||||
Total adjustments | 26,740 | (24,403) | ||||||||||||
Net cash provided by operating activities | 270,916 | 290,001 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
Net (increase) decrease in: | ||||||||||||||
Investments in qualified affordable housing partnerships, tax credit and other investments | (68,884) | (61,555) | ||||||||||||
Interest-bearing deposits with banks | (315,497) | 222,387 | ||||||||||||
Resale agreements: | ||||||||||||||
Proceeds from paydowns and maturities | 350,000 | 50,000 | ||||||||||||
Purchases | (500,000) | (25,000) | ||||||||||||
AFS debt securities: | ||||||||||||||
Proceeds from sales | 484,380 | 375,102 | ||||||||||||
Proceeds from repayments, maturities and redemptions | 848,633 | 117,325 | ||||||||||||
Purchases | (1,834,087) | (316,740) | ||||||||||||
Loans held-for-investment: | ||||||||||||||
Proceeds from sales of loans originally classified as held-for-investment | 144,015 | 170,174 | ||||||||||||
Purchases | (145,695) | (326,456) | ||||||||||||
Other changes in loans held-for-investment, net | (2,475,089) | (1,196,094) | ||||||||||||
Premises and equipment: | ||||||||||||||
Proceeds from sales | 1,883 | — | ||||||||||||
Purchases | (1,846) | (4,414) | ||||||||||||
Proceeds from distributions received from equity method investees | 1,948 | 3,636 | ||||||||||||
Other net investing activities | (374) | (5,516) | ||||||||||||
Net cash used in investing activities | (3,510,613) | (997,151) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||
Net increase in deposits | 3,355,168 | 1,035,650 | ||||||||||||
Net increase (decrease) in short-term borrowings | 225,834 | (38,107) | ||||||||||||
FHLB advances: | ||||||||||||||
Proceeds | 10,100 | 1,500,000 | ||||||||||||
Repayment | (100,099) | (1,082,000) | ||||||||||||
Repayment of repurchase agreements | (150,000) | — | ||||||||||||
Repurchase agreements’ extinguishment cost | (8,740) | — | ||||||||||||
Long-term debt and lease liabilities: | ||||||||||||||
Proceeds from long-term debt | 1,437,269 | — | ||||||||||||
Repayment of long-term debt and lease liabilities | (9,320) | (435) | ||||||||||||
Common stock: | ||||||||||||||
Repurchase of common stocks pursuant to the Stock Repurchase Program | (145,965) | — | ||||||||||||
Proceeds from issuance pursuant to various stock compensation plans and agreements | 1,170 | 1,894 | ||||||||||||
Stocks tendered for payment of withholding taxes | (7,626) | (14,169) | ||||||||||||
Cash dividends paid | (80,271) | (74,949) | ||||||||||||
Net cash provided by financing activities | 4,527,520 | 1,327,884 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (15,470) | (497) | ||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,272,353 | 620,237 | ||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 3,261,149 | 3,001,377 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 4,533,502 | $ | 3,621,614 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
7
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
(Continued)
Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | |||||||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||||
Cash paid during the period for: | ||||||||||||||
Interest | $ | 145,723 | $ | 203,577 | ||||||||||
Income taxes, net | $ | 5,609 | $ | 76,153 | ||||||||||
Noncash investing and financing activities: | ||||||||||||||
Loans transferred from held-for-investment to held-for-sale | $ | 143,283 | $ | 173,394 | ||||||||||
Loans transferred to OREO | $ | 19,504 | $ | — | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
8
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) is a registered bank holding company that offers a full range of banking services to individuals and businesses through its subsidiary bank, East West Bank and its subsidiaries (“East West Bank” or the “Bank”). The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West, East West Bank and East West’s subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of June 30, 2020, East West also has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Trusts are not included on the Consolidated Financial Statements. East West also owns East West Insurance Services, Inc. In 2019, the Company acquired East West Markets, LLC, a private broker dealer and also established East West Investment Management LLC, a registered investment adviser. Both East West Markets, LLC and East West Investment Management LLC are wholly-owned subsidiaries of East West.
The unaudited interim Consolidated Financial Statements are presented in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), applicable guidelines prescribed by regulatory authorities, and general practices in the banking industry. They reflect all adjustments that, in the opinion of management, are necessary for fair statement of the interim Consolidated Financial Statements. Certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.
The current period’s results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Events subsequent to the Consolidated Balance Sheet date have been evaluated through the date the Consolidated Financial Statements are issued for inclusion in the accompanying Consolidated Financial Statements. The unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on February 27, 2020 (the “Company’s 2019 Form 10-K”).
9
Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies
New Accounting Pronouncements Adopted
Standard | Required Date of Adoption | Description | Effect on Financial Statements | ||||||||
Standards Adopted in 2020 | |||||||||||
ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent related ASUs | January 1, 2020 Early adoption is permitted on January 1, 2019. | The ASU introduces a new current expected credit loss (“CECL”) model that applies to most financial assets measured at amortized cost and certain instruments, including trade and other receivables, loan receivables, AFS and held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted in each period for changes in expected lifetime credit losses. ASU 2016-13 also eliminates the guidance for purchased credit impaired (“PCI”) loans, but requires an allowance for loan losses for purchased financial assets with more than an insignificant deterioration of credit since origination. The ASU also modifies the other-than-temporary impairment (“OTTI”) model for AFS debt securities to require an allowance for credit losses instead of a direct write-down. A reversal of the allowance for credit losses is allowed in future periods based on improvements in credit performance expectations. This ASU expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). The guidance should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The new guidance also allows optional relief for certain instruments measured at amortized cost with an option to irrevocably elect the fair value option under ASC Topic 825, Financial Instruments. | The Company adopted ASU 2016-13 using a modified retrospective approach on January 1, 2020 without electing the fair value option on eligible financial instruments under ASU 2019-05. The adoption of this ASU increased the allowance for loan losses by $125.2 million, and allowance for unfunded credit commitments by $10.5 million and an after-tax decrease to opening retained earnings of $98.0 million on January 1, 2020. The increase to allowance for loan losses was primarily related to the commercial and industrial (“C&I”) and commercial real estate (“CRE”) loan portfolios. The Company did not record an allowance for credit losses related to the Company’s AFS debt securities as a result of this adoption. Disclosures for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in the Company’s 2019 Form 10-K. The Company has elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital for two years, followed by a three-year transition period. | ||||||||
ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | January 1, 2020 Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017. | The ASU simplifies the accounting for goodwill impairment. Under this guidance, an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, an impairment loss will be recognized when the carrying amount of a reporting unit exceeds its fair value and the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting units with a zero or negative carrying amount. This guidance should be applied prospectively. | The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements. | ||||||||
ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | January 1, 2020 | The ASU amends ASC Topic 350-40 to align the accounting for costs incurred in a cloud computing arrangement with the guidance on developing internal use software. Specifically, if a cloud computing arrangement is deemed to be a service contract, certain implementation costs are eligible for capitalization. The new guidance prescribes the balance sheet and income statement presentation and cash flow classification for the capitalized costs and related amortization expense. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. | The Company adopted this guidance on a prospective basis on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements. | ||||||||
10
Recent Accounting Pronouncement
Standard | Required Date of Adoption | Description | Effect on Financial Statements | ||||||||
Standard Not Yet Adopted | |||||||||||
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | Effective for all entities as of March 12, 2020 through December 31, 2022. | In March 2020, the FASB issued a new accounting standard related to contracts or hedging relationships that reference London interbank offered rate or other reference rates that are expected to be discontinued due to reference rate reform. This ASU provides temporary optional expedients and exceptions regarding the accounting requirements related to the modification of certain contracts, hedging relationships and other transactions that are affected by the reference rate reform. The guidance permits the Company to make a one-time election to sell and/or transfer qualifying held-to-maturity securities, and not to apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. This one time election may be made at any time after March 12, 2020, but no later than December 31, 2022. | The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment. The Company will continue to assess the impact as the reference rate transition occurs over the next two years. |
Summary of Significant Accounting Policies
The Company has revised the following significant accounting policies.
Allowance for Loan Losses — The allowance for loan losses is established as management’s estimate of expected credit losses inherent in the Company’s lending activities and increased by the provision for credit losses and decreased by net charge-offs. Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses is evaluated quarterly by management based on regular reviews of the collectability of the loans. The Company develops and documents the allowance for loan losses methodology at the portfolio segment level — the commercial loan portfolio is comprised of C&I, CRE, multifamily residential, and construction and land loans; and the consumer loan portfolio is comprised of single-family residential, home equity lines of credit (“HELOC”), and other consumer loans.
The allowance for loan losses represents the portion of the loan’s amortized cost basis that the Company does not expect to collect due to anticipated credit losses over the loan’s contractual life. The Company measures the expected loan losses on a collective pool basis when similar risk characteristics exist. Models consisting of quantitative and qualitative components are designed for each pool to develop the expected credit loss estimates. Reasonable and supportable forecast periods vary by loan portfolio. The collectively evaluated loans include non-classified and classified loans that have not been determined to be impaired. The Company has adopted lifetime loss rate models for the portfolios, which use historical loss rates and forecast economic variables to calculate the expected credit losses for each loan pool.
When impaired loans do not share similar risk characteristics, the Company evaluates the loan for expected credit losses on an individual basis. Impaired loans include nonaccrual and troubled debt restructuring (“TDR”) loans. The Company considers loans to be impaired if, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. For loans determined to be impaired, three different asset valuation measurement methods are available: (1) the present value of expected future cash flows, (2) the fair value of collateral less costs to sell, and (3) the loan's observable market price. The allowance for loan losses for collateral-dependent loans is determined based on the fair value of the collateral less costs to sell. For loans that are not collateral-dependent, the Company applies the present value of expected future cash flows valuation or the market value of the loan. When the loan is deemed uncollectible, the Company’s policy is to promptly charge off the estimated impaired amount.
The amortized cost of loans held-for-investment excludes accrued interest, which is included in Other assets on the Consolidated Balance Sheet. The Company has made an accounting policy election to not recognize an allowance for credit losses for accrued interest receivables as the Company reverses accrued interest if a loan is on nonaccrual status.
The allowance for loan losses is reported separately on the Consolidated Balance Sheet and the Provision for credit losses is reported on the Consolidated Statement of Income.
11
Allowance for Unfunded Credit Commitments — The allowance for unfunded credit commitments includes reserves provided for unfunded loan commitments, letters of credit, standby letters of credit (“SBLCs”) and recourse obligations for loans sold. The Company estimates the allowance for unfunded credit commitments over the contractual period in which the entity is exposed to credit risk via a present contractual obligation to extend credit. Within the period of credit exposure, the estimate of credit losses will consider both the likelihood that funding will occur, and an estimate of the expected credit losses on the commitments that are expected to fund over their estimated lives.
The allowance for unfunded credit commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities. For all off-balance sheet instruments and commitments, the unfunded credit exposure is calculated using utilization assumptions based on the Company's historical utilization experience in related portfolio segments. Loss rates are applied to the calculated exposure balances to estimate the allowance for unfunded credit commitments. Other elements such as credit risk factors for loans outstanding, terms and expiration dates of the unfunded credit facilities, and other pertinent information are considered to determine the adequacy of the allowance.
The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. Changes to the allowance for unfunded credit commitments are included in Provision for credit losses on the Consolidated Income Statements.
Allowance for Credit Losses on Available-for-Sale Debt Securities — ASU 2016-13 modifies the OTTI model for AFS debt securities to apply an allowance approach for credit impairment as opposed to permanently writing down the cost basis of the security. For each reporting period, AFS debt securities that are in an unrealized loss position are individually analyzed as part of the Company’s ongoing assessments to determine whether a fair value below the amortized cost basis has resulted from a credit loss or other factors. The initial indicator of impairment is a decline in fair value below the amortized cost, excluding accrued interest, of the AFS debt security. The Company first considers whether there is a plan to sell the AFS debt security or it is more-likely-than-not that it will be required to sell the debt security before recovery of the amortized cost. In determining whether an impairment is due to credit related factors, the Company considers the severity of the decline in fair value, nature of the security, the underlying collateral, the financial condition of the issuer, changes in the AFS debt securities’ ratings and other qualitative factors. For securities that are fully guaranteed by the U.S. government, or certain government enterprises, the Company believes that the credit loss exposure on these securities is remote and applies a zero credit loss assumption.
When the Company does not intend to sell the impaired AFS debt security and it is more-likely-than-not that the Company will not be required to sell the impaired debt security prior to recovery of its amortized cost basis, the credit component of the unrealized loss of the impaired AFS debt security is recognized as an allowance for credit losses, with a corresponding Provision for credit losses on the Consolidated Statement of Income and the non-credit component is recognized in Other comprehensive income (loss) on the Consolidated Statement of Comprehensive Income, net of applicable taxes. At each reporting period, the Company increases or decreases the allowance for credit losses as appropriate, while limiting reversals of the allowance for credit losses to the extent of the amounts previously recorded. If the Company intends to sell the impaired debt security or it is more-likely-than-not that the Company will be required to sell the impaired debt security prior to recovering its amortized cost basis, the entire impairment amount is recognized as an adjustment to the debt security’s amortized cost basis, with a corresponding Provision for credit losses on the Consolidated Statement of Income.
The amortized cost of the Company’s AFS debt securities excludes accrued interest, which is included in Other assets on the Consolidated Balance Sheet. The Company has made an accounting policy election to not recognize an allowance for credit losses for accrued interest receivables on AFS debt securities as the Company reverses any accrued interest if a debt security is impaired. As each AFS debt security has a unique security structure, where the accrual status is clearly determined when certain criteria listed in the terms are met, the Company assesses the default status of each security as defined by the debt security’s specific security structure.
12
Allowance for Collateral-Dependent Financial Assets — A financial asset is considered collateral-dependent if repayment is expected to be provided substantially through the operation or sale of the collateral. The allowance for credit losses is measured on an individual basis for collateral-dependent financial assets and determined by comparing the fair value of the collateral, minus the cost to sell, to the amortized cost basis of the related financial asset at the reporting date. Other than impaired loans, collateral-dependent financial assets could also include resale agreements. In arrangements which the borrower must continually adjust the collateral securing the asset to reflect changes in the collateral’s fair value (e.g., resale agreements), the Company estimates the expected credit losses on the basis of the unsecured portion of the amortized cost as of the balance sheet date. If the fair value of the collateral is equal to or greater than the amortized cost of the resale agreement, the expected losses would be zero. If the fair value of the collateral is less than the amortized cost of the asset, the expected losses are limited to the difference between the fair value of the collateral and the amortized cost basis of the resale agreement.
Allowance for Purchased Credit Deteriorated Assets — ASU 2016-13 replaces the concept of PCI accounting under ASC 310-30 Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality with the concept of purchased financial assets with credit deterioration. The Company adopted ASU 2016-13 using the prospective transition approach for Purchased credit deteriorated (“PCD”) assets that were previously classified as PCI assets. PCD financial assets are defined as acquired individual financial assets (or groups with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination. For PCD debt securities and PCD loans, the company records the allowance for credit losses by grossing up the initial amortized cost, which includes the purchase price and the allowance for credit losses. The expected credit losses of PCD debt securities are measured at the individual security level. The expected credit losses for PCD loans are measured based on the loan’s unpaid principal balance. Beginning January 1, 2020, for any asset designated as a PCD asset at the time of acquisition, the Company estimates and records an allowance for credit losses, which is added to the purchase price to establish the initial amortized cost basis of the financial asset. Hence, there is no income statement impact from the acquisition. Subsequent changes in the allowance for credit losses on PCD assets will be recognized in Provision for credit losses on the Consolidated Statement of Income. The noncredit discount or premium will be accreted to interest income based on the effective interest rate on the PCD assets determined after the gross-up for the allowance for credit losses.
Troubled Debt Restructurings — The Company has implemented various loan modification programs to provide its borrowers relief from the economic impacts of the Coronavirus Disease 2019 (“COVID-19”). In accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company has elected to not apply TDR classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. For loans modified in response to the COVID-19 pandemic that do not meet the CARES Act criteria (e.g., current payment status at December 31, 2019), the Company has applied the guidance included in “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”) issued by the federal banking regulators on April 7, 2020. The Interagency Statement states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were current as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are not TDRs. The delinquency of the loans modified under the CARES Act and Interagency Statement is frozen at the time of the modification, and interest income continues to be recognized over the contractual life of the loan. For more information on the Company's TDR accounting, see Note 1 — Summary of Significant Accounting Principles — Troubled Debt Restructurings to the Consolidated Financial Statements of the Company’s 2019 Annual Report on Form 10-K.
Paycheck Protection Program (“PPP”) — In April 2020, the Company started accepting PPP applications and began to originate loans to qualified small businesses under the PPP established by the CARES Act. These loans are included in the C&I portfolio, carry an interest rate of 1%, and are 100% guaranteed by the Small Business Administration (“SBA”). No allowance for loan losses were recorded for these loans as of June 30, 2020. As of June 30, 2020, the Company has funded over 7,200 PPP loans for customers with an outstanding loan balance totaling $1.75 billion. The majority of the Company’s PPP loans have a term of two years. The SBA pays the Company fees for processing PPP loans in the following amounts: (1) five percent for loans of not more than $350,000; (2) three percent for loans of more than $350,000 and less than $2,000,000; and (3) one percent for loans of at least $2,000,000. Loan processing fees paid to the Company by the SBA are accounted for as loan origination fees, where net deferred fees are recognized over the estimated life of the loan as a yield adjustment on the loans. Payments by borrowers on PPP loans begin ten months after the loan forgiveness covered period. Under the terms of the PPP, such loans are eligible to be forgiven if certain conditions are satisfied, in which case the SBA will make payments to the Company for the forgiven amounts. If a loan is paid off or forgiven by the SBA prior to its projected estimated life, the remaining unamortized deferred fees will be recognized as interest income in that period.
13
Note 3 — Fair Value Measurement and Fair Value of Financial Instruments
Fair Value Determination
Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value of financial instruments, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing an asset or a liability. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:
•Level 1 — Valuation is based on quoted prices for identical instruments traded in active markets.
•Level 2 — Valuation is based on quoted prices for similar instruments traded in active markets; quoted prices for identical or similar instruments traded in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.
•Level 3 — Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.
The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.
Available-for-Sale Debt Securities — When available, the Company uses quoted market prices to determine the fair value of AFS debt securities, which are classified as Level 1. Level 1 AFS debt securities are comprised of U.S. Treasury securities. The fair value of other AFS debt securities is generally determined by independent external pricing service providers who have experience in valuing these securities or by taking the average quoted market prices obtained from independent external brokers. The valuations provided by the third-party pricing service providers are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, prepayment expectation and reference data obtained from market research publications. Inputs used by the third-party pricing service providers in valuing collateralized mortgage obligations and other securitization structures also include new issue data, monthly payment information, whole loan collateral performance, tranche evaluation and “To Be Announced” prices. In valuing securities issued by state and political subdivisions, inputs used by third-party pricing service providers also include material event notices.
On a monthly basis, the Company validates the valuations provided by third-party pricing service providers to ensure that the fair value determination is consistent with the applicable accounting guidance and the financial instruments are properly classified in the fair value hierarchy. To perform this validation, the Company evaluates the fair values of securities by comparing the fair values provided by the third-party pricing service providers to prices from other available independent sources for the same securities. When variances in prices are identified, the Company further compares inputs used by different sources to ascertain the reliability of these sources. On a quarterly basis, the Company reviews the documentation received from the third-party pricing service providers regarding the valuation inputs and methodology used for each category of securities.
When pricing is unavailable from third-party pricing service providers for certain securities, the Company requests market quotes from various independent external brokers and utilizes the average quoted market prices. These valuations are based on observable inputs in the current marketplace and are classified as Level 2. The Company periodically communicates with the independent external brokers to validate their pricing methodology. Information such as pricing sources, pricing assumptions, data inputs and valuation technique are reviewed.
14
Equity Securities — Equity securities consisted of mutual funds as of both June 30, 2020 and December 31, 2019. The Company uses net asset value (“NAV”) information to determine the fair value of these equity securities. When NAV is available periodically and the equity securities can be put back to the transfer agents at the publicly available NAV, the fair value of the equity securities is classified as Level 1. When NAV is available periodically but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value of these equity securities is classified as Level 2.
Interest Rate Contracts — The Company enters into interest rate swap and option contracts with its borrowers to lock in attractive intermediate and long-term interest rates, resulting in the customer obtaining a synthetic fixed-rate loan. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued and certain variable interest rate borrowings. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The fair value of the interest rate options, which consist of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (rise above) the strike rate of the floors (caps). In addition, to comply with the provisions of ASC 820, Fair Value Measurement, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments associated with the Company’s derivatives utilize model-derived credit spreads, which are Level 3 inputs. As of June 30, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts and has determined that the credit valuation adjustments were not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.
Foreign Exchange Contracts — The Company enters into foreign exchange contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered with its customers, the Company entered into offsetting foreign exchange contracts with third-party financial institutions to manage its exposure. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. The fair value is determined at each reporting period based on changes in the foreign exchange rates. These are over-the-counter contracts where quoted market prices are not readily available. Valuation is measured using conventional valuation methodologies with observable market data. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and result in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign exchange contracts are classified as Level 2. As of June 30, 2020 and December 31, 2019, the Bank held foreign currency non-deliverable forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. dollar (“USD”) functional currency subsidiary in China. These foreign currency non-deliverable forward contracts were designated as net investment hedges. The fair value of foreign currency contracts is determined by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include spot rates and forward rates of the contractual currencies. Foreign exchange forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Credit Contracts — The Company may periodically enter into credit risk participation agreements (“RPAs”) to manage the credit exposure on interest rate contracts associated with the syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The majority of the inputs used to value the RPAs are observable. Accordingly, RPAs fall within Level 2.
15
Equity Contracts — As part of the loan origination process, from time to time, the Company obtains warrants to purchase preferred and/or common stock of technology and life sciences companies it provides loans to. As of June 30, 2020 and December 31, 2019, the warrants included on the Consolidated Financial Statements were from both public and private companies. The Company values these warrants based on the Black-Scholes option pricing model. For warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on a duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The Company applies proxy volatilities based on the industry sectors of the private companies. The model values are then adjusted for a general lack of liquidity due to the private nature of the underlying companies. Due to the unobservable nature of the option volatility and liquidity discount assumptions used in deriving the estimated fair value, warrants from private companies are classified as Level 3. Since both option volatility and liquidity discount assumptions are subject to management’s judgment, measurement uncertainty is inherent in the valuation of private companies’ warrants. Given that the Company holds long positions in all warrants, an increase in volatility assumption would generally result in an increase in fair value. A higher liquidity discount would result in a decrease in fair value. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a measurement uncertainty analysis on the option volatility and liquidity discount assumptions is performed.
Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. The fair value of the commodity option contracts is determined using the Black-Scholes model and assumptions that include expectations of future commodity price and volatility. The future commodity contract price is derived from observable inputs such as the market price of the commodity. Commodity swaps are structured as an exchange of fixed cash flows for floating cash flows. The fixed cash flows are predetermined based on the known volumes and fixed price as specified in the swap agreement. The floating cash flows are correlated with the change of forward commodity prices, which is derived from market corroborated futures settlement prices. The fair value of the commodity swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments) based on the market prices of the commodity. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.
16
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:
($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2020 | |||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 251,201 | $ | — | $ | — | $ | 251,201 | ||||||||||||||||||
U.S. government agency and U.S. government- sponsored enterprise debt securities | — | 442,644 | — | 442,644 | ||||||||||||||||||||||
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 858,440 | — | 858,440 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 1,280,895 | — | 1,280,895 | ||||||||||||||||||||||
Municipal securities | — | 215,184 | — | 215,184 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 151,368 | — | 151,368 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 114,338 | — | 114,338 | ||||||||||||||||||||||
Corporate debt securities | — | 30,826 | — | 30,826 | ||||||||||||||||||||||
Foreign bonds | — | 204,080 | — | 204,080 | ||||||||||||||||||||||
Asset-backed securities | — | 61,619 | — | 61,619 | ||||||||||||||||||||||
Collateralized loan obligations (“CLOs”) | — | 273,979 | — | 273,979 | ||||||||||||||||||||||
Total AFS debt securities | $ | 251,201 | $ | 3,633,373 | $ | — | $ | 3,884,574 | ||||||||||||||||||
Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities (1) | $ | 22,462 | $ | 8,680 | $ | — | $ | 31,142 | ||||||||||||||||||
Total investments in tax credit and other investments | $ | 22,462 | $ | 8,680 | $ | — | $ | 31,142 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 613,480 | $ | — | $ | 613,480 | ||||||||||||||||||
Foreign exchange contracts | — | 24,289 | — | 24,289 | ||||||||||||||||||||||
Credit contracts | — | 41 | — | 41 | ||||||||||||||||||||||
Equity contracts | — | 8,857 | 316 | 9,173 | ||||||||||||||||||||||
Commodity contracts | — | 117,447 | — | 117,447 | ||||||||||||||||||||||
Gross derivative assets | $ | — | $ | 764,114 | $ | 316 | $ | 764,430 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (122,218) | $ | — | $ | (122,218) | ||||||||||||||||||
Net derivative assets | $ | — | $ | 641,896 | $ | 316 | $ | 642,212 | ||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 401,803 | $ | — | $ | 401,803 | ||||||||||||||||||
Foreign exchange contracts | — | 19,741 | — | 19,741 | ||||||||||||||||||||||
Credit contracts | — | 327 | — | 327 | ||||||||||||||||||||||
Commodity contracts | — | 138,298 | — | 138,298 | ||||||||||||||||||||||
Gross derivative liabilities | $ | — | $ | 560,169 | $ | — | $ | 560,169 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (205,004) | $ | — | $ | (205,004) | ||||||||||||||||||
Net derivative liabilities | $ | — | $ | 355,165 | $ | — | $ | 355,165 | ||||||||||||||||||
(1)Equity securities consist of mutual funds with readily determinable fair values.
(2)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
17
($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2019 | |||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 176,422 | $ | — | $ | — | $ | 176,422 | ||||||||||||||||||
U.S. government agency and U.S. government- sponsored enterprise debt securities | — | 581,245 | — | 581,245 | ||||||||||||||||||||||
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 603,471 | — | 603,471 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 1,003,897 | — | 1,003,897 | ||||||||||||||||||||||
Municipal securities | — | 102,302 | — | 102,302 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 88,550 | — | 88,550 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 46,548 | — | 46,548 | ||||||||||||||||||||||
Corporate debt securities | — | 11,149 | — | 11,149 | ||||||||||||||||||||||
Foreign bonds | — | 354,172 | — | 354,172 | ||||||||||||||||||||||
Asset-backed securities | — | 64,752 | — | 64,752 | ||||||||||||||||||||||
CLOs | — | 284,706 | — | 284,706 | ||||||||||||||||||||||
Total AFS debt securities | $ | 176,422 | $ | 3,140,792 | $ | — | $ | 3,317,214 | ||||||||||||||||||
Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities (1) | $ | 21,746 | $ | 9,927 | $ | — | $ | 31,673 | ||||||||||||||||||
Total investments in tax credit and other investments | $ | 21,746 | $ | 9,927 | $ | — | $ | 31,673 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 192,883 | $ | — | $ | 192,883 | ||||||||||||||||||
Foreign exchange contracts | — | 54,637 | — | 54,637 | ||||||||||||||||||||||
Credit contracts | — | 2 | — | 2 | ||||||||||||||||||||||
Equity contracts | — | 993 | 421 | 1,414 | ||||||||||||||||||||||
Commodity contracts | — | 81,380 | — | 81,380 | ||||||||||||||||||||||
Gross derivative assets | $ | — | $ | 329,895 | $ | 421 | $ | 330,316 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (125,319) | $ | — | $ | (125,319) | ||||||||||||||||||
Net derivative assets | $ | — | $ | 204,576 | $ | 421 | $ | 204,997 | ||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 127,317 | $ | — | $ | 127,317 | ||||||||||||||||||
Foreign exchange contracts | — | 48,610 | — | 48,610 | ||||||||||||||||||||||
Credit contracts | — | 84 | — | 84 | ||||||||||||||||||||||
Commodity contracts | — | 80,517 | — | 80,517 | ||||||||||||||||||||||
Gross derivative liabilities | $ | — | $ | 256,528 | $ | — | $ | 256,528 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (159,799) | $ | — | $ | (159,799) | ||||||||||||||||||
Net derivative liabilities | $ | — | $ | 96,729 | $ | — | $ | 96,729 | ||||||||||||||||||
(1)Equity securities consist of mutual funds with readily determinable fair values.
(2)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
18
For the three and six months ended June 30, 2020 and 2019, Level 3 fair value measurements that were measured on a recurring basis consist of warrants issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity warrants for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Equity Contracts | ||||||||||||||||||||||||||
Beginning balance | $ | 713 | $ | 442 | $ | 421 | $ | 673 | ||||||||||||||||||
Total gains included in earnings (1) | 7,976 | 769 | 8,268 | 538 | ||||||||||||||||||||||
Issuances | — | 28 | — | 28 | ||||||||||||||||||||||
Settlements | — | (847) | — | (847) | ||||||||||||||||||||||
Transfers out of Level 3 (2) | (8,373) | — | (8,373) | — | ||||||||||||||||||||||
Ending balance | $ | 316 | $ | 392 | $ | 316 | $ | 392 | ||||||||||||||||||
(1)Includes unrealized gains (losses) of $8.0 million and $(4) thousand for the three months ended June 30, 2020 and 2019, respectively, and $8.3 million and $(235) thousand for the six months ended June 30, 2020 and 2019, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income.
(2)During the three and six months ended June 30, 2020, the Company transferred $8.4 million of equity contracts measured on a recurring basis out of Level 3 into Level 2 after the corresponding issuer of the equity warrant, which was previously a private company, completed its initial public offering and became a public company.
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of June 30, 2020 and December 31, 2019, respectively. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted- Average (1) | |||||||||||||||||||||||||||
June 30, 2020 | ||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Equity contracts | $ | 316 | Black-Scholes option pricing model | Equity volatility | 58% — 70% | 63% | ||||||||||||||||||||||||||
Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Equity contracts | $ | 421 | Black-Scholes option pricing model | Equity volatility | 39% — 44% | 42% | ||||||||||||||||||||||||||
Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
(1)Weighted-average is calculated based on fair value of equity warrants as of June 30, 2020 and December 31, 2019.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis include certain loans, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, loans held-for-sale, and other nonperforming assets. Nonrecurring fair value adjustments result from impairment on certain loans and investments in qualified affordable housing partnerships, tax credit and other investments, write-downs of OREO, or from the application of lower of cost or fair value on loans held-for-sale.
Individually Evaluated Loans — The Company typically adjusts the carrying amount of individually evaluated loans when there is evidence of probable loss and when the expected fair value of the loan is less than its carrying amount. Individually evaluated loans with specific reserves are classified as Level 3 assets. The following two methods are used to derive the fair value of individually evaluated loans:
•Discounted cash flows valuation techniques that consist of developing an expected stream of cash flows over the life of the loans and then valuing the loans at the present value by discounting the expected cash flows at a designated discount rate.
19
•A specific reserve is established for an individually evaluated loan based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of the underlying collateral is generally based on third-party appraisals, or an internal valuation if a third-party appraisal is not required by regulations, which utilize one or more valuation techniques such as income, market and/or cost approaches.
Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of its monitoring process, the Company conducts ongoing due diligence on the investments in its qualified affordable housing partnerships, tax credit and other investments after the initial investment date and prior to the placed-in-service-date. After these investments are either acquired or placed into service, periodic monitoring is performed. This includes the quarterly review of the financial statements of the investment entity, the annual review of the financial statements of the guarantor (if any), the review of the annual tax returns of the investment entity, and the comparison of the actual cash distributions received against the financial projections prepared at the time when the investment was made. The Company assesses its tax credit and other investments for possible OTTI on an annual basis or when events or circumstances suggest that the carrying amount of the investments may not be realizable. These circumstances can include, but are not limited to the following factors:
•The expected future cash flows is less than the carrying amount of the investment;
•Changes in the economic, market or technological environment that could adversely affect the investee’s operations; and
•Other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment.
All available evidence is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary.
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure or at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.
Other Nonperforming Assets — Other nonperforming assets are recorded at fair value upon transfers from loans to foreclosed assets. Subsequently, foreclosed assets are recorded at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised values of the collateral or management’s estimates of the foreclosed asset. The Company records an impairment when the foreclosed asset’s fair value declines below its carrying value. Other nonperforming assets are classified as Level 3.
20
The following tables present the carrying amounts of assets that were still held and had fair value changes measured on a nonrecurring basis as of June 30, 2020 and December 31, 2019:
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of June 30, 2020 | |||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value Measurements | |||||||||||||||||||||||
Individually evaluated loans (1): | ||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | $ | — | $ | — | $ | 53,122 | $ | 53,122 | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | — | — | 50,453 | 50,453 | ||||||||||||||||||||||
Total commercial | — | — | 103,575 | 103,575 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
HELOCs | — | — | 3,338 | 3,338 | ||||||||||||||||||||||
Other consumer | — | — | 2,491 | 2,491 | ||||||||||||||||||||||
Total consumer | — | — | 5,829 | 5,829 | ||||||||||||||||||||||
Total individually evaluated loans | $ | — | $ | — | $ | 109,404 | $ | 109,404 | ||||||||||||||||||
Investments in tax credit and other investments, net | $ | — | $ | — | $ | 6,216 | $ | 6,216 | ||||||||||||||||||
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2019 | |||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value Measurements | |||||||||||||||||||||||
Non-PCI impaired loans: | ||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | $ | — | $ | — | $ | 47,554 | $ | 47,554 | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | — | — | 753 | 753 | ||||||||||||||||||||||
Total commercial | — | — | 48,307 | 48,307 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
HELOCs | — | — | 1,372 | 1,372 | ||||||||||||||||||||||
Total consumer | — | — | 1,372 | 1,372 | ||||||||||||||||||||||
Total non-PCI impaired loans | $ | — | $ | — | $ | 49,679 | $ | 49,679 | ||||||||||||||||||
OREO (2) | $ | — | $ | — | $ | 125 | $ | 125 | ||||||||||||||||||
Investments in tax credit and other investments, net | $ | — | $ | — | $ | 3,076 | $ | 3,076 | ||||||||||||||||||
Other nonperforming assets | $ | — | $ | — | $ | 1,167 | $ | 1,167 | ||||||||||||||||||
(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total individually evaluated loans as of June 30, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 include only non-PCI loans.
(2)Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO.
21
The following table presents the increase (decrease) in fair value of assets for which a nonrecurring fair value adjustment has been recognized for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Individually Evaluated Loans (1) | Non-PCI Impaired Loans | Individually Evaluated Loans (1) | Non-PCI Impaired Loans | |||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | $ | (8,846) | $ | (24,001) | $ | (30,372) | $ | (25,823) | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | (271) | 2 | (276) | 4 | ||||||||||||||||||||||
Total commercial | (9,117) | (23,999) | (30,648) | (25,819) | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
HELOCs | (64) | — | (257) | — | ||||||||||||||||||||||
Other consumer | — | — | 2,491 | — | ||||||||||||||||||||||
Total consumer | (64) | — | 2,234 | — | ||||||||||||||||||||||
Total loans | $ | (9,181) | $ | (23,999) | $ | (28,414) | $ | (25,819) | ||||||||||||||||||
OREO | $ | — | $ | (3) | $ | — | $ | (3) | ||||||||||||||||||
Investments in tax credit and other investments, net | $ | (733) | $ | (2,892) | $ | (583) | $ | (9,870) | ||||||||||||||||||
Other nonperforming assets | $ | — | $ | — | $ | — | $ | (3,000) | ||||||||||||||||||
(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total individually evaluated loans during the three and six months ended June 30, 2020 considers PCD loans, if impaired, whereas impaired loans during the three and six months ended June 30, 2019 include only non-PCI loans.
The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of June 30, 2020 and December 31, 2019:
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Techniques | Unobservable Inputs | Range of Inputs | Weighted- Average of Inputs (1) | |||||||||||||||||||||||||||
June 30, 2020 | ||||||||||||||||||||||||||||||||
Individually evaluated loans (2) | $ | 29,949 | Discounted cash flows | Discount | 4% — 15% | 10% | ||||||||||||||||||||||||||
$ | 5,658 | Fair value of collateral | Discount | 10% — 63% | 19% | |||||||||||||||||||||||||||
$ | 21,452 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||
$ | 52,345 | Fair value of property | Selling cost | 8% | 8% | |||||||||||||||||||||||||||
Investments in tax credit and other investments, net | $ | 6,216 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | ||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||
Non-PCI impaired loans | $ | 27,841 | Discounted cash flows | Discount | 4% — 15% | 14% | ||||||||||||||||||||||||||
$ | 1,014 | Fair value of collateral | Discount | 8% — 20% | 19% | |||||||||||||||||||||||||||
$ | 20,824 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||
OREO | $ | 125 | Fair value of property | Selling cost | 8% | 8% | ||||||||||||||||||||||||||
Other nonperforming assets | $ | 1,167 | Fair value of collateral | Contract value | NM | NM | ||||||||||||||||||||||||||
Investments in tax credit and other investments, net | $ | 3,076 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | ||||||||||||||||||||||||||
NM — Not meaningful.
(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of June 30, 2020 and December 31, 2019.
(2)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total individually evaluated loans as of June 30, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 include only non-PCI loans.
22
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of June 30, 2020 and December 31, 2019, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in this Note. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable and mortgage servicing rights that are included in Other assets, and accrued interest payable that is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet.
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,533,502 | $ | 4,533,502 | $ | — | $ | — | $ | 4,533,502 | ||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 531,591 | $ | — | $ | 531,591 | $ | — | $ | 531,591 | ||||||||||||||||||||||
Resale agreements (1) | $ | 1,260,000 | $ | — | $ | 1,263,068 | $ | — | $ | 1,263,068 | ||||||||||||||||||||||
Restricted equity securities, at cost | $ | 78,963 | $ | — | $ | 78,963 | $ | — | $ | 78,963 | ||||||||||||||||||||||
Loans held-for-sale | $ | 3,875 | $ | — | $ | 3,875 | $ | — | $ | 3,875 | ||||||||||||||||||||||
Loans held-for-investment, net | $ | 36,597,341 | $ | — | $ | — | $ | 36,714,052 | $ | 36,714,052 | ||||||||||||||||||||||
Mortgage servicing rights | $ | 5,363 | $ | — | $ | — | $ | 7,798 | $ | 7,798 | ||||||||||||||||||||||
Accrued interest receivable | $ | 149,595 | $ | — | $ | 149,595 | $ | — | $ | 149,595 | ||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 31,410,130 | $ | — | $ | 31,410,130 | $ | — | $ | 31,410,130 | ||||||||||||||||||||||
Time deposits | $ | 9,262,548 | $ | — | $ | 9,295,199 | $ | — | $ | 9,295,199 | ||||||||||||||||||||||
Short-term borrowings | $ | 252,851 | $ | — | $ | 252,851 | $ | — | $ | 252,851 | ||||||||||||||||||||||
FHLB advances | $ | 656,759 | $ | — | $ | 667,996 | $ | — | $ | 667,996 | ||||||||||||||||||||||
Repurchase agreements (1) | $ | 300,000 | $ | — | $ | 320,361 | $ | — | $ | 320,361 | ||||||||||||||||||||||
Long-term debt | $ | 1,575,653 | $ | — | $ | 1,578,801 | $ | — | $ | 1,578,801 | ||||||||||||||||||||||
Accrued interest payable | $ | 23,007 | $ | — | $ | 23,007 | $ | — | $ | 23,007 | ||||||||||||||||||||||
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 3,261,149 | $ | 3,261,149 | $ | — | $ | — | $ | 3,261,149 | ||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 196,161 | $ | — | $ | 196,161 | $ | — | $ | 196,161 | ||||||||||||||||||||||
Resale agreements (1) | $ | 860,000 | $ | — | $ | 856,025 | $ | — | $ | 856,025 | ||||||||||||||||||||||
Restricted equity securities, at cost | $ | 78,580 | $ | — | $ | 78,580 | $ | — | $ | 78,580 | ||||||||||||||||||||||
Loans held-for-sale | $ | 434 | $ | — | $ | 434 | $ | — | $ | 434 | ||||||||||||||||||||||
Loans held-for-investment, net | $ | 34,420,252 | $ | — | $ | — | $ | 35,021,300 | $ | 35,021,300 | ||||||||||||||||||||||
Mortgage servicing rights | $ | 6,068 | $ | — | $ | — | $ | 8,199 | $ | 8,199 | ||||||||||||||||||||||
Accrued interest receivable | $ | 144,599 | $ | — | $ | 144,599 | $ | — | $ | 144,599 | ||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 27,109,951 | $ | — | $ | 27,109,951 | $ | — | $ | 27,109,951 | ||||||||||||||||||||||
Time deposits | $ | 10,214,308 | $ | — | $ | 10,208,895 | $ | — | $ | 10,208,895 | ||||||||||||||||||||||
Short-term borrowings | $ | 28,669 | $ | — | $ | 28,669 | $ | — | $ | 28,669 | ||||||||||||||||||||||
FHLB advances | $ | 745,915 | $ | — | $ | 755,371 | $ | — | $ | 755,371 | ||||||||||||||||||||||
Repurchase agreements (1) | $ | 200,000 | $ | — | $ | 232,597 | $ | — | $ | 232,597 | ||||||||||||||||||||||
Long-term debt | $ | 147,101 | $ | — | $ | 152,641 | $ | — | $ | 152,641 | ||||||||||||||||||||||
Accrued interest payable | $ | 27,246 | $ | — | $ | 27,246 | $ | — | $ | 27,246 | ||||||||||||||||||||||
(1)Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of June 30, 2020, none of the $300.0 million of gross repurchase agreements were eligible for netting against gross resale agreements. Out of $450.0 million of gross repurchase agreements, $250.0 million were eligible for netting against gross resale agreements as of December 31, 2019.
23
Note 4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements
Resale Agreements
Gross resale agreements were $1.26 billion and $1.11 billion as of June 30, 2020 and December 31, 2019, respectively. The weighted-average yields were 2.14% and 2.71% for the three months ended June 30, 2020 and 2019, respectively, and 2.32% and 2.77% for the six months ended June 30, 2020 and 2019, respectively.
Repurchase Agreements
As of June 30, 2020, the collateral for the repurchase agreements were comprised of U.S. Treasury securities, and U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities. Gross repurchase agreements were $300.0 million and $450.0 million as of June 30, 2020 and December 31, 2019, respectively. The weighted-average interest rates were 3.40% and 4.93% for the three months ended June 30, 2020 and 2019, respectively, and 3.76% and 4.97% for the six months ended June 30, 2020 and 2019, respectively. The Company recorded $8.7 million of charges related to the extinguishment of $150.0 million of repurchase agreements for the three and six months ended June 30, 2020. In comparison, there were no extinguishment charges recorded in 2019. As of June 30, 2020, $300.0 million of repurchase agreements will mature in 2023.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that provide the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral received includes securities that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral received or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, and is usually delivered to and held by the third-party trustees. The collateral amounts received/pledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Assets | Net Amount | |||||||||||||||||||||||||||||||
Collateral Received | ||||||||||||||||||||||||||||||||
Resale agreements | $ | 1,260,000 | $ | — | $ | 1,260,000 | $ | (1,258,866) | (1) | $ | 1,134 | |||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Liabilities | Net Amount | |||||||||||||||||||||||||||||||
Collateral Pledged | ||||||||||||||||||||||||||||||||
Repurchase agreements | $ | 300,000 | $ | — | $ | 300,000 | $ | (300,000) | (2) | $ | — | |||||||||||||||||||||
24
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Assets | Net Amount | |||||||||||||||||||||||||||||||
Collateral Received | ||||||||||||||||||||||||||||||||
Resale agreements | $ | 1,110,000 | $ | (250,000) | $ | 860,000 | $ | (856,058) | (1) | $ | 3,942 | |||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Liabilities | Net Amount | |||||||||||||||||||||||||||||||
Collateral Pledged | ||||||||||||||||||||||||||||||||
Repurchase agreements | $ | 450,000 | $ | (250,000) | $ | 200,000 | $ | (200,000) | (2) | $ | — | |||||||||||||||||||||
(1)Represents the fair value of securities the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
(2)Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability due to each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to derivatives. Refer to Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
Note 5 — Securities
The following tables present the amortized cost, gross unrealized gains and losses, and fair value by major categories of AFS debt securities as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 250,494 | $ | 707 | $ | — | $ | 251,201 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 433,923 | 8,853 | (132) | 442,644 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 827,929 | 34,585 | (4,074) | 858,440 | ||||||||||||||||||||||
Residential mortgage-backed securities | 1,246,609 | 34,445 | (159) | 1,280,895 | ||||||||||||||||||||||
Municipal securities | 208,333 | 7,002 | (151) | 215,184 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 148,322 | 3,989 | (943) | 151,368 | ||||||||||||||||||||||
Residential mortgage-backed securities | 113,548 | 804 | (14) | 114,338 | ||||||||||||||||||||||
Corporate debt securities | 31,254 | 74 | (502) | 30,826 | ||||||||||||||||||||||
Foreign bonds | 204,540 | 106 | (566) | 204,080 | ||||||||||||||||||||||
Asset-backed securities | 64,762 | — | (3,143) | 61,619 | ||||||||||||||||||||||
CLOs | 294,000 | — | (20,021) | 273,979 | ||||||||||||||||||||||
Total AFS debt securities | $ | 3,823,714 | $ | 90,565 | $ | (29,705) | $ | 3,884,574 | ||||||||||||||||||
25
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 177,215 | $ | — | $ | (793) | $ | 176,422 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 584,275 | 1,377 | (4,407) | 581,245 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 599,814 | 8,551 | (4,894) | 603,471 | ||||||||||||||||||||||
Residential mortgage-backed securities | 998,447 | 6,927 | (1,477) | 1,003,897 | ||||||||||||||||||||||
Municipal securities | 101,621 | 790 | (109) | 102,302 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 86,609 | 1,947 | (6) | 88,550 | ||||||||||||||||||||||
Residential mortgage-backed securities | 46,830 | 3 | (285) | 46,548 | ||||||||||||||||||||||
Corporate debt securities | 11,250 | 12 | (113) | 11,149 | ||||||||||||||||||||||
Foreign bonds | 354,481 | 198 | (507) | 354,172 | ||||||||||||||||||||||
Asset-backed securities | 66,106 | — | (1,354) | 64,752 | ||||||||||||||||||||||
CLOs | 294,000 | — | (9,294) | 284,706 | ||||||||||||||||||||||
Total AFS debt securities | $ | 3,320,648 | $ | 19,805 | $ | (23,239) | $ | 3,317,214 | ||||||||||||||||||
As of June 30, 2020, the amortized cost of AFS debt securities excludes accrued interest receivables of $17.8 million which are included in Other assets on the Consolidated Balance Sheet. For the Company’s accounting policy related to AFS debt securities’ accrued interest receivable, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses of the Company’s AFS debt securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position as of June 30, 2020 and December 31, 2019.
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||||||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | $ | 24,868 | $ | (132) | $ | — | $ | — | $ | 24,868 | $ | (132) | ||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 139,097 | (3,477) | 11,572 | (597) | 150,669 | (4,074) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 91,491 | (157) | 195 | (2) | 91,686 | (159) | ||||||||||||||||||||||||||||||||
Municipal securities | 8,617 | (151) | — | — | 8,617 | (151) | ||||||||||||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 59,418 | (943) | — | — | 59,418 | (943) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 23,720 | (14) | — | — | 23,720 | (14) | ||||||||||||||||||||||||||||||||
Corporate debt securities | 1,002 | (2) | 9,500 | (500) | 10,502 | (502) | ||||||||||||||||||||||||||||||||
Foreign bonds | 85,274 | (566) | — | — | 85,274 | (566) | ||||||||||||||||||||||||||||||||
Asset-backed securities | 18,359 | (483) | 43,260 | (2,660) | 61,619 | (3,143) | ||||||||||||||||||||||||||||||||
CLOs | 273,979 | (20,021) | — | — | 273,979 | (20,021) | ||||||||||||||||||||||||||||||||
Total AFS debt securities | $ | 725,825 | $ | (25,946) | $ | 64,527 | $ | (3,759) | $ | 790,352 | $ | (29,705) | ||||||||||||||||||||||||||
26
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | — | $ | — | $ | 176,422 | $ | (793) | $ | 176,422 | $ | (793) | ||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 310,349 | (4,407) | — | — | 310,349 | (4,407) | ||||||||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 204,675 | (2,346) | 108,314 | (2,548) | 312,989 | (4,894) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 325,354 | (1,234) | 34,337 | (243) | 359,691 | (1,477) | ||||||||||||||||||||||||||||||||
Municipal securities | 31,130 | (109) | — | — | 31,130 | (109) | ||||||||||||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 7,914 | (6) | — | — | 7,914 | (6) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 42,894 | (285) | — | — | 42,894 | (285) | ||||||||||||||||||||||||||||||||
Corporate debt securities | — | — | 9,888 | (113) | 9,888 | (113) | ||||||||||||||||||||||||||||||||
Foreign bonds | 129,074 | (407) | 9,900 | (100) | 138,974 | (507) | ||||||||||||||||||||||||||||||||
Asset-backed securities | 52,565 | (902) | 12,187 | (452) | 64,752 | (1,354) | ||||||||||||||||||||||||||||||||
CLOs | 284,706 | (9,294) | — | — | 284,706 | (9,294) | ||||||||||||||||||||||||||||||||
Total AFS debt securities | $ | 1,388,661 | $ | (18,990) | $ | 351,048 | $ | (4,249) | $ | 1,739,709 | $ | (23,239) | ||||||||||||||||||||||||||
As of June 30, 2020, the Company had 41 AFS debt securities in a gross unrealized loss position with no credit impairment, primarily consisting of three CLOs, 19 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and four asset-backed securities. In comparison, as of December 31, 2019, the Company had 101 AFS debt securities in a gross unrealized loss position with no credit impairment, primarily consisting of three CLOs, 57 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and 14 U.S. government agency and U.S. government-sponsored enterprise debt securities.
Allowance for Credit Losses
Each reporting period, the Company assesses each AFS debt security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for impairment related to credit losses, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in this Form 10-Q. Prior to January 1, 2020, the Company assessed individual securities that were in an unrealized loss position for OTTI.
The gross unrealized losses across all major security types presented in the above tables were primarily attributable to yield curve movements and widened spreads arising from the negative outlook and uncertainty as a result of the COVID-19 pandemic. The increase in unrealized losses during the six months ended June 30, 2020 was primarily due to further deterioration in the market values of the following security types:
•U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities — The market value decline was primarily due to the interest rate movement. Since these securities were guaranteed or sponsored by agencies of the U.S. government, and the credit profiles were strong (rated A, AA+ and AAA by Moody’s Investors Service (“Moody’s”), S&P and Fitch Ratings (“Fitch”), respectively), the Company expects to receive all contractual interest payments on-time, and believes the credit loss exposure on these securities is remote.
•Asset-backed securities — The market value decline of these securitized student loans was primarily due to the interest rate movement and the widening in spreads. Since credit profiles of these securities were strong (rated Aa1, AA+, and AA or higher by Moody’s Investors Service, S&P and Fitch Ratings, respectively), were backed by the Federal Family Education Loan Program, and the contractual payments from these bonds have been on-time, the Company deemed that the credit loss exposure on these securities is low and no credit loss is expected.
27
•CLOs — The market value decline was largely due to market dislocation in this sector resulting in wider liquidity spreads. The credit profiles of the securities were strong (rated A or higher by Standard and Poor's (“S&P”)) and the contractual payments from these bonds are expected to be received on-time. Accordingly, the Company believes that credit loss exposure on these securities is remote.
Overall, the Company believes that the credit support levels of the AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received even if credit performance deteriorates under the impact of the COVID-19 pandemic.
As of June 30, 2020, the Company has the intent to hold the AFS debt securities with unrealized losses through the anticipated recovery period and it is more-likely-than-not that the Company will not have to sell these securities before recovery of their amortized cost. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, there was no allowance for credit losses as of June 30, 2020, and there were no provision for credit losses recognized for the three and six months ended June 30, 2020. In comparison, no OTTI credit loss was recognized for the three and six months ended June 30, 2019.
Realized Gains and Losses
The following table presents the proceeds, gross realized gains and tax expense related to the sales of AFS debt securities for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Proceeds from sales | $ | 177,917 | $ | 223,763 | $ | 484,380 | $ | 375,102 | ||||||||||||||||||
Gross realized gains | $ | 9,640 | $ | 1,447 | $ | 11,169 | $ | 3,008 | ||||||||||||||||||
Related tax expense | $ | 2,850 | $ | 428 | $ | 3,302 | $ | 889 | ||||||||||||||||||
Contractual Maturities of Available-for-Sale Debt Securities
The following table presents the contractual maturities of AFS debt securities as of June 30, 2020. Expected maturities will differ from contractual maturities on certain securities as the issuers and borrowers of the underlying collateral may have the right to call or prepay obligations with or without prepayment penalties.
($ in thousands) | Amortized Cost | Fair Value | ||||||||||||
Due within one year | $ | 561,935 | $ | 562,869 | ||||||||||
Due after one year through five years | 366,403 | 371,895 | ||||||||||||
Due after five years through ten years | 277,823 | 289,730 | ||||||||||||
Due after ten years | 2,617,553 | 2,660,080 | ||||||||||||
Total AFS debt securities | $ | 3,823,714 | $ | 3,884,574 | ||||||||||
As of June 30, 2020 and December 31, 2019, AFS debt securities with fair value of $745.2 million and $479.4 million, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
Restricted Equity Securities
The following table presents the restricted equity securities on the Consolidated Balance Sheet as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||
Federal Reserve Bank (“FRB”) stock | $ | 58,781 | $ | 58,330 | ||||||||||
FHLB stock | 20,182 | 20,250 | ||||||||||||
Total restricted equity securities | $ | 78,963 | $ | 78,580 | ||||||||||
28
Note 6 — Derivatives
The Company uses derivatives to manage exposure to market risk, primarily interest rate risk and foreign currency risk, and to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates do not significantly affect earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities, as well as the Bank’s investment in East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Derivatives to the Consolidated Financial Statements of the Company’s 2019 Form 10-K.
The following table presents the total notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis as of June 30, 2020 and December 31, 2019. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of June 30, 2020 and December 31, 2019. The resulting net derivative asset and liability fair values are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 15,194 | $ | — | $ | 174 | $ | 31,026 | $ | — | $ | 3,198 | ||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 275,000 | — | 1,483 | — | — | — | ||||||||||||||||||||||||||||||||
Net investment hedges: | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | 77,689 | 245 | — | 86,167 | — | 1,586 | ||||||||||||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | 367,883 | $ | 245 | $ | 1,657 | $ | 117,193 | $ | — | $ | 4,784 | ||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 17,170,884 | $ | 613,480 | $ | 400,146 | $ | 15,489,692 | $ | 192,883 | $ | 124,119 | ||||||||||||||||||||||||||
Foreign exchange contracts | 2,738,018 | 24,044 | 19,741 | 4,839,661 | 54,637 | 47,024 | ||||||||||||||||||||||||||||||||
Credit contracts | 204,498 | 41 | 327 | 210,678 | 2 | 84 | ||||||||||||||||||||||||||||||||
Equity contracts | — | (1) | 9,173 | — | — | (1) | 1,414 | — | ||||||||||||||||||||||||||||||
Commodity contracts | — | (2) | 117,447 | 138,298 | — | (2) | 81,380 | 80,517 | ||||||||||||||||||||||||||||||
Total derivatives not designated as hedging instruments | $ | 20,113,400 | $ | 764,185 | $ | 558,512 | $ | 20,540,031 | $ | 330,316 | $ | 251,744 | ||||||||||||||||||||||||||
Gross derivative assets/liabilities | $ | 764,430 | $ | 560,169 | $ | 330,316 | $ | 256,528 | ||||||||||||||||||||||||||||||
Less: Master netting agreements | (110,569) | (110,569) | (121,561) | (121,561) | ||||||||||||||||||||||||||||||||||
Less: Cash collateral received/paid | (11,649) | (94,435) | (3,758) | (38,238) | ||||||||||||||||||||||||||||||||||
Net derivative assets/liabilities | $ | 642,212 | $ | 355,165 | $ | 204,997 | $ | 96,729 | ||||||||||||||||||||||||||||||
(1)The Company held equity contracts in three public companies and 17 private companies as of June 30, 2020. In comparison, the Company held equity contracts in three public companies and 18 private companies as of December 31, 2019.
(2)The notional amount of the Company’s commodity contracts entered with its customers totaled 6,155 thousand barrels of crude oil and 84,957 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of June 30, 2020. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 7,811 thousand barrels of crude oil and 63,773 thousand MMBTUs of natural gas as of December 31, 2019. The Company simultaneously entered into the offsetting commodity contracts with mirrored terms with third-party financial institutions.
29
Derivatives Designated as Hedging Instruments
Fair Value Hedges — The Company is exposed to changes in the fair value of certain certificates of deposit due to changes in the benchmark interest rates. The Company has entered into interest rate swaps, which were designated as fair value hedges. The interest rate swaps involve the exchange of variable rate payments over the life of the agreements without the exchange of the underlying notional amounts.
The following table presents the net gains (losses) recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Gains (losses) recorded in interest expense: | ||||||||||||||||||||||||||
Recognized on interest rate swaps | $ | 951 | $ | 1,634 | $ | 2,996 | $ | 2,854 | ||||||||||||||||||
Recognized on certificates of deposit | $ | (357) | $ | (1,434) | $ | (1,719) | $ | (2,695) | ||||||||||||||||||
The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of the hedged certificates of deposit as of June 30, 2020 and December 31, 2019:
($ in thousands) | Carrying Value (1) | Cumulative Fair Value Adjustment (2) | ||||||||||||||||||||||||
June 30, 2020 | December 31, 2019 | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
Certificates of deposit | $ | (14,986) | $ | (29,080) | $ | (114) | $ | 1,604 | ||||||||||||||||||
(1)Represents the full carrying amount of the hedged certificates of deposit.
(2)For liabilities, (increase) decrease to carrying value.
Cash Flow Hedges — The Company entered into interest rate swaps that were designated and qualified as cash flow hedges in the second quarter of 2020 to hedge the variability in interest payments on certain floating rate borrowings. For cash flow hedges, the entire change in the fair value of the hedging instruments is recognized in AOCI and reclassified to earnings in the same period when the hedged cash flows impacts earnings. Reclassified gains and losses on interest rate swaps are recorded in the same line item as the interest payments of the hedged long-term borrowings within Interest expense in the Consolidated Statements of Income. As of June 30, 2020, the notional amount of the interest rate swaps that were designated as cash flow hedges was $275.0 million. Considering the interest rates, yield curve and notional amounts as of June 30, 2020, the Company expects to reclassify an estimated $183 thousand of after-tax net gains on derivative instruments designated as cash flow hedges from AOCI into earnings during the next 12 months.
The following table presents the pre-tax changes in AOCI from cash flow hedges for the three and six months ended June 30, 2020 and 2019. The after-tax impact of cash flow hedges on AOCI is shown in Note 14 — Accumulated Other Comprehensive Income (Loss) to the Consolidated Financial Statements in the Form-10-Q.
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Gains (losses) recognized in AOCI | $ | (1,483) | $ | — | $ | (1,483) | $ | — | ||||||||||||||||||
Gains (losses) reclassified from AOCI to Interest expense | $ | 377 | $ | — | $ | 377 | $ | — | ||||||||||||||||||
Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. The Company enters into foreign currency forward contracts to hedge a portion of the Bank’s investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges, involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Bank’s net investment in East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate of the Chinese Renminbi (“RMB”). The Company may de-designate the net investment hedges when the Company expects the hedge will cease to be highly effective. The notional and fair value amounts of the foreign exchange forward contracts were $77.7 million and $245 thousand asset, respectively, as of June 30, 2020. In comparison, the notional and fair value amounts of the foreign exchange forward contracts, were $86.2 million and $1.6 million liability, respectively, as of December 31, 2019.
30
The following table presents the after-tax (losses) gains recognized in AOCI on net investment hedges for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Gains (losses) recognized in AOCI | $ | (377) | $ | (598) | $ | 627 | $ | (2,603) | ||||||||||||||||||
Derivatives Not Designated as Hedging Instruments
Interest Rate Contracts — The Company enters into interest rate contracts, which include interest rate swaps and options with its customers to allow customers to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions, including central clearing organizations. Beginning in January 2018, the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments made to and received from LCH as settlements of derivatives, and not as collateral against derivatives. Included in the total notional amount of $8.60 billion of interest rates contracts entered into with financial counterparties as of June 30, 2020, was a notional amount of $2.82 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative liability fair values of $229.8 million, as of June 30, 2020. In comparison, included in the total notional amount of $7.75 billion of interest rates contracts entered into with financial counterparties as of December 31, 2019, was a notional amount of $2.53 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair values of $2.9 million and liability fair values of $75.1 million as of December 31, 2019.
The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Written options | $ | 858,996 | $ | — | $ | 241 | Purchased options | $ | 858,996 | $ | 241 | $ | — | |||||||||||||||||||||||||||||||
Sold collars and corridors | 531,098 | 10,658 | 1 | Collars and corridors | 531,098 | 1 | 10,696 | |||||||||||||||||||||||||||||||||||||
Swaps | 7,179,331 | 601,250 | — | Swaps | 7,211,365 | 1,330 | 389,208 | |||||||||||||||||||||||||||||||||||||
Total | $ | 8,569,425 | $ | 611,908 | $ | 242 | Total | $ | 8,601,459 | $ | 1,572 | $ | 399,904 | |||||||||||||||||||||||||||||||
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Written options | $ | 1,003,558 | $ | — | $ | 66 | Purchased options | $ | 1,003,558 | $ | 67 | $ | — | |||||||||||||||||||||||||||||||
Sold collars and corridors | 490,852 | 1,971 | 16 | Collars and corridors | 490,852 | 17 | 1,996 | |||||||||||||||||||||||||||||||||||||
Swaps | 6,247,667 | 187,294 | 6,237 | Swaps | 6,253,205 | 3,534 | 115,804 | |||||||||||||||||||||||||||||||||||||
Total | $ | 7,742,077 | $ | 189,265 | $ | 6,319 | Total | $ | 7,747,615 | $ | 3,618 | $ | 117,800 | |||||||||||||||||||||||||||||||
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot, swap and option contracts to accommodate the business needs of its customers. For the foreign exchange contracts entered into with its customers, the Company managed its foreign exchange exposure by entering into offsetting foreign exchange contracts with third-party financial institutions and/or entering into bilateral collateral and master netting agreements with customer counterparties to manage its credit exposure. The Company also utilizes foreign exchange contracts, which are not designated as hedging instruments to mitigate the economic effect of currency fluctuations on certain foreign currency-denominated on-balance sheet assets and liabilities, primarily for foreign currency-denominated deposits offered to its customers. A majority of the foreign exchange contracts had original maturities of one year or less as of June 30, 2020 and December 31, 2019.
31
The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Forwards and spot | $ | 1,768,864 | $ | 17,940 | $ | 14,246 | Forwards and spot | $ | 62,424 | $ | 62 | $ | 98 | |||||||||||||||||||||||||||||||
Swaps | 7,160 | — | 42 | Swaps | 734,640 | 4,502 | 3,808 | |||||||||||||||||||||||||||||||||||||
Collars | 1,685 | 2 | — | Collars | 162,245 | 1,538 | 1,547 | |||||||||||||||||||||||||||||||||||||
Total | $ | 1,777,709 | $ | 17,942 | $ | 14,288 | Total | $ | 959,309 | $ | 6,102 | $ | 5,453 | |||||||||||||||||||||||||||||||
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Forwards and spot | $ | 3,581,036 | $ | 45,911 | $ | 40,591 | Forwards and spot | $ | 207,492 | $ | 1,400 | $ | 507 | |||||||||||||||||||||||||||||||
Swaps | 6,889 | 16 | 84 | Swaps | 702,391 | 6,156 | 4,712 | |||||||||||||||||||||||||||||||||||||
Written options | 87,036 | 127 | — | Purchased options | 87,036 | — | 127 | |||||||||||||||||||||||||||||||||||||
Collars | 2,244 | — | 14 | Collars | 165,537 | 1,027 | 989 | |||||||||||||||||||||||||||||||||||||
Total | $ | 3,677,205 | $ | 46,054 | $ | 40,689 | Total | $ | 1,162,456 | $ | 8,583 | $ | 6,335 | |||||||||||||||||||||||||||||||
Credit Contracts — The Company may periodically enter into RPA contracts to manage the credit exposure on interest rate contracts associated with syndicated loans and may enter into protection sold or protection purchased RPAs with institutional counterparties. Under the RPAs, the Company will receive or make a payment if a borrower defaults on the related interest rate contract. Credit risk on RPAs is managed by monitoring the credit worthiness of the borrowers and institutional counterparties, which is based on the normal credit review process. The referenced entities of the RPAs were investment grade as of both June 30, 2020 and December 31, 2019. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||
RPAs - protection sold | $ | 193,783 | $ | — | $ | 327 | $ | 199,964 | $ | — | $ | 84 | ||||||||||||||||||||||||||
RPAs - protection purchased | 10,714 | 41 | — | 10,714 | 2 | — | ||||||||||||||||||||||||||||||||
Total RPAs | $ | 204,497 | $ | 41 | $ | 327 | $ | 210,678 | $ | 2 | $ | 84 | ||||||||||||||||||||||||||
Assuming all underlying borrowers referenced in the interest rate contracts defaulted as of June 30, 2020 and December 31, 2019, the exposure from the RPAs with protections sold would be $778 thousand and $125 thousand, respectively. As of June 30, 2020 and December 31, 2019, the weighted-average remaining maturities of the outstanding RPAs were 1.7 years and 2.2 years, respectively.
Equity Contracts — As part of the Company’s loan origination process, from time to time, the Company obtains warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans. Warrants grant the Company the right to buy a certain class of the underlying company’s equity at a certain price before expiration. The Company held warrants in three public companies and 17 private companies as of June 30, 2020, and held warrants in three public companies and 18 private companies as of December 31, 2019. The total fair value of the warrants held in both public and private companies was $9.2 million and $1.4 million in assets as of June 30, 2020 and December 31, 2019, respectively.
32
Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. To economically hedge against the risk of fluctuation in commodity prices in the products offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions to manage the exposure with its customers. Beginning in January 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook to legally characterize variation margin payments made to and received from CME as settlements of derivatives and not as collateral against derivatives. As of June 30, 2020, the notional quantities that cleared through CME totaled 1,532 thousand barrels of crude oil and 24,895 thousand MMBTUs of natural gas. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in reductions in gross derivative asset fair value of $25.0 million and liability fair value of $631 thousand, respectively, as of June 30, 2020, for a net asset fair value of $2.3 million. In comparison, the notional quantities that cleared through CME totaled 1,752 thousand barrels of crude oil and 6,075 thousand MMBTUs of natural gas as of December 31, 2019. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in a reduction in gross derivative asset fair value of $2.9 million and liability fair value of $1.5 million, respectively, as of December 31, 2019, for a net asset fair value of $986 thousand.
The following tables present the notional amounts and fair values of the commodity derivative positions outstanding as of June 30, 2020 and December 31, 2019:
($ and units in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ and units in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional Unit | Fair Value | Notional Unit | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Crude oil: | Crude oil: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Written options | — | Barrels | $ | — | $ | 70 | Purchased options | — | Barrels | $ | 70 | $ | — | |||||||||||||||||||||||||||||||||||||||||||
Collars | 1,966 | Barrels | 63 | 20,463 | Collars | 2,218 | Barrels | 21,847 | 1,607 | |||||||||||||||||||||||||||||||||||||||||||||||
Swaps | 4,189 | Barrels | 1,273 | 51,320 | Swaps | 4,261 | Barrels | 32,875 | 1,779 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | 6,155 | $ | 1,336 | $ | 71,853 | Total | 6,479 | $ | 54,792 | $ | 3,386 | |||||||||||||||||||||||||||||||||||||||||||||
Natural gas: | Natural gas: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Written options | 1,033 | MMBTUs | $ | — | $ | 172 | Purchased Options | 1,023 | MMBTUs | $ | 157 | $ | — | |||||||||||||||||||||||||||||||||||||||||||
Collars | 13,066 | MMBTUs | 881 | 955 | Collars | 13,186 | MMBTUs | 883 | 881 | |||||||||||||||||||||||||||||||||||||||||||||||
Swaps | 70,858 | MMBTUs | 29,550 | 31,988 | Swaps | 78,528 | MMBTUs | 29,848 | 29,063 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | 84,957 | $ | 30,431 | $ | 33,115 | Total | 92,737 | $ | 30,888 | $ | 29,944 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 31,767 | $ | 104,968 | Total | $ | 85,680 | $ | 33,330 | |||||||||||||||||||||||||||||||||||||||||||||||
($ and units in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ and units in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional Unit | Fair Value | Notional Unit | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Crude oil: | Crude oil: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Written options | 36 | Barrels | $ | — | $ | 30 | Purchased options | 36 | Barrels | $ | 29 | $ | — | |||||||||||||||||||||||||||||||||||||||||||
Collars | 3,174 | Barrels | 2,673 | 538 | Collars | 3,630 | Barrels | 677 | 2,815 | |||||||||||||||||||||||||||||||||||||||||||||||
Swaps | 4,601 | Barrels | 6,949 | 5,531 | Swaps | 4,721 | Barrels | 4,516 | 5,215 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | 7,811 | $ | 9,622 | $ | 6,099 | Total | 8,387 | $ | 5,222 | $ | 8,030 | |||||||||||||||||||||||||||||||||||||||||||||
Natural gas: | Natural gas: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Written options | 540 | MMBTUs | $ | — | $ | 22 | Purchased options | 530 | MMBTUs | $ | 21 | $ | — | |||||||||||||||||||||||||||||||||||||||||||
Collars | 14,277 | MMBTUs | 186 | 522 | Collars | 14,517 | MMBTUs | 471 | 150 | |||||||||||||||||||||||||||||||||||||||||||||||
Swaps | 48,956 | MMBTUs | 30,257 | 35,497 | Swaps | 48,779 | MMBTUs | 35,601 | 30,197 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | 63,773 | $ | 30,443 | $ | 36,041 | Total | 63,826 | $ | 36,093 | $ | 30,347 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 40,065 | $ | 42,140 | Total | $ | 41,315 | $ | 38,377 | |||||||||||||||||||||||||||||||||||||||||||||||
33
The following table presents the net (losses) gains recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Classification on Consolidated Statement of Income | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
Interest rate contracts | Interest rate contracts and other derivative income | $ | (5,361) | $ | (1,359) | $ | (12,372) | $ | (3,138) | |||||||||||||||||||||||
Foreign exchange contracts | Foreign exchange income | 6,201 | 3,495 | 9,062 | 9,821 | |||||||||||||||||||||||||||
Credit contracts | Interest rate contracts and other derivative income | (75) | (36) | (98) | 47 | |||||||||||||||||||||||||||
Equity contracts | Lending fees | 8,070 | 917 | 8,379 | 1,167 | |||||||||||||||||||||||||||
Commodity contracts | Interest rate contracts and other derivative income | (71) | (22) | (47) | (18) | |||||||||||||||||||||||||||
Net gains | $ | 8,764 | $ | 2,995 | $ | 4,924 | $ | 7,879 | ||||||||||||||||||||||||
Credit Risk-Related Contingent Features — Certain over-the-counter derivative contracts of the Company contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit risk-related event. These events, which are defined by the existing derivative contracts, primarily relate to a downgrade in the credit rating of East West Bank to below investment grade. As of June 30, 2020, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that are in a net liability position totaled $136.6 million, in which $136.5 million in cash and securities collateral were posted to cover these positions. As of December 31, 2019, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that are in a net liability position totaled $56.4 million, which includes $14.4 million in derivative assets and $70.8 million in derivative liabilities. The Company posted $56.4 million in cash and securities collateral to cover these positions as of December 31, 2019. In the event that the credit rating of East West Bank had been downgraded to below investment grade, additional minimal collateral would have been required to be posted as of June 30, 2020, and December 31, 2019.
Offsetting of Derivatives
The following tables present the gross derivative fair values, the balance sheet netting adjustments and the resulting net fair values recorded on the consolidated balance sheet, as well as the cash and noncash collateral associated with master netting arrangements. The gross amounts of derivative assets and liabilities are presented after the application of variation margin payments as settlements with centrally cleared organizations, where applicable. The collateral amounts in the following tables are limited to the outstanding balances of the related asset or liability, after the application of netting; therefore instances of overcollateralization are not shown:
($ in thousands) | As of June 30, 2020 | |||||||||||||||||||||||||||||||||||||
Gross Amounts Recognized (1) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||||||||||
Master Netting Arrangements | Cash Collateral Received (3) | Security Collateral Received (5) | ||||||||||||||||||||||||||||||||||||
Derivative assets | $ | 764,430 | $ | (110,569) | $ | (11,649) | $ | 642,212 | $ | (13,447) | $ | 628,765 | ||||||||||||||||||||||||||
Gross Amounts Recognized (2) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||||||||||
Master Netting Arrangements | Cash Collateral Pledged (4) | Security Collateral Pledged (5) | ||||||||||||||||||||||||||||||||||||
Derivative liabilities | $ | 560,169 | $ | (110,569) | $ | (94,435) | $ | 355,165 | $ | (279,528) | $ | 75,637 | ||||||||||||||||||||||||||
34
($ in thousands) | As of December 31, 2019 | |||||||||||||||||||||||||||||||||||||
Gross Amounts Recognized (1) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||||||||||
Master Netting Arrangements | Cash Collateral Received (3) | Security Collateral Received (5) | ||||||||||||||||||||||||||||||||||||
Derivative assets | $ | 330,316 | $ | (121,561) | $ | (3,758) | $ | 204,997 | $ | — | $ | 204,997 | ||||||||||||||||||||||||||
Gross Amounts Recognized (2) | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | ||||||||||||||||||||||||||||||||||
Master Netting Arrangements | Cash Collateral Pledged (4) | Security Collateral Pledged (5) | ||||||||||||||||||||||||||||||||||||
Derivative liabilities | $ | 256,528 | $ | (121,561) | $ | (38,238) | $ | 96,729 | $ | (79,619) | $ | 17,110 | ||||||||||||||||||||||||||
(1)Gross amounts recognized for derivative assets include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $754.7 million and $328.7 million, respectively, as of June 30, 2020 and December 31, 2019, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $9.7 million and $1.6 million, respectively, as of June 30, 2020 and December 31, 2019.
(2)Gross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $560.0 million and $256.5 million, respectively, as of June 30, 2020 and December 31, 2019, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $211 thousand and $20 thousand, respectively, as of June 30, 2020 and December 31, 2019.
(3)Gross cash collateral received under master netting arrangements or similar agreements were $18.1 million and $3.8 million, respectively, as of June 30, 2020 and December 31, 2019. Of the gross cash collateral received, $11.6 million and $3.8 million were used to offset against derivative assets, respectively, as of June 30, 2020 and December 31, 2019.
(4)Gross cash collateral pledged under master netting arrangements or similar agreements were $98.9 million and $43.0 million, respectively, as of June 30, 2020 and December 31, 2019. Of the gross cash collateral pledged, $94.4 million and $38.2 million were used to offset against derivative liabilities, respectively, as of June 30, 2020 and December 31, 2019.
(5)Represents the fair value of security collateral received and pledged limited to derivative assets and liabilities that are subject to enforceable master netting arrangements or similar agreements. GAAP does not permit the netting of noncash collateral on the consolidated balance sheet but requires disclosure of such amounts.
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to the resale and repurchase agreements. Refer to Note 4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements for additional information. Refer to Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for fair value measurement disclosures on derivatives.
35
Note 7 — Loans Receivable and Allowance for Credit Losses
The following table presents the composition of the Company’s loans held-for-investment as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||
Amortized Cost (1) | Non-PCI Loans (1) | PCI Loans | Total (1) | |||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | $ | 13,422,691 | $ | 12,149,121 | $ | 1,810 | $ | 12,150,931 | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | 10,902,114 | 10,165,247 | 113,201 | 10,278,448 | ||||||||||||||||||||||
Multifamily residential | 3,032,385 | 2,834,212 | 22,162 | 2,856,374 | ||||||||||||||||||||||
Construction and land | 567,716 | 628,459 | 40 | 628,499 | ||||||||||||||||||||||
Total CRE | 14,502,215 | 13,627,918 | 135,403 | 13,763,321 | ||||||||||||||||||||||
Total commercial | 27,924,906 | 25,777,039 | 137,213 | 25,914,252 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
Single-family residential | 7,660,094 | 7,028,979 | 79,611 | 7,108,590 | ||||||||||||||||||||||
HELOCs | 1,461,951 | 1,466,736 | 6,047 | 1,472,783 | ||||||||||||||||||||||
Total residential mortgage | 9,122,045 | 8,495,715 | 85,658 | 8,581,373 | ||||||||||||||||||||||
Other consumer | 182,461 | 282,914 | — | 282,914 | ||||||||||||||||||||||
Total consumer | 9,304,506 | 8,778,629 | 85,658 | 8,864,287 | ||||||||||||||||||||||
Total loans held-for-investment | $ | 37,229,412 | $ | 34,555,668 | $ | 222,871 | $ | 34,778,539 | ||||||||||||||||||
Allowance for loan losses | (632,071) | (358,287) | — | (358,287) | ||||||||||||||||||||||
Loans held-for-investment, net | $ | 36,597,341 | $ | 34,197,381 | $ | 222,871 | $ | 34,420,252 | ||||||||||||||||||
(1)Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(72.1) million and $(43.2) million as of June 30, 2020 and December 31, 2019, respectively.
Loans held-for-investments’ accrued interest receivable was $111.8 million and $121.8 million as of June 30, 2020 and December 31, 2019, respectively. Interest income related to nonaccrual loans of approximately $1.2 million and $1.6 million were reversed during the three and six months ended June 30, 2020, respectively. Interest income of approximately $10 thousand and $12 thousand were recognized on nonaccrual loans for the three and six months ended June 30, 2020, respectively. For the accounting policy on accrued interest receivable related to loans held-for-investment, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
Loans totaling $27.41 billion and $22.43 billion as of June 30, 2020 and December 31, 2019, respectively, were pledged to secure borrowings and provide additional borrowing capacity from the FRB and the FHLB.
Credit Quality Indicators
All loans are subject to the Company’s credit review and monitoring. For the commercial portfolio, loans are risk rated based on an analysis of the borrower’s current payment performance or delinquency, repayment sources, financial and liquidity factors, including industry and geographic considerations. For the majority of the consumer portfolio, payment performance or delinquency is the driving indicator for the risk ratings.
For the Company’s internal credit risk ratings, each individual loan is given a risk rating of 1 through 10. Loans risk rated 1 through 5 are assigned an internal risk rating of “Pass”, with loans risk rated 1 being fully secured by cash or U.S. government securities. Pass loans have sufficient sources of repayment to repay the loan in full, in accordance with all terms and conditions. Loans assigned a risk rating of 6 have potential weaknesses that warrant closer attention by management; these are assigned an internal risk rating of “Special Mention”. Loans assigned a risk rating of 7 or 8 have well-defined weaknesses that may jeopardize the full and timely repayment of the loan; these are assigned an internal risk rating of “Substandard”. Loans assigned a risk rating of 9 have insufficient sources of repayment and a high probability of loss; these are assigned an internal risk rating of “Doubtful”. Loans assigned a risk rating of 10 are uncollectable and of such little value that they are no longer considered bankable assets; these are assigned an internal risk rating of “Loss”. The Company reviews the internal risk ratings for its loan portfolio on a regular and ongoing basis and make adjustments to the risk ratings based on changes in the borrowers’ financial status and the collectability of the loans.
36
The following table summarizes the Company’s loans held-for-investment as of June 30, 2020, presented by loan portfolio segments, internal risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification.
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term Loans Amortized Cost Basis | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Term Loans | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | Prior | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
C&I: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 2,922,977 | $ | 2,010,048 | $ | 818,374 | $ | 328,471 | $ | 85,000 | $ | 380,727 | $ | 6,007,247 | $ | 9,830 | $ | 12,562,674 | ||||||||||||||||||||||||||||||||||||||
Special mention | 525 | 80,449 | 54,144 | 22,757 | 150 | 6,105 | 251,461 | — | 415,591 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 8,102 | 82,574 | 52,383 | 7,979 | 6,313 | 2,515 | 283,335 | — | 443,201 | |||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | 964 | 261 | — | — | 1,225 | |||||||||||||||||||||||||||||||||||||||||||||||
Total C&I | 2,931,604 | 2,173,071 | 924,901 | 359,207 | 92,427 | 389,608 | 6,542,043 | 9,830 | 13,422,691 | |||||||||||||||||||||||||||||||||||||||||||||||
CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 1,249,819 | 2,859,844 | 2,410,797 | 1,380,086 | 794,228 | 1,722,081 | 170,556 | 10,716 | 10,598,127 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | 13,072 | — | 49,860 | 22,468 | 1,611 | 45,309 | — | — | 132,320 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 8,303 | 51,944 | 7,711 | 43,914 | 17,213 | 42,582 | — | — | 171,667 | |||||||||||||||||||||||||||||||||||||||||||||||
Total CRE | 1,271,194 | 2,911,788 | 2,468,368 | 1,446,468 | 813,052 | 1,809,972 | 170,556 | 10,716 | 10,902,114 | |||||||||||||||||||||||||||||||||||||||||||||||
Multifamily residential: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 489,855 | 1,045,053 | 507,413 | 414,771 | 181,265 | 357,680 | 5,809 | — | 3,001,846 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | 20,433 | — | — | 262 | 1,228 | — | — | 21,923 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 744 | 2,150 | — | — | 5,722 | — | — | 8,616 | |||||||||||||||||||||||||||||||||||||||||||||||
Total multifamily residential | 489,855 | 1,066,230 | 509,563 | 414,771 | 181,527 | 364,630 | 5,809 | — | 3,032,385 | |||||||||||||||||||||||||||||||||||||||||||||||
Construction and land: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 46,378 | 283,670 | 185,570 | 5,982 | 21,636 | 1,170 | — | — | 544,406 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 3,618 | — | — | — | — | 19,692 | — | — | 23,310 | |||||||||||||||||||||||||||||||||||||||||||||||
Total construction and land | 49,996 | 283,670 | 185,570 | 5,982 | 21,636 | 20,862 | — | — | 567,716 | |||||||||||||||||||||||||||||||||||||||||||||||
Total CRE | 1,811,045 | 4,261,688 | 3,163,501 | 1,867,221 | 1,016,215 | 2,195,464 | 176,365 | 10,716 | 14,502,215 | |||||||||||||||||||||||||||||||||||||||||||||||
Total commercial | 4,742,649 | 6,434,759 | 4,088,402 | 2,226,428 | 1,108,642 | 2,585,072 | 6,718,408 | 20,546 | 27,924,906 | |||||||||||||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Single-family residential: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 1,150,786 | 1,987,025 | 1,694,022 | 1,162,434 | 593,501 | 1,047,965 | — | — | 7,635,733 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | 637 | 1,601 | 836 | 305 | 1,834 | — | — | 5,213 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 1,393 | 3,256 | 3,382 | 1,349 | 9,768 | — | — | 19,148 | |||||||||||||||||||||||||||||||||||||||||||||||
Total single-family residential mortgage | 1,150,786 | 1,989,055 | 1,698,879 | 1,166,652 | 595,155 | 1,059,567 | — | — | 7,660,094 | |||||||||||||||||||||||||||||||||||||||||||||||
HELOCs: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 185 | 836 | 4,417 | 7,949 | 7,511 | 18,097 | 1,239,458 | 168,658 | 1,447,111 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | 200 | — | — | 380 | 2 | 190 | 772 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 151 | 788 | 4,632 | 1,308 | 4,038 | — | 3,151 | 14,068 | |||||||||||||||||||||||||||||||||||||||||||||||
Total HELOCs | 185 | 987 | 5,405 | 12,581 | 8,819 | 22,515 | 1,239,460 | 171,999 | 1,461,951 | |||||||||||||||||||||||||||||||||||||||||||||||
Total residential mortgage | 1,150,971 | 1,990,042 | 1,704,284 | 1,179,233 | 603,974 | 1,082,082 | 1,239,460 | 171,999 | 9,122,045 | |||||||||||||||||||||||||||||||||||||||||||||||
Other consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 3,236 | 4,272 | 3,358 | 1,838 | — | 131,825 | 35,372 | — | 179,901 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | 51 | — | — | — | — | — | — | — | 51 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 2 | — | — | 2,491 | — | 3 | 13 | — | 2,509 | |||||||||||||||||||||||||||||||||||||||||||||||
Total other consumer | 3,289 | 4,272 | 3,358 | 4,329 | — | 131,828 | 35,385 | — | 182,461 | |||||||||||||||||||||||||||||||||||||||||||||||
Total consumer | 1,154,260 | 1,994,314 | 1,707,642 | 1,183,562 | 603,974 | 1,213,910 | 1,274,845 | 171,999 | 9,304,506 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 5,896,909 | $ | 8,429,073 | $ | 5,796,044 | $ | 3,409,990 | $ | 1,712,616 | $ | 3,798,982 | $ | 7,993,253 | $ | 192,545 | $ | 37,229,412 | ||||||||||||||||||||||||||||||||||||||
37
Revolving loans that are converted to term loans presented in the table above are excluded from the term loans by vintage year columns. HELOCS totaling $12.1 million and $43.4 million converted to term loans during the three and six months ended June 30, 2020, respectively. There were no conversions of C&I or CRE revolving loans to term loans during the three and six months ended June 30, 2020.
The following tables present the credit risk ratings for non-PCI and PCI loans by portfolio segments as of December 31, 2019:
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total Non-PCI Loans | ||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||
C&I | $ | 11,423,094 | $ | 406,543 | $ | 302,509 | $ | 16,975 | $ | 12,149,121 | ||||||||||||||||||||||
CRE: | ||||||||||||||||||||||||||||||||
CRE | 10,003,749 | 83,683 | 77,815 | — | 10,165,247 | |||||||||||||||||||||||||||
Multifamily residential | 2,806,475 | 20,406 | 7,331 | — | 2,834,212 | |||||||||||||||||||||||||||
Construction and land | 603,447 | — | 25,012 | — | 628,459 | |||||||||||||||||||||||||||
Total CRE | 13,413,671 | 104,089 | 110,158 | — | 13,627,918 | |||||||||||||||||||||||||||
Total commercial | 24,836,765 | 510,632 | 412,667 | 16,975 | 25,777,039 | |||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||
Single-family residential | 7,012,522 | 2,278 | 14,179 | — | 7,028,979 | |||||||||||||||||||||||||||
HELOCs | 1,453,207 | 2,787 | 10,742 | — | 1,466,736 | |||||||||||||||||||||||||||
Total residential mortgage | 8,465,729 | 5,065 | 24,921 | — | 8,495,715 | |||||||||||||||||||||||||||
Other consumer | 280,392 | 5 | 2,517 | — | 282,914 | |||||||||||||||||||||||||||
Total consumer | 8,746,121 | 5,070 | 27,438 | — | 8,778,629 | |||||||||||||||||||||||||||
Total | $ | 33,582,886 | $ | 515,702 | $ | 440,105 | $ | 16,975 | $ | 34,555,668 | ||||||||||||||||||||||
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | Total PCI Loans | ||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||
C&I | $ | 1,810 | $ | — | $ | — | $ | — | $ | 1,810 | ||||||||||||||||||||||
CRE: | ||||||||||||||||||||||||||||||||
CRE | 102,257 | — | 10,944 | — | 113,201 | |||||||||||||||||||||||||||
Multifamily residential | 22,162 | — | — | — | 22,162 | |||||||||||||||||||||||||||
Construction and land | 40 | — | — | — | 40 | |||||||||||||||||||||||||||
Total CRE | 124,459 | — | 10,944 | — | 135,403 | |||||||||||||||||||||||||||
Total commercial | 126,269 | — | 10,944 | — | 137,213 | |||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||
Single-family residential | 79,517 | — | 94 | — | 79,611 | |||||||||||||||||||||||||||
HELOCs | 5,849 | — | 198 | — | 6,047 | |||||||||||||||||||||||||||
Total residential mortgage | 85,366 | — | 292 | — | 85,658 | |||||||||||||||||||||||||||
Total consumer | 85,366 | — | 292 | — | 85,658 | |||||||||||||||||||||||||||
Total (1) | $ | 211,635 | $ | — | $ | 11,236 | $ | — | $ | 222,871 | ||||||||||||||||||||||
(1)Loans net of ASC 310-10 discount.
38
Nonaccrual and Past Due Loans
Loans that are 90 or more days past due are generally placed on nonaccrual status, unless the loan is well-collateralized or guaranteed by government agencies, and in the process of collection. Loans that are less than 90 days past due but have identified deficiencies, such as when the full collection of principal or interest becomes uncertain, are also placed on nonaccrual status. The following table presents the aging analysis of total loans held-for-investment as of June 30, 2020:
($ in thousands) | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
Current Accruing Loans | Accruing Loans 30-59 Days Past Due | Accruing Loans 60-89 Days Past Due | Total Accruing Past Due Loans | Nonaccrual Loans Less Than 90 Days Past Due | Nonaccrual Loans 90 or More Days Past Due | Total Nonaccrual Loans | Total Loans | |||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||
C&I | $ | 13,277,732 | $ | 46,774 | $ | 13,362 | $ | 60,136 | $ | 54,555 | $ | 30,268 | $ | 84,823 | $ | 13,422,691 | ||||||||||||||||||||||||||||||||||
CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||
CRE | 10,836,810 | 7,452 | 1,275 | 8,727 | 1,210 | 55,367 | 56,577 | 10,902,114 | ||||||||||||||||||||||||||||||||||||||||||
Multifamily residential | 3,025,648 | 3,655 | 2,308 | 5,963 | 774 | — | 774 | 3,032,385 | ||||||||||||||||||||||||||||||||||||||||||
Construction and land | 567,716 | — | — | — | — | — | — | 567,716 | ||||||||||||||||||||||||||||||||||||||||||
Total CRE | 14,430,174 | 11,107 | 3,583 | 14,690 | 1,984 | 55,367 | 57,351 | 14,502,215 | ||||||||||||||||||||||||||||||||||||||||||
Total commercial | 27,707,906 | 57,881 | 16,945 | 74,826 | 56,539 | 85,635 | 142,174 | 27,924,906 | ||||||||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Single-family residential | 7,619,333 | 15,739 | 4,952 | 20,691 | 1,713 | 18,357 | 20,070 | 7,660,094 | ||||||||||||||||||||||||||||||||||||||||||
HELOCs | 1,444,945 | 2,165 | 773 | 2,938 | 443 | 13,625 | 14,068 | 1,461,951 | ||||||||||||||||||||||||||||||||||||||||||
Total residential mortgage | 9,064,278 | 17,904 | 5,725 | 23,629 | 2,156 | 31,982 | 34,138 | 9,122,045 | ||||||||||||||||||||||||||||||||||||||||||
Other consumer | 165,258 | 14,636 | 59 | 14,695 | — | 2,508 | 2,508 | 182,461 | ||||||||||||||||||||||||||||||||||||||||||
Total consumer | 9,229,536 | 32,540 | 5,784 | 38,324 | 2,156 | 34,490 | 36,646 | 9,304,506 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 36,937,442 | $ | 90,421 | $ | 22,729 | $ | 113,150 | $ | 58,695 | $ | 120,125 | $ | 178,820 | $ | 37,229,412 | ||||||||||||||||||||||||||||||||||
The following table presents amortized cost of loans on nonaccrual status for which there was no related allowance for loan losses as of June 30, 2020:
($ in thousands) | June 30, 2020 | |||||||
Commercial: | ||||||||
C&I | $ | 66,109 | ||||||
CRE: | ||||||||
CRE | 54,879 | |||||||
Total CRE | 54,879 | |||||||
Total commercial | 120,988 | |||||||
Consumer: | ||||||||
Residential mortgage: | ||||||||
Single-family residential | 8,642 | |||||||
HELOCs | 8,898 | |||||||
Total residential mortgage | 17,540 | |||||||
Other consumer | 2,491 | |||||||
Total consumer | 20,031 | |||||||
Total nonaccrual loans with no related allowance for loan losses | $ | 141,019 | ||||||
39
The following table presents the aging analysis of non-PCI loans as of December 31, 2019:
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Current Accruing Loans | Accruing Loans 30-59 Days Past Due | Accruing Loans 60-89 Days Past Due | Total Accruing Past Due Loans | Nonaccrual Loans Less Than 90 Days Past Due | Nonaccrual Loans 90 or More Days Past Due | Total Nonaccrual Loans | Total Non-PCI Loans | |||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||
C&I | $ | 12,026,131 | $ | 31,121 | $ | 17,034 | $ | 48,155 | $ | 31,084 | $ | 43,751 | $ | 74,835 | $ | 12,149,121 | ||||||||||||||||||||||||||||||||||
CRE: | ||||||||||||||||||||||||||||||||||||||||||||||||||
CRE | 10,123,999 | 22,830 | 1,977 | 24,807 | 540 | 15,901 | 16,441 | 10,165,247 | ||||||||||||||||||||||||||||||||||||||||||
Multifamily residential | 2,832,664 | 198 | 531 | 729 | 534 | 285 | 819 | 2,834,212 | ||||||||||||||||||||||||||||||||||||||||||
Construction and land | 628,459 | — | — | — | — | — | — | 628,459 | ||||||||||||||||||||||||||||||||||||||||||
Total CRE | 13,585,122 | 23,028 | 2,508 | 25,536 | 1,074 | 16,186 | 17,260 | 13,627,918 | ||||||||||||||||||||||||||||||||||||||||||
Total commercial | 25,611,253 | 54,149 | 19,542 | 73,691 | 32,158 | 59,937 | 92,095 | 25,777,039 | ||||||||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Single-family residential | 6,993,597 | 15,443 | 5,074 | 20,517 | 1,964 | 12,901 | 14,865 | 7,028,979 | ||||||||||||||||||||||||||||||||||||||||||
HELOCs | 1,448,930 | 4,273 | 2,791 | 7,064 | 1,448 | 9,294 | 10,742 | 1,466,736 | ||||||||||||||||||||||||||||||||||||||||||
Total residential mortgage | 8,442,527 | 19,716 | 7,865 | 27,581 | 3,412 | 22,195 | 25,607 | 8,495,715 | ||||||||||||||||||||||||||||||||||||||||||
Other consumer | 280,386 | 6 | 5 | 11 | — | 2,517 | 2,517 | 282,914 | ||||||||||||||||||||||||||||||||||||||||||
Total consumer | 8,722,913 | 19,722 | 7,870 | 27,592 | 3,412 | 24,712 | 28,124 | 8,778,629 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 34,334,166 | $ | 73,871 | $ | 27,412 | $ | 101,283 | $ | 35,570 | $ | 84,649 | $ | 120,219 | $ | 34,555,668 | ||||||||||||||||||||||||||||||||||
PCI loans were excluded from the above aging analysis table as of December 31, 2019, as the Company elected to account for these loans on a pool level basis under ASC 310-30 at the time of acquisition. As of December 31, 2019, PCI loans on nonaccrual status totaled $297 thousand.
Foreclosed Assets
The Company had $23.4 million in foreclosed assets as of June 30, 2020 compared with $1.3 million as of December 31, 2019. The Company commences the foreclosure process on consumer mortgage loans when a borrower becomes 120 days delinquent in accordance with the Consumer Finance Protection Bureau guidelines. The carrying value of consumer real estate loans that were in the process of active or suspended foreclosure was $6.3 million and $7.2 million as of June 30, 2020 and December 31, 2019, respectively. The foreclosure proceedings for these consumer real estate loans were initiated prior to the CARES Act passed by Congress in March 2020. The Company has suspended certain mortgage foreclosure activities in connection with our actions to support our customers during the COVID-19 pandemic.
Troubled Debt Restructurings
TDRs are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered. The Company has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19 that are not considered TDRs. For additional details related to COVID-19 loan modifications, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies — Summary of Significant Accounting Policies — Troubled Debt Restructurings to the Consolidated Financial Statements.
40
The following tables present the additions to TDRs for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Loans Modified as TDRs During the Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | Financial
Impact (2) | Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | Financial Impact (2) | |||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||
C&I | 3 | $ | 35,260 | $ | 28,926 | $ | 872 | 6 | $ | 48,099 | $ | 48,054 | $ | 5,869 | ||||||||||||||||||||||||||||||||||||
Total commercial | 3 | 35,260 | 28,926 | 872 | 6 | 48,099 | 48,054 | 5,869 | ||||||||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Single-family residential | — | — | — | — | 1 | 220 | 219 | — | ||||||||||||||||||||||||||||||||||||||||||
Total residential mortgage | — | — | — | — | 1 | 220 | 219 | — | ||||||||||||||||||||||||||||||||||||||||||
Total consumer | — | — | — | — | 1 | 220 | 219 | — | ||||||||||||||||||||||||||||||||||||||||||
Total | 3 | $ | 35,260 | $ | 28,926 | $ | 872 | 7 | $ | 48,319 | $ | 48,273 | $ | 5,869 | ||||||||||||||||||||||||||||||||||||
($ in thousands) | Loans Modified as TDRs During the Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | Financial Impact (2) | Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | Financial Impact (2) | |||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||
C&I | 6 | $ | 51,708 | $ | 43,833 | $ | 1,000 | 9 | $ | 77,250 | $ | 77,486 | $ | 5,929 | ||||||||||||||||||||||||||||||||||||
Total commercial | 6 | 51,708 | 43,833 | 1,000 | 9 | 77,250 | 77,486 | 5,929 | ||||||||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Single-family residential | — | — | — | — | 1 | 220 | 219 | — | ||||||||||||||||||||||||||||||||||||||||||
Total residential mortgage | — | — | — | — | 1 | 220 | 219 | — | ||||||||||||||||||||||||||||||||||||||||||
Total consumer | — | — | — | — | 1 | 220 | 219 | — | ||||||||||||||||||||||||||||||||||||||||||
Total | 6 | $ | 51,708 | $ | 43,833 | $ | 1,000 | 10 | $ | 77,470 | $ | 77,705 | $ | 5,929 | ||||||||||||||||||||||||||||||||||||
(1)Includes subsequent payments after modification and reflects the balance as of June 30, 2020 and 2019.
(2)The financial impact includes charge-offs and specific reserves recorded since the modification date.
The following tables present the TDR post-modification outstanding balances for the three and six months ended June 30, 2020 and 2019 by modification type:
($ in thousands) | Modification Type During the Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||
Principal (1) | Interest Deferments | Total | Principal (1) | Other (2) | Total | |||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||
C&I | $ | 11,766 | $ | 17,160 | $ | 28,926 | $ | 9,909 | $ | 38,145 | $ | 48,054 | ||||||||||||||||||||||||||
Total commercial | 11,766 | 17,160 | 28,926 | 9,909 | 38,145 | 48,054 | ||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
Single-family residential | — | — | — | — | 219 | 219 | ||||||||||||||||||||||||||||||||
Total residential mortgage | — | — | — | — | 219 | 219 | ||||||||||||||||||||||||||||||||
Total consumer | — | — | — | — | 219 | 219 | ||||||||||||||||||||||||||||||||
Total | $ | 11,766 | $ | 17,160 | $ | 28,926 | $ | 9,909 | $ | 38,364 | $ | 48,273 | ||||||||||||||||||||||||||
41
($ in thousands) | Modification Type During the Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
Principal (1) | Principal and Interest (3) | Interest Deferments | Total | Principal (1) | Other (2) | Total | ||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||
C&I | $ | 15,898 | $ | 10,775 | $ | 17,160 | $ | 43,833 | $ | 39,341 | $ | 38,145 | $ | 77,486 | ||||||||||||||||||||||||||||||
Total commercial | 15,898 | 10,775 | 17,160 | 43,833 | 39,341 | 38,145 | 77,486 | |||||||||||||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||
Single-family residential | — | — | — | — | — | 219 | 219 | |||||||||||||||||||||||||||||||||||||
Total residential mortgage | — | — | — | — | — | 219 | 219 | |||||||||||||||||||||||||||||||||||||
Total consumer | — | — | — | — | — | 219 | 219 | |||||||||||||||||||||||||||||||||||||
Total | $ | 15,898 | $ | 10,775 | $ | 17,160 | $ | 43,833 | $ | 39,341 | $ | 38,364 | $ | 77,705 | ||||||||||||||||||||||||||||||
(1)Includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payments to interest payments only.
(2)Includes funding to secure additional collateral and provides liquidity to collateral-dependent C&I loans.
(3)Includes principal and interest deferments or reductions.
Subsequent to restructuring, if a TDR that becomes delinquent, generally beyond 90 days past due, it is considered to be in default. TDRs are individually evaluated for impairment. Subsequent defaults do not generally have a significant additional impact on the allowance for loan losses. The following tables present information on loans for which a subsequent payment default occurred during the three and six months ended June 30, 2020 and 2019, respectively, which had been modified as TDR within the previous 12 months of its default, and were still in default as of June 30, 2020 and 2019:
($ in thousands) | Loans Modified as TDRs that Subsequently Defaulted During the Three Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||
Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | 1 | $ | 17,160 | $ | 1 | $ | 1,484 | |||||||||||||||||||
Total commercial | 1 | 17,160 | 1 | 1,484 | ||||||||||||||||||||||
Total | 1 | $ | 17,160 | $ | 1 | $ | 1,484 | |||||||||||||||||||
($ in thousands) | Loans Modified as TDRs that Subsequently Defaulted During the Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||
Number of Loans | Recorded Investment | Number of Loans | Recorded Investment | |||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | 1 | $ | 17,160 | $ | 1 | $ | 1,484 | |||||||||||||||||||
Total commercial | 1 | 17,160 | 1 | 1,484 | ||||||||||||||||||||||
Total | 1 | $ | 17,160 | $ | 1 | $ | 1,484 | |||||||||||||||||||
The amount of additional funds committed to lend to borrowers whose terms have been modified as TDRs was $4.5 million and $2.2 million as of June 30, 2020 and December 31, 2019, respectively.
42
Impaired Loans
In connection with the adoption of ASU 2016-13 on January 1, 2020, the Company no longer provides information on impaired loans. The Company had retained impaired loans information for the period ended December 31, 2019. The following table presents information on non-PCI impaired loans as of December 31, 2019:
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Total Recorded Investment | Related Allowance | ||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||
C&I | $ | 174,656 | $ | 73,956 | $ | 40,086 | $ | 114,042 | $ | 2,881 | ||||||||||||||||||||||
CRE: | ||||||||||||||||||||||||||||||||
CRE | 27,601 | 20,098 | 1,520 | 21,618 | 97 | |||||||||||||||||||||||||||
Multifamily residential | 4,965 | 1,371 | 3,093 | 4,464 | 55 | |||||||||||||||||||||||||||
Construction and land | 19,696 | 19,691 | — | 19,691 | — | |||||||||||||||||||||||||||
Total CRE | 52,262 | 41,160 | 4,613 | 45,773 | 152 | |||||||||||||||||||||||||||
Total commercial | 226,918 | 115,116 | 44,699 | 159,815 | 3,033 | |||||||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||
Single-family residential | 23,626 | 8,507 | 13,704 | 22,211 | 35 | |||||||||||||||||||||||||||
HELOCs | 13,711 | 6,125 | 7,449 | 13,574 | 8 | |||||||||||||||||||||||||||
Total residential mortgage | 37,337 | 14,632 | 21,153 | 35,785 | 43 | |||||||||||||||||||||||||||
Other consumer | 2,517 | — | 2,517 | 2,517 | 2,517 | |||||||||||||||||||||||||||
Total consumer | 39,854 | 14,632 | 23,670 | 38,302 | 2,560 | |||||||||||||||||||||||||||
Total non-PCI impaired loans | $ | 266,772 | $ | 129,748 | $ | 68,369 | $ | 198,117 | $ | 5,593 | ||||||||||||||||||||||
The following table presents the average recorded investment and interest income recognized on non-PCI impaired loans for the three and six months ended June 30, 2019:
($ in thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||||||||||||||||||||
Average Recorded Investment | Recognized Interest Income (1) | Average Recorded Investment | Recognized Interest Income (1) | |||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | $ | 182,689 | $ | 1,081 | $ | 189,553 | $ | 1,816 | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | 29,241 | 135 | 31,456 | 249 | ||||||||||||||||||||||
Multifamily residential | 5,852 | 61 | 5,883 | 121 | ||||||||||||||||||||||
Total CRE | 35,093 | 196 | 37,339 | 370 | ||||||||||||||||||||||
Total commercial | 217,782 | 1,277 | 226,892 | 2,186 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
Single-family residential | 23,247 | 129 | 24,865 | 258 | ||||||||||||||||||||||
HELOCs | 13,564 | 38 | 15,321 | 56 | ||||||||||||||||||||||
Total residential mortgage | 36,811 | 167 | 40,186 | 314 | ||||||||||||||||||||||
Other consumer | 2,515 | — | 2,526 | — | ||||||||||||||||||||||
Total consumer | 39,326 | 167 | 42,712 | 314 | ||||||||||||||||||||||
Total non-PCI impaired loans | $ | 257,108 | $ | 1,444 | $ | 269,604 | $ | 2,500 | ||||||||||||||||||
(1)Includes interest income recognized on accruing non-PCI TDRs. Interest payments received on nonaccrual non-PCI loans are reflected as a reduction to principal, not as interest income.
43
Allowance for Loan Losses
On January 1, 2020, the Company adopted ASU 2016-13 that establishes a single allowance framework for all financial assets measured at amortized cost and certain off-balance sheet credit exposures. It requires the measurement of the allowance for loan losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Company’s relevant financial assets. Balance sheet information and results for reporting periods beginning with January 1, 2020 are presented under ASC 326, while prior period comparisons continue to be presented under legacy GAAP.
The process of the allowance for loan losses involves procedures to consider the unique risk characteristics of the portfolio segments. For each loan portfolio segment, the expected credit losses are estimated collectively for groups of loans with similar risk characteristics. For loans that do not share similar risk characteristics, the expected credit losses are estimated individually, which includes impaired loans.
Allowance for Collectively Evaluated Loans
Quantitative Component — The allowance for loan losses is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. The Company incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the loans. These macroeconomic scenarios include variables that are considered key drivers of increases and decreases in credit losses. The Company utilizes a probability-weighted multiple scenario forecast approach. These scenarios may consist of a base forecast representing management's view of the most likely outcome, combined with and downside and upside scenarios reflecting possible worsening or improving economic conditions, respectively. A weighted average of these macroeconomic scenarios over a reasonable and supportable forecast period is incorporated into the quantitative models. If the loan’s life extends beyond the reasonable and supportable forecast period, then historical experience is considered over the remaining life of the loans in the allowance for loan losses.
Qualitative Component — The Company also considers the following qualitative factors in the determination of collectively evaluated allowance if they have not already been captured by the quantitative model. Such qualitative factors may include, but not limited to:
•Loan growth trends.
•The volume and severity of past due financial assets and the volume and severity of adversely classified or rated financial assets.
•The Company’s lending policies and procedures, including changes in lending strategies, underwriting standards, collection, write-off and recovery practices, as well as knowledge of the borrower’s operations or the borrower’s standing in the community.
•The quality of the Company’s credit review system.
•The experience, ability and depth of the Company’s management, lending staff and relevant staff.
•The effect of other external factors such as the regulatory, legal and technological environments.
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates, including the actual and expected condition of various market segments.
The following table provides key credit risk characteristics and macroeconomic variables that the Company uses to estimate the expected credit losses by portfolio segments and methodologies:
Portfolio Segment | Risk Characteristics | Macroeconomic Variables | ||||||||||||
C&I | Internal risk rating, size and credit spread at origination and time to maturity | Unemployment rate and two and ten year treasury spread | ||||||||||||
CRE, Multifamily residential, and Construction and land | Delinquency status, maturity date, collateral value, property type and geographic location | Unemployment rate, GDP and U.S. Treasury rates | ||||||||||||
Single-family residential and HELOCs | FICO, delinquency status, maturity date, collateral value and geographic location | Unemployment rate, GDP and home price index | ||||||||||||
Other consumer | Historical loss experience | Immaterial (1) | ||||||||||||
(1)Macroeconomic variables were measured in the qualitative estimate.
44
In light of the recessionary economic conditions and forecasts during the quarter, management updated its macroeconomic forecast used in the credit loss estimation process to reflect the sudden sharp and continued recession caused by the COVID-19 global pandemic, U.S. monetary and fiscal responses to the outbreak, oil price declines and other assumptions. The macroeconomic forecast used in the credit loss estimation for the quarter ended June 30, 2020 was more adverse compared to the prior quarter, as expectations for the unemployment rate and real GDP growth deteriorated and a slower recovery was expected. For the three and six months ended June 30, 2020, there were no changes to the reasonable and supportable forecast period, and reversion to historical loss experience method.
Allowance for Loan Losses for the Commercial Loan Portfolio — The Company’s C&I lifetime loss rate model estimates credit losses by estimating a loss rate expected over the life of a loan. This loss rate is applied to the amortized cost basis, excluding accrued interest receivables, to determine expected credit losses. The lifetime loss rate model’s reasonable and supportable period spans eight quarters, thereafter immediately reverting to the historical average loss rate, expressed implicitly through the loan-level lifetime loss rate.
The Company’s CRE probability of default (“PD”)/loss given default (“LGD”) models estimate the probability that a loan will default and, in the event of default, estimate the expected credit losses upon default. The product of the PD/LGD determines the Company’s CECL. The PD/LGD model assumptions and variable inputs span the entire contractual life of the loans, adjusted for expected prepayments. After a reasonable and supportable period, the forecast of future economic conditions reverts to long-run historical economic trends. The loan-specific variables apply over the lifetime of a loan.
In order to estimate the life of a loan under both models, the contractual term of the loan is adjusted for estimated prepayments, which are based on historical prepayment experience.
Allowance for Loan Losses for the Consumer Loan Portfolio — For single-family residential and HELOC loans, PD/LGD model assumptions and variable inputs span the entire contractual life of the loans, adjusted for expected prepayments. After a reasonable and supportable period, the forecast of future economic conditions reverts to long-run historical economic trends. The loan-specific variables apply over the lifetime of a loan.
For other consumer loans, the Company uses a loss rate approach. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated prepayments, which are based on historical prepayment experience.
While the Company’s allowance methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. The Company may hold additional reserves that are designed to provide coverage for losses attributable to such risk. The allowance for loan losses as of June 30, 2020 also included qualitative adjustments for certain industry sectors, such as oil & gas, which are included as part of the C&I loan portfolio, that the Company views as higher risk, where quantitative models may not have captured the additional exposure related to such industry sectors.
Allowance for Individually Assessed Loans When a loan no longer shares similar risk characteristics with other loans, such as in the case for certain nonaccrual or TDR loans, the Company estimates the allowance for loan losses on an individual loan basis. The allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and their fair value. For loans evaluated individually, the Company uses one of three different asset valuation measurement methods: (1) the present value of expected future cash flows; (2) the fair value of collateral less costs to sell; and (3) the loan's observable market price. If an individually evaluated loan is determined to be collateral dependent, the Company applies the fair value of the collateral less costs to sell method. If an individually evaluated loan is determined to not be collateral dependent, the Company uses the present value of future cash flows or the observable market value of the loan.
Collateral-Dependent Loans — When a loan is collateral dependent, the allowance is measured on an individual loan basis and is limited to the difference between the recorded value and fair value of the collateral less cost of disposal or sale. As of June 30, 2020, collateral-dependent commercial and consumer loans totaled $88.1 million and $23.8 million, respectively. The Company's commercial collateral-dependent loans were secured by real estate or other collateral. The Company's consumer collateral-dependent loans were all residential mortgage loans, secured by the underlying real estate. As of June 30, 2020, the collateral value of the properties securing each of these collateral dependent loans, net of selling costs, exceeded the recorded value of the individual loans, except for two loans, one C&I loan and one HELOC loan, against which there was a recorded allowance of $756 thousand and $76 thousand, respectively. For the three and six months ended June 30, 2020, there was no significant deterioration or changes in the collateral securing these loans.
45
The following tables present summaries of activities in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
CRE | Multi-Family Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, beginning of period | $ | 362,629 | $ | 132,819 | $ | 16,530 | $ | 11,018 | $ | 26,822 | $ | 3,881 | $ | 3,304 | $ | 557,003 | ||||||||||||||||||||||||||||||||||
Provision for (reversal of) credit losses on loans | (a) | 37,862 | 43,315 | 7,908 | 7,526 | (1,667) | 205 | (849) | 94,300 | |||||||||||||||||||||||||||||||||||||||||
Gross charge-offs | (20,378) | (320) | — | — | — | (221) | (30) | (20,949) | ||||||||||||||||||||||||||||||||||||||||||
Gross recoveries | 602 | 226 | 620 | 7 | 159 | 2 | 93 | 1,709 | ||||||||||||||||||||||||||||||||||||||||||
Total net (charge-offs) recoveries | (19,776) | (94) | 620 | 7 | 159 | (219) | 63 | (19,240) | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 8 | — | — | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, end of period | $ | 380,723 | $ | 176,040 | $ | 25,058 | $ | 18,551 | $ | 25,314 | $ | 3,867 | $ | 2,518 | $ | 632,071 | ||||||||||||||||||||||||||||||||||
($ in thousands) | Three Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
CRE | Multi-Family Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, beginning of period | $ | 189,757 | $ | 39,224 | $ | 19,169 | $ | 22,349 | $ | 35,759 | $ | 7,401 | $ | 4,235 | $ | 317,894 | ||||||||||||||||||||||||||||||||||
Provision for (reversal of) credit losses on loans | (a) | 26,140 | (1,250) | 58 | 173 | (3,068) | (1,224) | (98) | 20,731 | |||||||||||||||||||||||||||||||||||||||||
Gross charge-offs | (11,745) | — | — | — | — | — | (14) | (11,759) | ||||||||||||||||||||||||||||||||||||||||||
Gross recoveries | 1,713 | 1,837 | 53 | 439 | 72 | — | 7 | 4,121 | ||||||||||||||||||||||||||||||||||||||||||
Total net (charge-offs) recoveries | (10,032) | 1,837 | 53 | 439 | 72 | — | (7) | (7,638) | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (362) | — | — | — | — | — | — | (362) | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, end of period | $ | 205,503 | $ | 39,811 | $ | 19,280 | $ | 22,961 | $ | 32,763 | $ | 6,177 | $ | 4,130 | $ | 330,625 | ||||||||||||||||||||||||||||||||||
($ in thousands) | Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
CRE | Multi-Family Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, beginning of period | $ | 238,376 | $ | 40,509 | $ | 22,826 | $ | 19,404 | $ | 28,527 | $ | 5,265 | $ | 3,380 | $ | 358,287 | ||||||||||||||||||||||||||||||||||
74,237 | 72,169 | (8,112) | (9,889) | (3,670) | (1,798) | 2,221 | 125,158 | |||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, January 1, 2020 | 312,613 | 112,678 | 14,714 | 9,515 | 24,857 | 3,467 | 5,601 | 483,445 | ||||||||||||||||||||||||||||||||||||||||||
Provision for (reversal of) credit losses on loans | (a) | 98,480 | 54,750 | 9,189 | 9,008 | 33 | 617 | (3,121) | 168,956 | |||||||||||||||||||||||||||||||||||||||||
Gross charge-offs | (32,355) | (1,274) | — | — | — | (221) | (56) | (33,906) | ||||||||||||||||||||||||||||||||||||||||||
Gross recoveries | 2,177 | 9,886 | 1,155 | 28 | 424 | 4 | 94 | 13,768 | ||||||||||||||||||||||||||||||||||||||||||
Total net (charge-offs) recoveries | (30,178) | 8,612 | 1,155 | 28 | 424 | (217) | 38 | (20,138) | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (192) | — | — | — | — | — | — | (192) | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, end of period | $ | 380,723 | $ | 176,040 | $ | 25,058 | $ | 18,551 | $ | 25,314 | $ | 3,867 | $ | 2,518 | $ | 632,071 | ||||||||||||||||||||||||||||||||||
46
($ in thousands) | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
CRE | Multi-Family Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, beginning of period | $ | 189,117 | $ | 40,666 | $ | 19,885 | $ | 20,290 | $ | 31,340 | $ | 5,774 | $ | 4,250 | $ | 311,322 | ||||||||||||||||||||||||||||||||||
Provision for (reversal of) credit losses on loans | (a) | 41,404 | (2,914) | (939) | 2,169 | 1,349 | 401 | (99) | 41,371 | |||||||||||||||||||||||||||||||||||||||||
Gross charge-offs | (28,989) | — | — | — | — | — | (28) | (29,017) | ||||||||||||||||||||||||||||||||||||||||||
Gross recoveries | 3,964 | 2,059 | 334 | 502 | 74 | 2 | 7 | 6,942 | ||||||||||||||||||||||||||||||||||||||||||
Total net (charge-offs) recoveries | (25,025) | 2,059 | 334 | 502 | 74 | 2 | (21) | (22,075) | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 7 | — | — | — | — | — | — | 7 | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, end of period | $ | 205,503 | $ | 39,811 | $ | 19,280 | $ | 22,961 | $ | 32,763 | $ | 6,177 | $ | 4,130 | $ | 330,625 | ||||||||||||||||||||||||||||||||||
The following table presents a summary of activities in the allowance for unfunded credit commitments for the three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
($ in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
Unfunded credit facilities | ||||||||||||||||||||||||||
Allowance for unfunded credit commitments, beginning of period | $ | 20,829 | $ | 14,505 | $ | 11,158 | $ | 12,566 | ||||||||||||||||||
— | — | 10,457 | — | |||||||||||||||||||||||
Provision for (reversal of) credit losses on unfunded credit commitments | (b) | 8,143 | (1,486) | 7,357 | 453 | |||||||||||||||||||||
Allowance for unfunded credit commitments, end of period | $ | 28,972 | $ | 13,019 | $ | 28,972 | $ | 13,019 | ||||||||||||||||||
Provision for credit losses | (a) + (b) | $ | 102,443 | $ | 19,245 | $ | 176,313 | $ | 41,824 | |||||||||||||||||
The allowance for loan losses as of June 30, 2020 was $632.1 million, an increase of $273.8 million compared with $358.3 million as of December 31, 2019. The overall increase in allowance for loan losses was primarily driven by deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, which resulted in a provision for credit losses of $102.4 million and $176.3 million for the three and six months ended June 30, 2020, respectively, and the adoption of ASU 2016-13, which increased the allowance for loan losses by $125.2 million on January 1, 2020.
The allowance for unfunded credit commitments is maintained at a level that management believes to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities. See Note 10 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q for additional information related to unfunded credit commitments.
47
The following table presents the Company’s allowance for loan losses and recorded investments by portfolio segments and impairment methodology as of December 31, 2019. This is no longer relevant after December 31, 2019, given the adoption of ASU 2016-13 on January 1, 2020, which has a single impairment methodology:
($ in thousands) | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | Other Consumer | |||||||||||||||||||||||||||||||||||||||||||||||
CRE | Multifamily Residential | Construction and Land | Single- Family Residential | HELOCs | ||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | ||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,881 | $ | 97 | $ | 55 | $ | — | $ | 35 | $ | 8 | $ | 2,517 | $ | 5,593 | ||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 235,495 | 40,412 | 22,771 | 19,404 | 28,492 | 5,257 | 863 | 352,694 | ||||||||||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 238,376 | $ | 40,509 | $ | 22,826 | $ | 19,404 | $ | 28,527 | $ | 5,265 | $ | 3,380 | $ | 358,287 | ||||||||||||||||||||||||||||||||||
Recorded investment in loans | ||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 114,042 | $ | 21,618 | $ | 4,464 | $ | 19,691 | $ | 22,211 | $ | 13,574 | $ | 2,517 | $ | 198,117 | ||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 12,035,079 | 10,143,629 | 2,829,748 | 608,768 | 7,006,768 | 1,453,162 | 280,397 | 34,357,551 | ||||||||||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality (1) | 1,810 | 113,201 | 22,162 | 40 | 79,611 | 6,047 | — | 222,871 | ||||||||||||||||||||||||||||||||||||||||||
Total (1) | $ | 12,150,931 | $ | 10,278,448 | $ | 2,856,374 | $ | 628,499 | $ | 7,108,590 | $ | 1,472,783 | $ | 282,914 | $ | 34,778,539 | ||||||||||||||||||||||||||||||||||
(1)Loans net of ASC 310-10 discount.
Purchased Credit-Deteriorated Loans
On January 1, 2020, the amortized cost basis of the PCD loans was adjusted to reflect the $1.2 million of allowance for loan losses. For the three and six months ended June 30, 2020, the Company did not acquire any PCD loans. For information on PCD loans, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
The following table presents the changes in accretable yield on PCI loans for the three and six months ended June 30, 2019:
($ in thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||||||||
Accretable yield for PCI loans, beginning of period | $ | 68,861 | $ | 74,870 | ||||||||||
Accretion | (5,806) | (12,007) | ||||||||||||
Changes in expected cash flows | 998 | 1,190 | ||||||||||||
Accretable yield for PCI loans, end of period | $ | 64,053 | $ | 64,053 | ||||||||||
Loans Held-for-Sale
As of June 30, 2020 and December 31, 2019, loans held-for-sale of $3.9 million and $434 thousand, respectively, consisted of single-family residential loans. Refer to Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Loans Held-for-Sale to the Consolidated Financial Statements of the Company’s 2019 Form 10-K for additional details related to the Company’s loans held-for-sale.
48
Loan Purchases, Transfers and Sales
The Company purchases and sells loans in the secondary market in the ordinary course of business. From time to time, purchased loans may be transferred from held-for-investment to held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate. The following tables provide information about the carrying value of loans purchased for the held-for-investment portfolio, loans sold and loans transferred from held-for-investment to held-for-sale at lower of cost or fair value during the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | ||||||||||||||||||||||||||||||||||||
CRE | Multifamily Residential | Construction and Land | Single-Family Residential | |||||||||||||||||||||||||||||||||||
Loans transferred from held-for-investment to held-for-sale (1) | $ | 33,060 | $ | — | $ | — | $ | — | $ | — | $ | 33,060 | ||||||||||||||||||||||||||
Sales (2)(3)(4) | $ | 33,060 | $ | — | $ | — | $ | — | $ | 13,708 | $ | 46,768 | ||||||||||||||||||||||||||
Purchases (5) | $ | 12,503 | $ | — | $ | 7 | $ | — | $ | — | $ | 12,510 | ||||||||||||||||||||||||||
($ in thousands) | Three Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | ||||||||||||||||||||||||||||||||||||
CRE | Multifamily Residential | Construction and Land | Single-Family Residential | |||||||||||||||||||||||||||||||||||
Loans transferred from held-for-investment to held-for-sale (1) | $ | 79,593 | $ | — | $ | — | $ | 1,573 | $ | — | $ | 81,166 | ||||||||||||||||||||||||||
Sales (2)(3)(4) | $ | 76,031 | $ | — | $ | — | $ | 1,573 | $ | 1,172 | $ | 78,776 | ||||||||||||||||||||||||||
Purchases (5) | $ | 159,100 | $ | — | $ | 1,734 | $ | — | $ | 17,637 | $ | 178,471 | ||||||||||||||||||||||||||
($ in thousands) | Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | ||||||||||||||||||||||||||||||||||||
CRE | Multifamily Residential | Construction and Land | Single-Family Residential | |||||||||||||||||||||||||||||||||||
Loans transferred from held-for-investment to held-for-sale (1) | $ | 136,033 | $ | 7,250 | $ | — | $ | — | $ | — | $ | 143,283 | ||||||||||||||||||||||||||
Sales (2)(3)(4) | $ | 136,033 | $ | 7,250 | $ | — | $ | — | $ | 18,350 | $ | 161,633 | ||||||||||||||||||||||||||
Purchases (5) | $ | 143,086 | $ | — | $ | 1,520 | $ | — | $ | 1,084 | $ | 145,690 | ||||||||||||||||||||||||||
49
($ in thousands) | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||
Commercial | Consumer | Total | ||||||||||||||||||||||||||||||||||||
C&I | CRE | Residential Mortgage | ||||||||||||||||||||||||||||||||||||
CRE | Multifamily Residential | Construction and Land | Single-Family Residential | |||||||||||||||||||||||||||||||||||
Loans transferred from held-for-investment to held-for-sale (1) | $ | 155,166 | $ | 16,655 | $ | — | $ | 1,573 | $ | — | $ | 173,394 | ||||||||||||||||||||||||||
Sales (2)(3)(4) | $ | 151,677 | $ | 16,655 | $ | — | $ | 1,573 | $ | 3,614 | $ | 173,519 | ||||||||||||||||||||||||||
Purchases (5) | $ | 266,294 | $ | — | $ | 5,952 | $ | — | $ | 54,039 | $ | 326,285 | ||||||||||||||||||||||||||
(1)The Company recorded no write-downs to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for both the three and six months ended June 30, 2020 and $317 thousand and $390 thousand for the same periods in 2019, respectively.
(2)Includes originated loans sold of $46.8 million and $161.6 million for the three and six months ended June 30, 2020, respectively, and $55.7 million and $132.2 million for the same periods in 2019, respectively. Originated loans sold were primarily C&I and single-family residential loans during the three and six months ended June 30, 2020. In comparison, originated loans sold were primarily C&I loans for the same periods in 2019.
(3)Includes none of the purchased loans sold in the secondary market for both the three and six months ended June 30, 2020 and $23.1 million and $41.3 million for the same periods in 2019, respectively.
(4)Net gains on sales of loans were $132 thousand and $1.1 million for the three and six months ended June 30, 2020, respectively, and $15 thousand and $930 thousand for the same periods in 2019, respectively.
(5)C&I loan purchases for each of the three and six months ended June 30, 2020 and 2019 were comprised primarily of syndicated C&I term loans.
Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities
The Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in low- and moderate-income neighborhoods. The Company invests in certain affordable housing projects in the form of ownership interests in limited partnerships or limited liability companies that qualify for CRA and tax credits. These entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. To fully utilize the available tax credits, each of these entities must meet the regulatory affordable housing requirements for a minimum 15-year compliance period. In addition to affordable housing projects, the Company also invests in New Market Tax Credit projects that qualify for CRA credits, as well as eligible projects that qualify for renewable energy and historic tax credits. Investments in renewable energy tax credits help promote the development of renewable energy sources, and the investments in historic tax credits promote the rehabilitation of historic buildings and economic revitalization of the surrounding areas.
Investments in Qualified Affordable Housing Partnerships, Net
The Company records its investments in qualified affordable housing partnerships, net, using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in Income tax expense on the Consolidated Statement of Income.
The following table presents the Company’s investments in qualified affordable housing partnerships, net, and related unfunded commitments as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||
Investments in qualified affordable housing partnerships, net | $ | 201,888 | $ | 207,037 | ||||||||||
Accrued expenses and other liabilities — Unfunded commitments | $ | 72,655 | $ | 80,294 | ||||||||||
The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Tax credits and other tax benefits recognized | $ | 11,772 | $ | 11,506 | $ | 22,803 | $ | 23,332 | ||||||||||||||||||
Amortization expense included in income tax expense | $ | 9,148 | $ | 9,657 | $ | 17,532 | $ | 18,554 | ||||||||||||||||||
50
Investments in Tax Credit and Other Investments, Net
Depending on the ownership percentage and the influence the Company has on the investments in tax credit and other investments, net, the Company applies the equity or cost method of accounting, or the measurement alternative as elected under ASU 2016-01 for equity investments without readily determinable fair value.
The following table presents the Company’s investments in tax credit and other investments, net, and related unfunded commitments as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||
Investments in tax credit and other investments, net | $ | 251,318 | $ | 254,140 | ||||||||||
Accrued expenses and other liabilities — Unfunded commitments | $ | 106,969 | $ | 113,515 | ||||||||||
Amortization of tax credit and other investments was $24.8 million and $42.1 million, respectively, for the three and six months ended June 30, 2020, as compared with $16.7 million and $41.6 million, respectively, for the same periods in 2019.
Included in Investments in tax credit and other investments, net, on the Consolidated Balance Sheet were equity securities with readily determinable fair values of $31.1 million and $31.7 million, as of June 30, 2020 and December 31, 2019, respectively. These equity securities were CRA investments measured at fair value with changes in fair value recorded in net income. The Company recorded unrealized gains on these equity securities of $720 thousand and $758 thousand during the three and six months ended June 30, 2020, respectively, and unrealized gains of $375 thousand and $767 thousand, respectively, for the same periods in 2019.
The Company held equity securities without readily determinable fair values at carrying value totaling $18.8 million and $19.1 million as of June 30, 2020 and December 31, 2019, respectively, which were measured using the measurement alternative at cost less impairment and adjusted for observable price changes. For the three and six months ended June 30, 2020 and 2019, there were no adjustments to these securities.
The Company recorded an impairment recovery of $109 thousand related to one historic tax credit investment and impairment recoveries of $259 thousand related to two historic tax credit investments for the three and six months ended June 30, 2020, respectively. During the second quarter of 2020, the Company also recorded $733 thousand OTTI charge related to one historic tax credit and one CRA investment. In comparison, the Company recorded an OTTI charge of $2.9 million and $9.9 million, respectively, and no impairment recovery for the three and six months ended June 30, 2019. OTTI charges and impairment recoveries are recorded within Amortization of tax credit and other investments on the Consolidated Statement of Income for the three and six months ended June 30, 2020 and 2019.
Variable Interest Entities
The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation projects, wind and solar projects, of which the majority of such investments are Variable interest entities (“VIEs”). As a limited partner in these partnerships, these investments are designed to generate a return primarily through the realization of federal tax credits and tax benefits. An unrelated third party is typically the general partner or managing member who has control over the significant activities of such investments. While the Company’s interest in some of the investments may exceed 50% of the outstanding equity interests, the Company does not consolidate these structures due to the general partner or managing member’s ability to manage the entity, which is indicative of power over them. The Company’s maximum exposure to loss in connection with these partnerships consist of the unamortized investment balance and any tax credits claimed that may become subject to recapture.
Special purpose entities formed in connection with securitization transactions are generally considered VIEs. The Company is the servicer of the multifamily residential loans it has securitized in 2016. The Company does not consolidate the multifamily securitization entity because it does not have power and does not have a variable interest that could potentially be significant to the VIE. A CLO is a VIE that purchases a pool of assets consisting primarily of non-investment grade corporate loans and issues multiple tranches of notes to investors to fund the asset purchases and pay upfront expenses associated with forming the CLO. The Company serves as the collateral manager of a CLO that closed in the fourth quarter of 2019 and retained substantially all of the investment grade rated securities issued by the CLO. In accordance with GAAP, the Company does not consolidate the CLO as it does not hold interests that could potentially be significant to the CLO. The Company’s maximum exposure to loss from the CLO is equal to the carrying amount of the retained securities of $274.0 million and $284.7 million as of June 30, 2020 and December 31, 2019, respectively.
51
Note 9 — Goodwill and Other Intangible Assets
Goodwill
Total goodwill was $465.7 million as of both June 30, 2020 and December 31, 2019. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in an acquisition. The Company assesses goodwill for impairment at the reporting unit level, equivalent to the same level as the Company’s business segments. This assessment is performed on an annual basis as of December 31 each year, or more frequently if events or circumstances, such as adverse changes in the economic or business environment, indicate there may be impairment. The Company organizes its operation into three reporting segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. For information on how the reporting units are identified and the components are aggregated, see Note 15 — Business Segments to the Consolidated Financial Statements in this Form 10-Q.
There was no change in the carrying amount of goodwill during the three and six months ended June 30, 2020. The following table presents changes in the carrying amount of goodwill by reporting unit during the six months ended June 30, 2019:
($ in thousands) | Consumer and Business Banking | Commercial Banking | Total | |||||||||||||||||
Beginning balance, January 1, 2019 | $ | 353,321 | $ | 112,226 | $ | 465,547 | ||||||||||||||
Acquisition of East West Capital Markets, LLC | — | 150 | 150 | |||||||||||||||||
Ending balance, June 30, 2019 | $ | 353,321 | $ | 112,376 | $ | 465,697 | ||||||||||||||
Impairment Analysis
The Company performed its annual impairment analysis as of December 31, 2019, and concluded that there was no goodwill impairment as the fair value of all reporting units exceeded the carrying amount of their respective reporting unit. Given the economic and market deterioration as a result of the COVID-19 outbreak and public health response to contain it, the Company further evaluated goodwill by assessing if the fair value of all reporting units exceeded the carrying amount of the respective reporting units by performing a goodwill impairment analysis as of March 31, 2020 and concluded that no impairment was warranted. While there is uncertainty in the duration of the COVID-19 impact and the reopening of the economy, the Company did not note further stressed macroeconomic conditions, adverse market conditions, deterioration of the Company’s financial performance, any other significant events, that negatively impacted the fair value of its reporting units during the three months ended June 30, 2020. Based on this, the Company concluded that there was no goodwill impairment as of June 30, 2020. Refer to Note 9 — Goodwill and Other Intangible Assets to the Consolidated Financial Statements of the Company’s 2019 Form 10-K for additional details related to the Company’s annual goodwill impairment analysis.
Core Deposit Intangibles
Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions and are included in Other assets on the Consolidated Balance Sheet. These intangibles are tested for impairment on an annual basis, or more frequently as events occur or current circumstances and conditions warrant. There were no impairment write-downs on the core deposit intangibles for each of the three and six months ended June 30, 2020 and 2019.
The following table presents the gross carrying amount of core deposit intangible assets and accumulated amortization as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||
Gross balance (1) | $ | 86,099 | $ | 86,099 | ||||||||||
Accumulated amortization (1) | (77,972) | (76,088) | ||||||||||||
Net carrying balance (1) | $ | 8,127 | $ | 10,011 | ||||||||||
(1)Excludes fully amortized core deposit intangible assets.
52
Amortization Expense
The Company amortizes the core deposit intangibles based on the projected useful lives of the related deposits. The amortization expense related to the core deposit intangible assets was $931 thousand and $1.1 million for the three months ended June 30, 2020 and 2019, respectively, and $1.9 million and $2.3 million for the six months ended June 30, 2020 and 2019, respectively.
The following table presents the estimated future amortization expense of core deposit intangibles as of June 30, 2020:
($ in thousands) | Amount | |||||||
Remainder of 2020 | $ | 1,750 | ||||||
2021 | 2,749 | |||||||
2022 | 1,865 | |||||||
2023 | 1,199 | |||||||
2024 | 553 | |||||||
Thereafter | 11 | |||||||
Total | $ | 8,127 | ||||||
Note 10 — Commitments and Contingencies
Commitments to Extend Credit — In the normal course of business, the Company provides customers loan commitments on predetermined terms. These outstanding commitments to extend credit are not reflected in the accompanying Consolidated Financial Statements. While the Company does not anticipate losses as a result of these transactions, commitments to extend credit are included in determining the appropriate level of the allowance for unfunded credit commitments, and outstanding commercial and SBLCs.
The following table presents the Company’s credit-related commitments as of June 30, 2020 and December 31, 2019:
($ in thousands) | June 30, 2020 | December 31, 2019 | ||||||||||||
Loan commitments | $ | 5,131,120 | $ | 5,330,211 | ||||||||||
Commercial letters of credit and SBLCs | $ | 2,005,402 | $ | 1,860,414 | ||||||||||
Loan commitments are agreements to lend to customers provided that there are no violations of any conditions established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements.
Commercial letters of credit are issued to facilitate domestic and foreign trade transactions, while SBLCs are generally contingent upon the failure of the customers to perform according to the terms of the underlying contract with the third party. As a result, the total contractual amounts do not necessarily represent future funding requirements. The Company’s historical experience is that SBLCs typically expire without being funded. Additionally, in many cases, the Company holds collateral in various forms against these SBLCs. As part of its risk management activities, the Company monitors the creditworthiness of customers in conjunction with its SBLC exposure. Customers are obligated to reimburse the Company for any payment made on the customers’ behalf. If the customers fail to pay, the Company would, as applicable, liquidate the collateral and/or offset accounts. As of June 30, 2020, total letters of credit of $2.01 billion consisted of SBLCs of $1.93 billion and commercial letters of credit of $72.3 million.
The Company applies the same credit underwriting criteria to extend loans, commitments and conditional obligations to customers. Each customer’s creditworthiness is evaluated on a case-by-case basis. Collateral and financial guarantees may be obtained based on management’s assessment of a customer’s credit. Collateral may include cash, accounts receivable, inventory, property, plant and equipment, and income-producing commercial property.
Estimated exposure to loss from these commitments is included in the allowance for unfunded credit commitments and amounted to $28.9 million as of June 30, 2020 and $11.1 million as of December 31, 2019.
53
Guarantees — The Company sells or securitizes single-family and multifamily residential loans with recourse in the ordinary course of business. The recourse component of the loans sold or securitized with recourse is considered a guarantee. As the guarantor, the Company is obligated to repurchase up to the recourse component of the loans if the loans default. The following table presents the types of guarantees the Company had outstanding as of June 30, 2020 and December 31, 2019:
($ in thousands) | Maximum Potential Future Payments | Carrying Value | ||||||||||||||||||||||||
June 30, 2020 | December 31, 2019 | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
Single-family residential loans sold or securitized with recourse | $ | 11,501 | $ | 12,578 | $ | 11,501 | $ | 12,578 | ||||||||||||||||||
Multifamily residential loans sold or securitized with recourse | 15,682 | 15,892 | 30,152 | 40,708 | ||||||||||||||||||||||
Total | $ | 27,183 | $ | 28,470 | $ | 41,653 | $ | 53,286 | ||||||||||||||||||
The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit commitments and totaled $85 thousand and $76 thousand as of June 30, 2020 and December 31, 2019, respectively. The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. The Company continues to experience minimal losses from the single-family and multifamily residential loan portfolios sold or securitized with recourse.
Litigation — The Company is a party to various legal actions arising in the course of its business. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more than the amounts accrued.
Other Commitments — The Company has commitments to invest in qualified affordable housing partnerships, tax credit and other investments as discussed in Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities to the Consolidated Financial Statements in this Form 10-Q. As of June 30, 2020 and December 31, 2019, these commitments were $179.6 million and $193.8 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.
Note 11 — Revenue from Contracts with Customers
The following tables present revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, and other noninterest income, segregated by operating segments for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, 2020 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||||
Revenue from contracts with customers: | ||||||||||||||||||||||||||
Deposit account fees: | ||||||||||||||||||||||||||
Deposit service charges and related fee income | $ | 6,166 | $ | 3,904 | $ | 41 | $ | 10,111 | ||||||||||||||||||
Card income | 639 | 122 | — | 761 | ||||||||||||||||||||||
Wealth management fees | 2,691 | 400 | — | 3,091 | ||||||||||||||||||||||
Total revenue from contracts with customers | $ | 9,496 | $ | 4,426 | $ | 41 | $ | 13,963 | ||||||||||||||||||
Other sources of noninterest income (1) | 4,447 | 29,461 | 10,766 | 44,674 | ||||||||||||||||||||||
Total noninterest income | $ | 13,943 | $ | 33,887 | $ | 10,807 | $ | 58,637 | ||||||||||||||||||
54
($ in thousands) | Three Months Ended June 30, 2019 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||||
Revenue from contracts with customers: | ||||||||||||||||||||||||||
Deposit account fees: | ||||||||||||||||||||||||||
Deposit service charges and related fee income | $ | 5,397 | $ | 3,299 | $ | 10 | $ | 8,706 | ||||||||||||||||||
Card income | 747 | 154 | — | 901 | ||||||||||||||||||||||
Wealth management fees | 3,565 | 235 | — | 3,800 | ||||||||||||||||||||||
Total revenue from contracts with customers | $ | 9,709 | $ | 3,688 | $ | 10 | $ | 13,407 | ||||||||||||||||||
Other sources of noninterest income (1) | 4,794 | 29,968 | 4,590 | 39,352 | ||||||||||||||||||||||
Total noninterest income | $ | 14,503 | $ | 33,656 | $ | 4,600 | $ | 52,759 | ||||||||||||||||||
($ in thousands) | Six Months Ended June 30, 2020 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||||
Revenue from contracts with customers: | ||||||||||||||||||||||||||
Deposit account fees: | ||||||||||||||||||||||||||
Deposit service charges and related fee income | $ | 11,710 | $ | 7,703 | $ | 47 | $ | 19,460 | ||||||||||||||||||
Card income | 1,537 | 322 | — | 1,859 | ||||||||||||||||||||||
Wealth management fees | 7,704 | 740 | — | 8,444 | ||||||||||||||||||||||
Total revenue from contracts with customers | $ | 20,951 | $ | 8,765 | $ | 47 | $ | 29,763 | ||||||||||||||||||
Other sources of noninterest income (1) | 9,394 | 57,578 | 15,951 | 82,923 | ||||||||||||||||||||||
Total noninterest income | $ | 30,345 | $ | 66,343 | $ | 15,998 | $ | 112,686 | ||||||||||||||||||
($ in thousands) | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||||
Revenue from contracts with customers: | ||||||||||||||||||||||||||
Deposit account fees: | ||||||||||||||||||||||||||
Deposit service charges and related fee income | $ | 10,630 | $ | 6,573 | $ | 26 | $ | 17,229 | ||||||||||||||||||
Card income | 1,507 | 339 | — | 1,846 | ||||||||||||||||||||||
Wealth management fees | 7,233 | 341 | — | 7,574 | ||||||||||||||||||||||
Total revenue from contracts with customers | $ | 19,370 | $ | 7,253 | $ | 26 | $ | 26,649 | ||||||||||||||||||
Other sources of noninterest income (1) | 8,905 | 50,947 | 8,389 | 68,241 | ||||||||||||||||||||||
Total noninterest income | $ | 28,275 | $ | 58,200 | $ | 8,415 | $ | 94,890 | ||||||||||||||||||
(1)Primarily represents revenue from contracts with customers that are out of the scope of ASC 606, Revenue from Contracts with Customers.
Generally, the Company recognizes revenue from contracts with customers when it satisfies its performance obligations. The Company’s performance obligations are typically satisfied as services are rendered. The Company generally records contract liabilities, or deferred revenue, when payments from customers are received or due in advance of providing services. The Company records contract assets when services are provided to customers before payment is received or before payment is due. Since the Company receives payments for its services during the period or at the time services are provided, there were no contract assets or contract liabilities as of both June 30, 2020 and December 31, 2019.
55
The major revenue streams by fee type that are within the scope of ASC 606 presented in the above tables are described in additional detail below:
Deposit Account Fees — Deposit Service Charges and Related Fee Income
The Company offers a range of deposit products to individuals and businesses, which includes savings, money market, checking and time deposit accounts. The deposit account services include ongoing account maintenance, as well as certain optional services such as automated teller machine usage, wire transfer services or check orders. In addition, treasury management and business account analysis services are offered to commercial deposit customers. The monthly account fees may vary with the amount of average monthly deposit balances maintained, or the Company may charge a fixed monthly account maintenance fee if certain average balances are not maintained. In addition, each time a deposit customer selects an optional service, the Company may earn transactional fees, generally recognized by the Company at the point when the transaction occurs. For business analysis accounts, commercial deposit customers receive an earnings credit based on their account balance, which can be used to offset the cost of banking and treasury management services. Business analysis accounts that are assessed fees in excess of earnings credits received are typically charged at the end of each month, after all transactions are known and the credits are calculated.
Deposit Account Fees — Card Income
Card income is comprised of merchant referral fees and interchange income. For merchant referral fees, the Company provides marketing and referral services to acquiring banks for merchant card processing services and earns variable referral fees based on transaction activities. The Company satisfies its performance obligation over time as the Company identifies, solicits, and refers business customers who are provided such services. The Company receives monthly fees net of consideration it pays to the acquiring bank performing the merchant card processing services. The Company recognizes revenue on a monthly basis when the uncertainty associated with the variable referral fees is resolved after the Company receives monthly statements from the acquiring bank. For interchange income, the Company, as a card issuer, has a stand ready performance obligation to authorize, clear, and settle card transactions. The Company earns, or pays, interchange fees, which are percentage-based on each transaction, and based on rates published by the corresponding payment network for transactions processed using their network. The Company measures its progress toward the satisfaction of its performance obligation over time, as services are rendered, and the Company provides continuous access to this service and settles transactions as its customer or the payment network requires. Interchange income is presented net of direct costs paid to the customer and entities in their distribution chain, which are transaction-based expenses such as rewards program expenses and certain network costs. Revenue is recognized when the net profit is determined by the payment networks at the end of each day.
Wealth Management Fees
The Company provides investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The fees the Company earns are variable and are generally received monthly. The Company recognizes revenue for the services performed at quarter-end based on actual transaction details received from the broker-dealer the Company engages.
Practical Expedients and Exemptions
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose the value of unsatisfied performance obligations as the Company’s contracts with customers generally have a term that is less than one year, are open-ended with a cancellation period that is less than one year, or allow the Company to recognize revenue in the amount to which the Company has the right to invoice.
In addition, given the short-term nature of the contracts, the Company also applies the practical expedient in ASC 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component, if at contract inception, the period between when the entity transfers the goods or services and when the customer pays for that good or service is one year or less.
56
Note 12 — Stock Compensation Plans
Pursuant to the Company’s 2016 Stock Incentive Plan, as amended, the Company may issue stocks, stock options, restricted stock, restricted stock units (“RSUs”), stock purchase warrants, stock appreciation rights, phantom stock and dividend equivalents to eligible employees, non-employee directors, consultants, and other service providers of the Company and its subsidiaries. There were no outstanding stock awards other than RSUs as of both June 30, 2020 and December 31, 2019.
The following table presents a summary of the total share-based compensation expense and the related net tax (deficiencies) benefits associated with the Company’s various employee share-based compensation plans for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Stock compensation costs | $ | 7,071 | $ | 8,081 | $ | 14,280 | $ | 15,525 | ||||||||||||||||||
Related net tax (deficiencies) benefits for stock compensation plans | $ | (9) | $ | 1 | $ | (1,575) | $ | 4,708 | ||||||||||||||||||
Restricted Stock Units — RSUs are granted under the Company’s long-term incentive plan at no cost to the recipient. RSUs cliff vest after three years of continued employment from the date of the grant and are authorized to settle predominantly in shares of the Company’s common stock. Certain RSUs will be settled in cash. RSUs entitle the recipient to receive cash dividend equivalents to any dividends paid on the underlying common stock during the period RSUs are outstanding. The dividends are accrued during the vesting period and are paid at the time of vesting. While a portion of RSUs are time-vesting awards, others vest subject to the attainment of specified performance goals referred to as “performance-based RSUs.” Substantially all RSUs are subject to forfeiture until vested unless otherwise specified in the employment terms.
Performance-based RSUs are granted at the target amount of awards. Based on the Company’s attainment of specified performance goals and consideration of market conditions, the number of shares that vest can be adjusted to a minimum of 0% and to a maximum of 200% of the target. The amount of performance-based RSUs that are eligible to vest is determined at the end of each performance period and is then added together as the total number of performance shares to vest. Performance-based RSUs cliff vest three years from the date of each grant.
Compensation costs for the time-based awards that will be settled in shares of the Company’s common stock are based on the quoted market price of the Company’s common stock at the grant date. Compensation costs for certain time-based awards that will be settled in cash are adjusted to fair value based on changes in the share price of the Company’s common stock up to the settlement date. Compensation costs associated with performance-based RSUs are based on grant date fair value which considers both market and performance conditions, and is subject to subsequent adjustments based on the changes in the Company’s projected outcome of the performance criteria. Compensation costs of both time-based and performance-based awards are estimated based on awards ultimately expected to vest and recognized on a straight-line basis from the grant date until the vesting date of each grant.
The following table presents a summary of the activities for the Company’s time-based and performance-based RSUs that will be settled in shares for the six months ended June 30, 2020. The number of outstanding performance-based RSUs stated below assumes the associated performance targets will be met at the target level:
Time-Based RSUs | Performance-Based RSUs | |||||||||||||||||||||||||
Shares | Weighted-Average Grant Date Fair Value | Shares | Weighted-Average Grant Date Fair Value | |||||||||||||||||||||||
Outstanding, January 1, 2020 | 1,139,868 | $ | 57.78 | 386,483 | $ | 60.13 | ||||||||||||||||||||
Granted | 657,461 | 40.51 | 165,084 | 39.79 | ||||||||||||||||||||||
Vested | (251,526) | 54.47 | (131,597) | 56.59 | ||||||||||||||||||||||
Forfeited | (100,371) | 54.33 | — | — | ||||||||||||||||||||||
Outstanding, June 30, 2020 | 1,445,432 | $ | 50.74 | 419,970 | $ | 53.24 | ||||||||||||||||||||
57
The following table presents a summary of the activities for the Company’s time-based RSUs that will be settled in cash for the six months ended June 30, 2020:
Shares | ||||||||
Outstanding, January 1, 2020 | 11,638 | |||||||
Granted | 11,215 | |||||||
Vested | (723) | |||||||
Forfeited | — | |||||||
Outstanding, June 30, 2020 | 22,130 | |||||||
As of June 30, 2020, there were $31.4 million and $19.6 million of total unrecognized compensation costs related to unvested time-based and performance-based RSUs, respectively. These costs are expected to be recognized over a weighted-average period of 2.04 years and 2.07 years, respectively.
Note 13 — Stockholders’ Equity and Earnings Per Share
The following table presents the basic and diluted EPS calculations for the three and six months ended June 30, 2020 and 2019. For more information on the calculation of EPS, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Earnings Per Share to the Consolidated Financial Statements of the Company’s 2019 Form 10-K.
($ and shares in thousands, except per share data) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||||
Net income | $ | 99,352 | $ | 150,380 | $ | 244,176 | $ | 314,404 | ||||||||||||||||||
Basic weighted-average number of shares outstanding | 141,486 | 145,546 | 143,150 | 145,402 | ||||||||||||||||||||||
Basic EPS | $ | 0.70 | $ | 1.03 | $ | 1.71 | $ | 2.16 | ||||||||||||||||||
Diluted: | ||||||||||||||||||||||||||
Net income | $ | 99,352 | $ | 150,380 | $ | 244,176 | $ | 314,404 | ||||||||||||||||||
Basic weighted-average number of shares outstanding (1) | 141,486 | 145,546 | 143,150 | 145,402 | ||||||||||||||||||||||
Diluted potential common shares (2) | 341 | 506 | 410 | 614 | ||||||||||||||||||||||
Diluted weighted-average number of shares outstanding (1)(2) | 141,827 | 146,052 | 143,560 | 146,016 | ||||||||||||||||||||||
Diluted EPS | $ | 0.70 | $ | 1.03 | $ | 1.70 | $ | 2.15 | ||||||||||||||||||
(1)The Company acquired MetroCorp Bancshares, Inc. (“MetroCorp”) on January 17, 2014. Prior to the acquisition, MetroCorp had outstanding warrants to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holders were converted into the rights to acquire 230,282 shares of East West’s common stock until January 16, 2019. All warrants were exercised on January 7, 2019.
(2)Includes dilutive shares from RSUs for the three and six months ended June 30, 2020 and 2019.
For the three and six months ended June 30, 2020, 1.2 million and 620 thousand weighted-average shares of anti-dilutive RSUs, respectively, were excluded from the diluted EPS computation. In comparison, 584 thousand and 239 thousand weighted-average shares of anti-dilutive RSUs, respectively, were excluded from the diluted EPS computation for the three and six months ended June 30, 2019.
Stock Repurchase Program — On March 3, 2020, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $500.0 million of the Company’s common stock. For the three months ended June 30, 2020, there were no share repurchases. For the six months ended June 30, 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the three and six months ended June 30, 2019.
58
Note 14 — Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in the components of AOCI balances for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | AFS Debt Securities | Cash Flow Hedges | Foreign Currency Translation Adjustments (1) | Total | ||||||||||||||||||||||
Balance, April 1, 2019 | $ | (23,810) | $ | — | $ | (9,173) | $ | (32,983) | ||||||||||||||||||
Net unrealized gains (losses) arising during the period | 30,046 | — | (6,016) | 24,030 | ||||||||||||||||||||||
Amounts reclassified from AOCI | (1,019) | — | — | (1,019) | ||||||||||||||||||||||
Changes, net of tax | 29,027 | — | (6,016) | 23,011 | ||||||||||||||||||||||
Balance, June 30, 2019 | $ | 5,217 | $ | — | $ | (15,189) | $ | (9,972) | ||||||||||||||||||
Balance, April 1, 2020 | $ | 25,034 | $ | — | $ | (18,153) | $ | 6,881 | ||||||||||||||||||
Net unrealized gains (losses) arising during the period | 24,606 | (1,063) | (230) | 23,313 | ||||||||||||||||||||||
Amounts reclassified from AOCI | (6,790) | (270) | — | (7,060) | ||||||||||||||||||||||
Changes, net of tax | 17,816 | (1,333) | (230) | 16,253 | ||||||||||||||||||||||
Balance, June 30, 2020 | $ | 42,850 | $ | (1,333) | $ | (18,383) | $ | 23,134 | ||||||||||||||||||
($ in thousands) | AFS Debt Securities | Cash Flow Hedges | Foreign Currency Translation Adjustments (1) | Total | ||||||||||||||||||||||
Balance, January 1, 2019 | $ | (45,821) | $ | — | $ | (12,353) | $ | (58,174) | ||||||||||||||||||
Net unrealized gains (losses) arising during the period | 53,157 | — | (2,836) | 50,321 | ||||||||||||||||||||||
Amounts reclassified from AOCI | (2,119) | — | — | (2,119) | ||||||||||||||||||||||
Changes, net of tax | 51,038 | — | (2,836) | 48,202 | ||||||||||||||||||||||
Balance, June 30, 2019 | $ | 5,217 | $ | — | $ | (15,189) | $ | (9,972) | ||||||||||||||||||
Balance, January 1, 2020 | $ | (2,419) | $ | — | $ | (15,989) | $ | (18,408) | ||||||||||||||||||
Net unrealized gains (losses) arising during the period | 53,136 | (1,063) | (2,394) | 49,679 | ||||||||||||||||||||||
Amounts reclassified from AOCI | (7,867) | (270) | — | (8,137) | ||||||||||||||||||||||
Changes, net of tax | 45,269 | (1,333) | (2,394) | 41,542 | ||||||||||||||||||||||
Balance, June 30, 2020 | $ | 42,850 | $ | (1,333) | $ | (18,383) | $ | 23,134 | ||||||||||||||||||
(1)Represents foreign currency translation adjustments related to the Company’s net investment in non-U.S. operations, including related hedges. The functional currency and reporting currency of the Company’s foreign subsidiary was RMB and USD, respectively.
The following tables present the components of other comprehensive income (loss), reclassifications to net income and the related tax effects for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||
Before-Tax | Tax Effect | Net-of-Tax | Before-Tax | Tax Effect | Net-of-Tax | |||||||||||||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||||||||||||||
Net unrealized gains arising during the period | $ | 34,970 | $ | (10,364) | $ | 24,606 | $ | 44,531 | $ | (14,485) | $ | 30,046 | ||||||||||||||||||||||||||
Net realized (gains) reclassified into net income (1) | (9,640) | 2,850 | (6,790) | (1,447) | 428 | (1,019) | ||||||||||||||||||||||||||||||||
Net change | 25,330 | (7,514) | 17,816 | 43,084 | (14,057) | 29,027 | ||||||||||||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||||||||||||||||
Net unrealized (losses) arising during the period | (1,483) | 420 | (1,063) | — | — | — | ||||||||||||||||||||||||||||||||
Net realized (gains) reclassified into net income (2) | (377) | 107 | (270) | — | — | — | ||||||||||||||||||||||||||||||||
Net change | (1,860) | 527 | (1,333) | — | — | — | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of hedges: | ||||||||||||||||||||||||||||||||||||||
Net unrealized (losses) arising during the period | (379) | 149 | (230) | (2,989) | (3,027) | (6,016) | ||||||||||||||||||||||||||||||||
Net change | (379) | 149 | (230) | (2,989) | (3,027) | (6,016) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | $ | 23,091 | $ | (6,838) | $ | 16,253 | $ | 40,095 | $ | (17,084) | $ | 23,011 | ||||||||||||||||||||||||||
59
($ in thousands) | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||
Before-Tax | Tax Effect | Net-of-Tax | Before-Tax | Tax Effect | Net-of-Tax | |||||||||||||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||||||||||||||
Net unrealized gains arising during the period | $ | 75,463 | $ | (22,327) | $ | 53,136 | $ | 75,469 | $ | (22,312) | $ | 53,157 | ||||||||||||||||||||||||||
Net realized (gains) reclassified into net income (1) | (11,169) | 3,302 | (7,867) | (3,008) | 889 | (2,119) | ||||||||||||||||||||||||||||||||
Net change | 64,294 | (19,025) | 45,269 | 72,461 | (21,423) | 51,038 | ||||||||||||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||||||||||||||||
Net unrealized (losses) arising during the period | (1,483) | 420 | (1,063) | — | — | — | ||||||||||||||||||||||||||||||||
Net realized (gains) reclassified into net income (2) | (377) | 107 | (270) | — | — | — | ||||||||||||||||||||||||||||||||
Net change | (1,860) | 527 | (1,333) | — | — | — | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of hedges: | ||||||||||||||||||||||||||||||||||||||
Net unrealized (losses) arising during the period | (2,145) | (249) | (2,394) | 191 | (3,027) | (2,836) | ||||||||||||||||||||||||||||||||
Net change | (2,145) | (249) | (2,394) | 191 | (3,027) | (2,836) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | $ | 60,289 | $ | (18,747) | $ | 41,542 | $ | 72,652 | $ | (24,450) | $ | 48,202 | ||||||||||||||||||||||||||
(1)For the three and six months ended June 30, 2020 and 2019, pre-tax amounts were reported in Gains on sales of AFS debt securities on the Consolidated Statement of Income.
(2)For the three and six months ended June 30, 2020 and 2019, pre-tax amounts were reported in Interest expense on the Consolidated Statement of Income.
Note 15 — Business Segments
The Company organizes its operations into three reportable operating segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These segments are defined by the type of customers served, and the related products and services provided. The segments reflect how financial information is currently evaluated by management. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of certain balance sheet and income statement items. The information presented is not indicative of how the segments would perform if they operated as independent entities due to the interrelationships among the segments.
The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network. This segment offers consumer and commercial deposits, mortgage and home equity loans, and other products and services. It also originates commercial loans for small and medium-sized enterprises through the Company’s branch network. Other products and services provided by this segment include wealth management, treasury management and foreign exchange services.
The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction and land loans, affordable housing loans and letters of credit, asset-based lending, and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity risk hedging.
The remaining centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, namely the Consumer and Business Banking and the Commercial Banking segments.
The Company utilizes an internal reporting process to measure the performance of the three operating segments within the Company. The internal reporting process derives operating segment results by utilizing allocation methodologies for revenue and expenses. Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for funding charges or credits through the Company’s internal funds transfer pricing (“FTP”) process. Noninterest income and noninterest expense directly attributable to a business segment are assigned to that segment. Indirect costs, including technology-related costs and corporate overhead, are allocated based on a segment’s estimated usage using factors including but not limited to, full-time equivalent employees, net interest income, and loan and deposit volume. Charge-offs are allocated to the segment directly associated with the loans charged off, and the remaining provision for credit losses is allocated to each segment based on loan volume. The Company’s internal reporting process utilizes a full-allocation methodology. Under this methodology, corporate and indirect expenses incurred by the Other segment are allocated to the Consumer and Business Banking and the Commercial Banking segments, except certain corporate treasury-related expenses and insignificant unallocated expenses.
60
The corporate treasury function within the Other segment is responsible for liquidity and interest rate management of the Company. The Company’s internal FTP process is also managed by the corporate treasury function within the Other segment. The process is formulated with the goal of encouraging loan and deposit growth that is consistent with the Company’s overall profitability objectives, as well as to provide a reasonable and consistent basis for the measurement of its business segments’ net interest margins and profitability. The FTP process charges a cost to fund loans (“FTP charges for loans”) and allocates credits for funds provided from deposits (“FTP credits for deposits”) using internal FTP rates. FTP charges for loans are determined based on a matched cost of funds, which is tied to the pricing and term characteristics of the loans. FTP credits for deposits are based on matched funding credit rates, which are tied to the implied or stated maturity of the deposits. FTP credits for deposits reflect the long-term value generated by the deposits. The net spread between the total internal FTP charges and credits is recorded as part of net interest income in the Other segment. The FTP process transfers the corporate interest rate risk exposure to the treasury function within the Other segment, where such exposures are centrally managed.
The Company’s internal FTP assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions. During the third quarter of 2019, the Company enhanced its FTP methodology related to deposits by setting a minimum floor rate using the short-term FHLB rate as a reference rate for the FTP credits paid for deposits in event of the flattened and inverted yield curve. This methodology has been retrospectively applied to segment financial results for the three and six months ended June 30, 2019, and the process is effectively reflecting the current market conditions as of June 30, 2020.
The following tables present the operating results and other key financial measures for the individual operating segments as of and for the three and six months ended June 30, 2020 and 2019:
($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||||||||||||
Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 124,926 | $ | 183,796 | $ | 35,053 | $ | 343,775 | ||||||||||||||||||
Provision for credit losses | 5,590 | 96,853 | — | 102,443 | ||||||||||||||||||||||
Noninterest income | 13,943 | 33,887 | 10,807 | 58,637 | ||||||||||||||||||||||
Noninterest expense | 80,164 | 64,900 | 42,632 | 187,696 | ||||||||||||||||||||||
Segment income before income taxes | 53,115 | 55,930 | 3,228 | 112,273 | ||||||||||||||||||||||
Segment net income | $ | 38,058 | $ | 40,178 | $ | 21,116 | $ | 99,352 | ||||||||||||||||||
As of June 30, 2020 | ||||||||||||||||||||||||||
Segment assets | $ | 12,666,938 | $ | 26,984,013 | $ | 9,756,642 | $ | 49,407,593 | ||||||||||||||||||
($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||||||||||||
Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 180,911 | $ | 158,941 | $ | 27,474 | $ | 367,326 | ||||||||||||||||||
Provision for credit losses | 1,616 | 17,629 | — | 19,245 | ||||||||||||||||||||||
Noninterest income | 14,503 | 33,656 | 4,600 | 52,759 | ||||||||||||||||||||||
Noninterest expense | 83,656 | 67,303 | 26,704 | 177,663 | ||||||||||||||||||||||
Segment income before income taxes | 110,142 | 107,665 | 5,370 | 223,177 | ||||||||||||||||||||||
Segment net income (loss) | $ | 78,741 | $ | 76,885 | $ | (5,246) | $ | 150,380 | ||||||||||||||||||
As of June 30, 2019 | ||||||||||||||||||||||||||
Segment assets | $ | 11,013,898 | $ | 25,001,894 | $ | 6,876,566 | $ | 42,892,358 | ||||||||||||||||||
61
($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||||||||||||
Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 277,517 | $ | 367,297 | $ | 61,668 | $ | 706,482 | ||||||||||||||||||
Provision for credit losses | 13,378 | 162,935 | — | 176,313 | ||||||||||||||||||||||
Noninterest income | 30,345 | 66,343 | 15,998 | 112,686 | ||||||||||||||||||||||
Noninterest expense | 167,128 | 135,026 | 64,418 | 366,572 | ||||||||||||||||||||||
Segment income before income taxes | 127,356 | 135,679 | 13,248 | 276,283 | ||||||||||||||||||||||
Segment net income | $ | 91,253 | $ | 97,309 | $ | 55,614 | $ | 244,176 | ||||||||||||||||||
As of June 30, 2020 | ||||||||||||||||||||||||||
Segment assets | $ | 12,666,938 | $ | 26,984,013 | $ | 9,756,642 | $ | 49,407,593 | ||||||||||||||||||
($ in thousands) | Consumer and Business Banking | Commercial Banking | Other | Total | ||||||||||||||||||||||
Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 365,970 | $ | 311,649 | $ | 52,168 | $ | 729,787 | ||||||||||||||||||
Provision for credit losses | 4,629 | 37,195 | — | 41,824 | ||||||||||||||||||||||
Noninterest income | 28,275 | 58,200 | 8,415 | 94,890 | ||||||||||||||||||||||
Noninterest expense | 171,562 | 137,847 | 55,176 | 364,585 | ||||||||||||||||||||||
Segment income before income taxes | 218,054 | 194,807 | 5,407 | 418,268 | ||||||||||||||||||||||
Segment net income | $ | 155,887 | $ | 139,219 | $ | 19,298 | $ | 314,404 | ||||||||||||||||||
As of June 30, 2019 | ||||||||||||||||||||||||||
Segment assets | $ | 11,013,898 | $ | 25,001,894 | $ | 6,876,566 | $ | 42,892,358 | ||||||||||||||||||
Note 16 — Subsequent Events
On July 23, 2020, the Company’s Board of Directors declared third quarter 2020 cash dividends for the Company’s common stock. The common stock cash dividend of $0.275 per share is payable on August 17, 2020 to stockholders of record as of August 4, 2020.
62
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page | |||||||||||
63
Overview
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”, “EWBC” or “we”), and its subsidiaries, including its subsidiary bank, East West Bank and its subsidiaries (referred to herein as “East West Bank” or the “Bank”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented elsewhere in this report, and the Company’s annual report on Form 10-K for the year ended December 31, 2019, filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on February 27, 2020 (the “Company’s 2019 Form 10-K”).
Company Overview
East West is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the Bank Holding Company Act of 1956, as amended. The Company commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of the Bank, which became its principal asset. The Bank is an independent commercial bank headquartered in California that has a strong focus on the financial service needs of the Chinese-American community. Through over 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 debt securities and interest paid on deposits and other funding sources. As of June 30, 2020, the Company had $49.41 billion in assets and approximately 3,200 full-time equivalent employees. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services of the Company’s 2019 Form 10-K.
Corporate Strategy
We are committed to 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 businesses. 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.
Coronavirus Disease 2019 Global Pandemic
The Coronavirus Disease 2019 (“COVID-19”) pandemic has caused significant, unprecedented disruption around the world, as well as economic and financial market deterioration, which did not exist at the beginning of the year. The recession resulting from government-mandated closures of certain businesses and “stay-at-home” orders has significantly impacted businesses, investments in those businesses and consumer spending, and heightened volatility in the global financial markets. These economic and operating conditions caused by the COVID-19 pandemic have created financial difficulties for many of the Company’s commercial and consumer customers and, as a result, some borrowers may not be able to satisfy their obligations to us. As many of the Company’s loans are secured by real estate, a potential decline in the real estate markets could also negatively impact the Company’s business, financial condition and the credit quality of the Company’s loan portfolio. As a result of the ongoing COVID-19 pandemic, the provision for credit losses was elevated during the second quarter of 2020.
64
Regulatory Developments Relating to COVID-19 Pandemic
Coronavirus Aid, Relief, and Economic Security Act — The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 to address the economic impact to individuals and businesses as a result of the COVID-19 pandemic. As part of the CARES Act, various initiatives to protect individuals, businesses and local economies, such as the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and the Main Street Lending Program were established in an effort to lessen the impact of COVID-19 on consumers and businesses. As part of our commitment to support our customers, the Bank participated as a lender in the PPP. During the second quarter of 2020, the Company funded over 7,200 SBA 7(a) approved PPP loans for customers with an outstanding loan balance totaling $1.75 billion as of June 30, 2020. The SBA guarantees 100% of the PPP loans made to eligible borrowers and if used for qualified expenditures, the PPP loans are forgivable. These loans are included in our commercial and industrial (“C&I”) portfolio, have an interest rate of 1% and a maturity of two or five years. The Board of Governors of the Federal Reserve system (“Federal Reserve”) has established the PPP Liquidity Facility (“PPPLF”) to enable Federal Reserve Banks (“FRB”) to extend credit to financial institutions that originate PPP loans, while taking the PPP loans as collateral. As of June 30, 2020, we have drawn down $1.43 billion from the Federal Reserve PPPLF and pledged the same amount in PPP loans as collateral. The Bank is also a participating lender in the Main Street Lending Program, which was established by the Federal Reserve system, to support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.
In addition, the CARES Act requires mortgage servicers to grant, on a borrower’s request, forbearance for up to 180 days (which can be extended for an additional 180 days) on a federally-backed single-family mortgage loan or forbearance up to 30 days (which can be extended for two additional 30-day periods) on a federally-backed multi-family mortgage loan when the borrowers experience financial hardship due to COVID-19.
Loan Modifications — The CARES Act also includes an option for financial institutions to suspend the U.S. generally accepted accounting principles (“GAAP”) requirements and regulatory determinations for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a troubled debt restructuring (“TDR”) from March 1, 2020, through the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or December 31, 2020. On April 7, 2020, the federal banking regulators issued the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”). The Interagency Statement also provides financial institutions the option to suspend the application of the TDR accounting guidance for short-term modifications (i.e., six months or less) made on a good faith basis in response to COVID-19 to borrowers who were current at the time of modification. Given that nonaccrual loans are more heavily risk-weighted for capital purposes, this TDR relief allows a capital benefit in the form of reduced risk-weighted assets since the aging of such loans were frozen at the time of modification. We are granting loan modifications to our customers in the form of maturity extensions, payment deferrals and forbearance. For a summary of the loans that we have modified in response to COVID-19, please refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Risk Management — Credit Risk Management in this Form 10-Q.
Regulatory Capital — On March 31, 2020, the U.S. federal banking agencies issued an interim final rule that provided the option to temporarily delay the effects of current expected credit losses (“CECL”) on regulatory capital for two years, followed by a three-year transition period (“CECL Capital Transition”). The Company has elected to apply the CECL Capital Transition during the first quarter of 2020.
Reserve Requirements — On March 26, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent, eliminating the reserve requirement for all depository institutions, an action that provides liquidity in the banking system to support lending to households and businesses.
65
Our Response to COVID-19
In response to the COVID-19 pandemic, we have been working diligently to protect employee safety while continuing to carry out our role as a provider of critical and essential services to the public. We have taken comprehensive steps to help our employees, customers and communities as follows:
•Employees:
For employees with jobs that are required to be performed on-site, we have taken significant actions to ensure employee safety by adopting social distancing measures, implementing an enhanced cleaning program and installing plexiglass panels and requiring temperature screenings and the wearing of masks for all employees physically at on-site locations. We have further provided support to our employees by granting an increase in flexibility by temporarily adjusting vacation policies.
•Customers:
We offered assistance to our commercial, consumer and small business clients affected by the COVID-19 pandemic, which includes payment deferrals, pausing foreclosures on certain residential mortgage loans and participation in the SBA PPP and the Main Street Lending Program under the CARES Act as discussed above. We intend to evaluate participation in additional new government-sponsored programs, as they are established.
Given the continuous unprecedented uncertainty and rapidly evolving socioeconomic impacts of the COVID-19 pandemic, the Company continues to closely monitor its impacts on the Company’s business and loan portfolio. The pandemic had a significant impact on the Company’s second quarter and first half of 2020 provision for credit losses. Although we are uncertain of the full magnitude and duration of the business and economic impact from the unprecedented public health efforts to contain and combat the spread of COVID-19, we could experience material declines in revenues, profitability and/or cash flows in one or more periods in 2020, compared to the corresponding prior-year periods and compared to our expectations at the beginning of the 2020 fiscal year. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided below under Part II, Item 1A - Risk Factors in this Form 10-Q.
66
Selected Financial Data
($ and shares in thousands, except per share, ratio and headcount data) | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||
June 30, 2020 | March 31, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||||||||||||||||||
Summary of operations: | ||||||||||||||||||||||||||||||||
Interest and dividend income (1) | $ | 398,776 | $ | 449,190 | $ | 474,844 | $ | 847,966 | $ | 938,155 | ||||||||||||||||||||||
Interest expense | 55,001 | 86,483 | 107,518 | 141,484 | 208,368 | |||||||||||||||||||||||||||
Net interest income before provision for credit losses | 343,775 | 362,707 | 367,326 | 706,482 | 729,787 | |||||||||||||||||||||||||||
Provision for credit losses | 102,443 | 73,870 | 19,245 | 176,313 | 41,824 | |||||||||||||||||||||||||||
Net interest income after provision for credit losses | 241,332 | 288,837 | 348,081 | 530,169 | 687,963 | |||||||||||||||||||||||||||
Noninterest income | 58,637 | 54,049 | 52,759 | 112,686 | 94,890 | |||||||||||||||||||||||||||
Noninterest expense (2) | 187,696 | 178,876 | 177,663 | 366,572 | 364,585 | |||||||||||||||||||||||||||
Income before income taxes | 112,273 | 164,010 | 223,177 | 276,283 | 418,268 | |||||||||||||||||||||||||||
Income tax expense (3) | 12,921 | 19,186 | 72,797 | 32,107 | 103,864 | |||||||||||||||||||||||||||
Net income (1)(2)(3) | $ | 99,352 | $ | 144,824 | $ | 150,380 | $ | 244,176 | $ | 314,404 | ||||||||||||||||||||||
Per common share: | ||||||||||||||||||||||||||||||||
Basic earnings | $ | 0.70 | $ | 1.00 | $ | 1.03 | $ | 1.71 | $ | 2.16 | ||||||||||||||||||||||
Diluted earnings | $ | 0.70 | $ | 1.00 | $ | 1.03 | $ | 1.70 | $ | 2.15 | ||||||||||||||||||||||
Dividends declared | $ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.55 | $ | 0.51 | ||||||||||||||||||||||
Book value | $ | 35.25 | $ | 34.67 | $ | 32.53 | $ | 35.25 | $ | 32.53 | ||||||||||||||||||||||
Non-GAAP tangible common equity per share (4) | $ | 31.86 | $ | 31.27 | $ | 29.20 | $ | 31.86 | $ | 29.20 | ||||||||||||||||||||||
Weighted-average number of shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 141,486 | 144,814 | 145,546 | 143,150 | 145,402 | |||||||||||||||||||||||||||
Diluted | 141,827 | 145,285 | 146,052 | 143,560 | 146,016 | |||||||||||||||||||||||||||
Common shares outstanding at period-end | 141,486 | 141,435 | 145,547 | 141,486 | 145,547 | |||||||||||||||||||||||||||
At period end: | ||||||||||||||||||||||||||||||||
Total assets | $ | 49,407,593 | $ | 45,948,545 | $ | 42,892,358 | $ | 49,407,593 | $ | 42,892,358 | ||||||||||||||||||||||
Total loans | $ | 37,233,287 | $ | 35,894,987 | $ | 33,734,256 | $ | 37,233,287 | $ | 33,734,256 | ||||||||||||||||||||||
Available-for-sale (“AFS”) debt securities | $ | 3,884,574 | $ | 3,695,943 | $ | 2,592,913 | $ | 3,884,574 | $ | 2,592,913 | ||||||||||||||||||||||
Total deposits | $ | 40,672,678 | $ | 38,686,958 | $ | 36,477,542 | $ | 40,672,678 | $ | 36,477,542 | ||||||||||||||||||||||
Long-term debt and finance lease liabilities (5) | $ | 1,580,442 | $ | 152,162 | $ | 152,506 | $ | 1,580,442 | $ | 152,506 | ||||||||||||||||||||||
Federal Home Loan Bank (“FHLB”) advances | $ | 656,759 | $ | 646,336 | $ | 745,074 | $ | 656,759 | $ | 745,074 | ||||||||||||||||||||||
Stockholders’ equity (6) | $ | 4,987,243 | $ | 4,902,985 | $ | 4,734,593 | $ | 4,987,243 | $ | 4,734,593 | ||||||||||||||||||||||
Non-GAAP tangible common equity (4) | $ | 4,508,056 | $ | 4,422,519 | $ | 4,249,944 | $ | 4,508,056 | $ | 4,249,944 | ||||||||||||||||||||||
Head count (full-time equivalent) | 3,249 | 3,285 | 3,261 | 3,249 | 3,261 | |||||||||||||||||||||||||||
Performance metrics: | ||||||||||||||||||||||||||||||||
Return on average assets (“ROA”) | 0.83 | % | 1.30 | % | 1.45 | % | 1.06 | % | 1.54 | % | ||||||||||||||||||||||
Return on average equity (“ROE”) | 8.02 | % | 11.60 | % | 12.88 | % | 9.82 | % | 13.75 | % | ||||||||||||||||||||||
Net interest margin | 3.04 | % | 3.44 | % | 3.73 | % | 3.24 | % | 3.76 | % | ||||||||||||||||||||||
Efficiency ratio (7) | 46.64 | % | 42.92 | % | 42.29 | % | 44.75 | % | 44.21 | % | ||||||||||||||||||||||
Non-GAAP efficiency ratio (4) | 38.09 | % | 38.54 | % | 38.03 | % | 38.31 | % | 38.88 | % | ||||||||||||||||||||||
Credit quality metrics: | ||||||||||||||||||||||||||||||||
Allowance for loan losses | $ | 632,071 | $ | 557,003 | $ | 330,625 | $ | 632,071 | $ | 330,625 | ||||||||||||||||||||||
Allowance for loan losses to loans held-for-investment | 1.70 | % | 1.55 | % | 0.98 | % | 1.70 | % | 0.98 | % | ||||||||||||||||||||||
Nonperforming assets to total assets | 0.41 | % | 0.33 | % | 0.28 | % | 0.41 | % | 0.28 | % | ||||||||||||||||||||||
Annualized net charge-offs to average loans held-for-investment | 0.21 | % | 0.01 | % | 0.09 | % | 0.11 | % | 0.14 | % | ||||||||||||||||||||||
Selected metrics: | ||||||||||||||||||||||||||||||||
Total average equity to total average assets | 10.33 | % | 11.22 | % | 11.28 | % | 10.76 | % | 11.21 | % | ||||||||||||||||||||||
Common dividend payout ratio | 39.72 | % | 27.95 | % | 26.95 | % | 32.74 | % | 23.63 | % | ||||||||||||||||||||||
Loan-to-deposit ratio | 91.54 | % | 92.78 | % | 92.48 | % | 91.54 | % | 92.48 | % | ||||||||||||||||||||||
EWBC capital ratios: | ||||||||||||||||||||||||||||||||
Common Equity Tier 1 (“CET1”) capital | 12.7 | % | 12.4 | % | 12.5 | % | 12.7 | % | 12.5 | % | ||||||||||||||||||||||
Tier 1 capital | 12.7 | % | 12.4 | % | 12.5 | % | 12.7 | % | 12.5 | % | ||||||||||||||||||||||
Total capital | 14.4 | % | 13.9 | % | 13.9 | % | 14.4 | % | 13.9 | % | ||||||||||||||||||||||
Tier 1 leverage capital | 9.7 | % | 10.2 | % | 10.4 | % | 9.7 | % | 10.4 | % | ||||||||||||||||||||||
(1)Includes $21.3 million of interest income related to PPP loans for the second quarter of 2020.
(2)Includes $8.7 million of securities sold under repurchase agreements’ (“repurchase agreements”) extinguishment cost for the second quarter of 2020.
(3)Includes $30.1 million of additional tax expense to reverse certain previously claimed tax credits related to the DC Solar tax credit investments (“DC Solar”) during the second quarter of 2019.
(4)For a discussion of tangible common equity, tangible common equity per share and non-GAAP efficiency ratio, refer to Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.
(5)Includes $1.43 billion of advances from the PPPLF.
(6)On January 1, 2020, the Company adopted Accounting Standards Codification (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using the modified retrospective approach. The Company recorded an after-tax decrease to opening retained earnings of $98.0 million as of January 1, 2020.
(7)The efficiency ratio is noninterest expense divided by total revenue (net interest income before provision for credit losses and noninterest income).
67
Financial Highlights




Noteworthy items about the Company’s performance for the second quarter and first half of 2020 included:
•Earnings: Second quarter 2020 net income was $99.4 million or $0.70 in diluted earnings per share (“EPS”), compared with second quarter of 2019 net income of $150.4 million or diluted EPS of $1.03, a decrease of $51.0 million or 34% in net income. Net income for the first half of 2020 was $244.2 million or $1.70 in diluted EPS, compared with net income of $314.4 million or $2.15 in diluted EPS for the first half of 2019, a decrease of $70.2 million or 22% in net income. These decreases in both periods were primarily due to higher provision for credit losses resulting from the deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic and the recently adopted CECL methodology, and lower net interest income resulting from lower interest rates, partially offset by a decrease in income tax expense. Provision for credit losses of $176.3 million for the first half of 2020 increased by 322% compared to the same period a year ago.
•Adjusted Earnings: There were no adjustments for non-recurring items during the second quarter and first half of 2020 that affected non-GAAP net income and diluted EPS. Non-GAAP net income and non-GAAP diluted EPS for the second quarter of 2019 were $180.5 million and $1.24, respectively. Non-GAAP net income and non-GAAP diluted EPS for the first half of 2019 were $349.4 million and $2.39, respectively. During the first and second quarters of 2019, the Company recorded a $7.0 million pre-tax impairment charge and reversed $30.1 million of certain previously claimed tax credits related to the DC Solar, respectively. Refer to reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.
•Revenue: Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $402.4 million for the second quarter of 2020, compared with $420.1 million for the second quarter of 2019, a decrease of $17.7 million or 4%. Revenue for the first half of 2020 was $819.2 million, compared with $824.7 million for the first half of 2019, a decrease of $5.5 million or 1%. These decreases were primarily due to lower net interest income, partially offset by an increase in noninterest income.
68
•Net Interest Income and Net Interest Margin: Second quarter 2020 net interest income was $343.8 million, compared with second quarter 2019 net interest income of $367.3 million, a decrease of $23.5 million or 6%. Second quarter 2020 net interest margin was 3.04%, a 69 basis point decrease from 3.73% for the second quarter of 2019. Net interest income for the first half of 2020 was $706.5 million, compared with $729.8 million for the first half of 2019, a decrease of $23.3 million or 3%. Net interest margin was 3.24% for the first half of 2020, a decrease of 52 basis points from 3.76% for the first half of 2019. The decreases in the net interest income and net interest margin reflected lower interest rates year-over-year, including a cumulative 225 basis point reduction of the federal funds target rate from the second half of 2019 through the second quarter of 2020.
•Operating Efficiency: Efficiency ratio, calculated as noninterest expense divided by revenue, was 46.64% and 42.29% for the second quarters of 2020 and 2019, respectively. The efficiency ratio was 44.75% for the first half of 2020, compared with 44.21% for the first half of 2019. Adjusting for the amortization of tax credit and other investments, amortization of core deposit intangibles, and repurchase agreements’ extinguishment cost, non-GAAP efficiency ratio for the second quarter of 2020 was 38.09%, a six basis point increase from 38.03% for the second quarter of 2019. For the first half of 2020, non-GAAP efficiency ratio was 38.31%, a 57 basis point improvement from 38.88% for the first half of 2019. For additional detail, see the reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.
•Tax: Income tax expense was $12.9 million and the effective tax rate was 11.5% for the second quarter of 2020, compared with income tax expense of $72.8 million and an effective tax rate of 32.6% for the second quarter of 2019. Income tax expense was $32.1 million and the effective tax rate was 11.6% for the first half of 2020, compared with income tax expense of $103.9 million and an effective tax rate of 24.8% for the first half of 2019.
•Profitability: ROA for the second quarters of 2020 and 2019 were 0.83% and 1.45%, respectively. ROA for the first half of 2020 and 2019 were 1.06% and 1.54%, respectively. ROE for the second quarters of 2020 and 2019 were 8.02% and 12.88%, respectively. ROE for the first half of 2020 and 2019 were 9.82% and 13.75%, respectively. Adjusting for non-recurring items related to DC Solar which occurred in 2019, non-GAAP ROA and non-GAAP ROE for the second quarter of 2019 were 1.74% and 15.45%, respectively. Non-GAAP ROA and non-GAAP ROE for the first half of 2019 were 1.71% and 15.28%, respectively. For additional detail, see the reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.)
•Loans: Total loans were $37.23 billion as of June 30, 2020, an increase of $2.45 billion or 7% from $34.78 billion as of December 31, 2019. Loan growth was well-diversified across each of the Company’s major loan portfolios, with the strongest growth from C&I, driven by PPP loan funding, commercial real estate (“CRE”) and single-family residential loans.
•Deposits: Total deposits were $40.67 billion as of June 30, 2020, an increase of $3.35 billion or 9% from $37.32 billion as of December 31, 2019. This increase was primarily driven by growth in noninterest-bearing demand deposits and money market accounts, partially offset by a decrease in time deposits.
•Asset Quality Metrics: The allowance for loan losses was $632.1 million or 1.70% of loans held-for-investment, as of June 30, 2020, compared with $358.3 million or 1.03% of loans held-for-investment, as of December 31, 2019. The increase in the allowance for loan losses was primarily due to the deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic; and the adoption of ASU 2016-13, which increased the allowance for loan losses by $125.2 million. Nonperforming assets were $202.2 million or 0.41% of total assets, as of June 30, 2020, an increase from $121.5 million, or 0.27% of total assets, as of December 31, 2019. Second quarter 2020 net charge-offs were $19.2 million, or an annualized 0.21% of average loans held-for-investment, compared with $7.6 million, or an annualized 0.09% of average loans held-for-investment for the second quarter of 2019. For the first half of 2020, net charge-offs were $20.1 million or annualized 0.11% of average loans held-for-investment, compared with $22.1 million or annualized 0.14% of average loans held-for-investment for the first half of 2019.
•Capital Levels: Our capital levels are strong. As of June 30, 2020, all of the Company’s and the Bank’s regulatory capital ratios were well above the regulatory requirements to be considered well-capitalized. See Item 2. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-Q for more information regarding capital. On March 3, 2020, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $500.0 million of the Company’s common stock. During the first quarter of 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. There were no share repurchases during the second quarter of 2020 or the full year 2019.
69
•Cash Dividends: The quarterly cash common stock dividend for both the second quarters of 2020 and 2019 was $0.275 per share. Cash dividends of $39.5 million during the second quarter of 2020 and $79.9 million the first half of 2020 were retuned to stockholders, compared with $40.5 million and $74.3 million during the same periods in 2019, respectively.
Results of Operations
Net Interest Income
The Company’s primary source of revenue is net interest income, which is the 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 the slope of the yield curve, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities, volume of noninterest-bearing sources of funds, and asset quality.



Second quarter 2020 net interest income was $343.8 million, a decrease of $23.5 million or 6%, compared with $367.3 million for the second quarter of 2019. For the first half of 2020, net interest income was $706.5 million, a decrease of $23.3 million or 3%, compared with $729.8 million for the first half of 2019. The decreases in net interest income were due to a decrease in interest-earning asset yields which reflected the drop in the average Prime and London Interbank Offered Rates (“LIBOR”), partially offset by decreases in the cost of funds. Second quarter 2020 net interest margin was 3.04%, a 69 basis point decrease from 3.73% for the second quarter of 2019. For the first half of 2020, net interest margin was 3.24%, a 52 basis point decrease from 3.76% for the first half of 2019.
The average loan yield for the second quarter of 2020 was 3.98%, a 130 basis point decrease from 5.28% for the second quarter of 2019. For the first half of 2020, the average loan yield was 4.34%, a 95 basis point decrease from 5.29% for the first half of 2019. These decreases, compared with the same periods in 2019, reflected materially lower interest rates, which resulted from a cumulative 225 basis point reduction of the federal funds target rate. Approximately 65% and 70% of loans were comprised of variable-rate or hybrid loans that were in the adjustable rate period as of June 30, 2020 and 2019, respectively. Second quarter of 2020 average loans were $37.14 billion, an increase of $4.16 billion or 13% from $32.98 billion for the second quarter of 2019. For the first half of 2020, average loans were $36.15 billion, an increase of $3.45 billion or 11% from $32.70 billion for the first half of 2019. The year-over-year increase stemmed from broad-based growth across CRE, C&I, and single-family residential loans.
70
Second quarter of 2020 average interest-earning assets was $45.41 billion, an increase of $5.95 billion or 15% from $39.46 billion for the second quarter of 2019. This was primarily due to increases of $4.16 billion in average loans and $1.17 billion in AFS debt securities. For the first half of 2020, average interest-earning assets was $43.89 billion, an increase of $4.78 billion or 12% from $39.11 billion for first half of 2019. This was primarily due to increases of $3.45 billion in average loans and $900.4 million in AFS debt securities.
Deposits are an important source of funds and impact both net interest income and net interest margin. Average noninterest-bearing demand deposits totaled $13.53 billion for the second quarter of 2020, compared with $10.24 billion for the second quarter of 2019, an increase of $3.29 billion or 32%. Average noninterest-bearing demand deposits comprised 34% and 29% of average total deposits for the second quarters of 2020 and 2019, respectively. Average noninterest-bearing demand deposits was $12.33 billion for the first half of 2020, compared with $10.16 billion for the first half of 2019, an increase of $2.17 billion or 21%. Average noninterest-bearing demand deposits made up 32% and 29% of average total deposits for first half of 2020 and 2019, respectively. Average interest-bearing deposits of $26.37 billion for the second quarter of 2020 increased by $1.28 billion or 5% from $25.09 billion for the second quarter of 2019. Average interest-bearing deposits of $26.36 billion for the first half of 2020 increased by $1.39 billion or 6%, from $24.97 billion for the first half of 2019.
The average cost of funds was 0.53% for the second quarter of 2020, a decrease of 66 basis points from 1.19% for the second quarter of 2019. For the first half of 2020, the average cost of funds was 0.71%, a decrease of 46 basis points from 1.17% for the first half of 2019. The decreases in the average cost of funds reflected the cumulative 225 basis point reduction of the target federal funds rate from the second half of 2019 through the second quarter of 2020. The average cost of deposits was 0.47% for the second quarter of 2020, a decrease of 64 basis points from 1.11% for the second quarter of 2019. The average cost of deposits was 0.64% for the first half of 2020, a decrease of 45 basis points from 1.09% for the first half of 2019.
The average cost of interest-bearing deposits was 0.71% for the second quarter of 2020, a decrease of 86 basis points from 1.57% for the second quarter of 2019. For the first half of 2020, the average cost of interest-bearing deposits decreased 59 basis points to 0.94%, from 1.53% for the first half of 2019. Other sources of funding included in the calculation of the average cost of funds consist of short-term borrowings, FHLB advances, repurchase agreements and long-term debt.
The Company utilizes various tools to manage interest rate risk. Refer to Item 2. MD&A — Risk Management — Market Risk Management in this Form 10-Q.
71
The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the second quarters of 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||
Average Balance | Interest | Average Yield/ Rate (1) | Average Balance | Interest | Average Yield/ Rate (1) | |||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||
Interest-bearing cash and deposits with banks | $ | 3,435,920 | $ | 4,564 | 0.53 | % | $ | 2,852,060 | $ | 16,800 | 2.37 | % | ||||||||||||||||||||||||||
Securities purchased under resale agreements (“Resale agreements”) (2) | 1,037,473 | 5,514 | 2.14 | % | 999,835 | 7,404 | 2.98 | % | ||||||||||||||||||||||||||||||
AFS debt securities (3)(4) | 3,719,209 | 21,004 | 2.27 | % | 2,551,383 | 15,685 | 2.47 | % | ||||||||||||||||||||||||||||||
Loans (5)(6) | 37,141,773 | 367,393 | 3.98 | % | 32,981,374 | 434,450 | 5.28 | % | ||||||||||||||||||||||||||||||
Restricted equity securities | 78,867 | 301 | 1.54 | % | 76,449 | 505 | 2.65 | % | ||||||||||||||||||||||||||||||
Total interest-earning assets | $ | 45,413,242 | $ | 398,776 | 3.53 | % | $ | 39,461,101 | $ | 474,844 | 4.83 | % | ||||||||||||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 498,908 | 439,449 | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (566,473) | (321,335) | ||||||||||||||||||||||||||||||||||||
Other assets | 2,883,237 | 1,966,226 | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 48,228,914 | $ | 41,545,441 | ||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||
Checking deposits | $ | 4,687,178 | $ | 5,404 | 0.46 | % | $ | 5,221,110 | $ | 15,836 | 1.22 | % | ||||||||||||||||||||||||||
Money market deposits | 9,893,816 | 8,093 | 0.33 | % | 7,856,055 | 28,681 | 1.46 | % | ||||||||||||||||||||||||||||||
Savings deposits | 2,149,965 | 1,445 | 0.27 | % | 2,106,626 | 2,477 | 0.47 | % | ||||||||||||||||||||||||||||||
Time deposits | 9,634,696 | 31,457 | 1.31 | % | 9,904,726 | 50,970 | 2.06 | % | ||||||||||||||||||||||||||||||
Short-term borrowings | 242,185 | 265 | 0.44 | % | 35,575 | 361 | 4.07 | % | ||||||||||||||||||||||||||||||
FHLB advances | 653,665 | 3,343 | 2.06 | % | 533,841 | 4,011 | 3.01 | % | ||||||||||||||||||||||||||||||
Repurchase agreements (2) | 418,681 | 3,540 | 3.40 | % | 50,000 | 3,469 | 27.83 | % | ||||||||||||||||||||||||||||||
Long-term debt and finance lease liabilities | 682,432 | 1,454 | 0.86 | % | 152,608 | 1,713 | 4.50 | % | ||||||||||||||||||||||||||||||
Total interest-bearing liabilities | $ | 28,362,618 | $ | 55,001 | 0.78 | % | $ | 25,860,541 | $ | 107,518 | 1.67 | % | ||||||||||||||||||||||||||
Noninterest-bearing liabilities and stockholders’ equity: | ||||||||||||||||||||||||||||||||||||||
Demand deposits | 13,534,873 | 10,237,868 | ||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | 1,348,977 | 762,684 | ||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 4,982,446 | 4,684,348 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 48,228,914 | $ | 41,545,441 | ||||||||||||||||||||||||||||||||||
Interest rate spread | 2.75 | % | 3.16 | % | ||||||||||||||||||||||||||||||||||
Net interest income and net interest margin | $ | 343,775 | 3.04 | % | $ | 367,326 | 3.73 | % | ||||||||||||||||||||||||||||||
(1)Annualized.
(2)There was no netting of repurchase agreements against resale agreements for the second quarter of 2020. Average balances of resale and repurchase agreements for the three months ended June 30, 2019 have been reported net, pursuant to Accounting Standards Codification (“ASC”) 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 2.14% and 2.71% for the second quarters of 2020 and 2019, respectively. The weighted-average interest rates of gross repurchase agreements were 3.40% and 4.93% for the second quarters of 2020 and 2019, respectively.
(3)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
(4)Includes the amortization of premiums on debt securities of $5.9 million and $2.9 million for the second quarters of 2020 and 2019, respectively.
(5)Average balances include nonperforming loans and loans held-for-sale.
(6)Loans include the accretion of net deferred loan fees, unearned fees and amortization of premiums, which totaled $21.1 million and $8.8 million for the second quarters of 2020 and 2019, respectively.
72
The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the first half of 2020 and 2019:
($ in thousands) | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||
Average Balance | Interest | Average Yield/ Rate (1) | Average Balance | Interest | Average Yield/ Rate (1) | |||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||
Interest-bearing cash and deposits with banks | $ | 3,204,463 | $ | 15,672 | 0.98 | % | $ | 2,716,128 | $ | 32,210 | 2.38 | % | ||||||||||||||||||||||||||
Resale agreements (2) | 959,807 | 11,139 | 2.33 | % | 1,017,320 | 15,310 | 3.03 | % | ||||||||||||||||||||||||||||||
AFS debt securities (3)(4) | 3,496,974 | 41,146 | 2.37 | % | 2,596,590 | 31,433 | 2.44 | % | ||||||||||||||||||||||||||||||
Loans (5)(6) | 36,147,871 | 779,262 | 4.34 | % | 32,699,644 | 857,984 | 5.29 | % | ||||||||||||||||||||||||||||||
Restricted equity securities | 78,771 | 747 | 1.91 | % | 75,348 | 1,218 | 3.26 | % | ||||||||||||||||||||||||||||||
Total interest-earning assets | $ | 43,887,886 | $ | 847,966 | 3.89 | % | $ | 39,105,030 | $ | 938,155 | 4.84 | % | ||||||||||||||||||||||||||
Noninterest-earning assets: | ||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 504,710 | 453,725 | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (529,385) | (317,909) | ||||||||||||||||||||||||||||||||||||
Other assets | 2,629,000 | 1,903,306 | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 46,492,211 | $ | 41,144,152 | ||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||
Checking deposits | $ | 4,844,425 | $ | 15,650 | 0.65 | % | $ | 5,245,845 | $ | 30,091 | 1.16 | % | ||||||||||||||||||||||||||
Money market deposits | 9,453,599 | 30,341 | 0.65 | % | 7,967,831 | 58,915 | 1.49 | % | ||||||||||||||||||||||||||||||
Savings deposits | 2,113,118 | 3,262 | 0.31 | % | 2,099,058 | 4,704 | 0.45 | % | ||||||||||||||||||||||||||||||
Time deposits | 9,949,351 | 73,549 | 1.49 | % | 9,658,181 | 96,259 | 2.01 | % | ||||||||||||||||||||||||||||||
Short-term borrowings | 151,081 | 821 | 1.09 | % | 47,939 | 977 | 4.11 | % | ||||||||||||||||||||||||||||||
FHLB advances | 673,511 | 7,509 | 2.24 | % | 436,475 | 6,990 | 3.23 | % | ||||||||||||||||||||||||||||||
Repurchase agreements (2) | 375,549 | 7,531 | 4.03 | % | 50,000 | 6,961 | 28.07 | % | ||||||||||||||||||||||||||||||
Long-term debt and finance lease liabilities | 417,345 | 2,821 | 1.36 | % | 152,485 | 3,471 | 4.59 | % | ||||||||||||||||||||||||||||||
Total interest-bearing liabilities | $ | 27,977,979 | $ | 141,484 | 1.02 | % | $ | 25,657,814 | $ | 208,368 | 1.64 | % | ||||||||||||||||||||||||||
Noninterest-bearing liabilities and stockholders’ equity: | ||||||||||||||||||||||||||||||||||||||
Demand deposits | 12,326,291 | 10,155,079 | ||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | 1,185,715 | 720,028 | ||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 5,002,226 | 4,611,231 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 46,492,211 | $ | 41,144,152 | ||||||||||||||||||||||||||||||||||
Interest rate spread | 2.87 | % | 3.20 | % | ||||||||||||||||||||||||||||||||||
Net interest income and net interest margin | $ | 706,482 | 3.24 | % | $ | 729,787 | 3.76 | % | ||||||||||||||||||||||||||||||
(1)Annualized.
(2)Average balances of resale and repurchase agreements have been reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 2.32% and 2.77% for the first half of 2020 and 2019, respectively. The weighted-average interest rates of gross repurchase agreements were 3.76% and 4.97% for the first half of 2020 and 2019, respectively.
(3)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
(4)Includes the amortization of premiums on debt securities of $9.2 million and $6.0 million for the first half of 2020 and 2019, respectively.
(5)Average balances include nonperforming loans and loans held-for-sale.
(6)Loans include the accretion of net deferred loan fees, unearned fees and amortization of premiums, which totaled $29.1 million and $16.8 million for the first half of 2020 and 2019, respectively.
73
The following table summarizes the extent to which changes in (1) interest rates; and (2) average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and interest rates. Changes that are not solely due to either volume or rate are allocated proportionally based on the absolute value of the change related to average volume and average rate.
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||
2020 vs. 2019 | 2020 vs. 2019 | |||||||||||||||||||||||||||||||||||||
Total Change | Changes Due to | Total Change | Changes Due to | |||||||||||||||||||||||||||||||||||
Volume | Yield/Rate | Volume | Yield/Rate | |||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||
Interest-bearing cash and deposits with banks | $ | (12,236) | $ | 2,882 | $ | (15,118) | $ | (16,538) | $ | 4,994 | $ | (21,532) | ||||||||||||||||||||||||||
Resale agreements | (1,890) | 269 | (2,159) | (4,171) | (826) | (3,345) | ||||||||||||||||||||||||||||||||
AFS debt securities | 5,319 | 6,642 | (1,323) | 9,713 | 10,702 | (989) | ||||||||||||||||||||||||||||||||
Loans | (67,057) | 49,689 | (116,746) | (78,722) | 85,564 | (164,286) | ||||||||||||||||||||||||||||||||
Restricted equity securities | (204) | 15 | (219) | (471) | 54 | (525) | ||||||||||||||||||||||||||||||||
Total interest and dividend income | $ | (76,068) | $ | 59,497 | $ | (135,565) | $ | (90,189) | $ | 100,488 | $ | (190,677) | ||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||
Checking deposits | $ | (10,432) | $ | (1,479) | $ | (8,953) | $ | (14,441) | $ | (2,146) | $ | (12,295) | ||||||||||||||||||||||||||
Money market deposits | (20,588) | 5,958 | (26,546) | (28,574) | 9,511 | (38,085) | ||||||||||||||||||||||||||||||||
Savings deposits | (1,032) | 50 | (1,082) | (1,442) | 32 | (1,474) | ||||||||||||||||||||||||||||||||
Time deposits | (19,513) | (1,360) | (18,153) | (22,710) | 2,859 | (25,569) | ||||||||||||||||||||||||||||||||
Short-term borrowings | (96) | 473 | (569) | (156) | 956 | (1,112) | ||||||||||||||||||||||||||||||||
FHLB advances | (668) | 775 | (1,443) | 519 | 3,074 | (2,555) | ||||||||||||||||||||||||||||||||
Repurchase agreements | 71 | 5,491 | (5,420) | 570 | 11,069 | (10,499) | ||||||||||||||||||||||||||||||||
Long-term debt and finance lease liabilities | (259) | 2,033 | (2,292) | (650) | 3,024 | (3,674) | ||||||||||||||||||||||||||||||||
Total interest expense | $ | (52,517) | $ | 11,941 | $ | (64,458) | $ | (66,884) | $ | 28,379 | $ | (95,263) | ||||||||||||||||||||||||||
Change in net interest income | $ | (23,551) | $ | 47,556 | $ | (71,107) | $ | (23,305) | $ | 72,109 | $ | (95,414) | ||||||||||||||||||||||||||
Noninterest Income
The following table presents the components of noninterest income for the second quarter and first half of 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
Lending fees | $ | 21,946 | $ | 16,423 | 34 | % | $ | 37,719 | $ | 31,392 | 20 | % | ||||||||||||||||||||||||||
Deposit account fees | 10,872 | 9,607 | 13 | % | 21,319 | 19,075 | 12 | % | ||||||||||||||||||||||||||||||
Foreign exchange income | 4,562 | 7,286 | (37) | % | 12,381 | 12,301 | 1 | % | ||||||||||||||||||||||||||||||
Wealth management fees | 3,091 | 3,800 | (19) | % | 8,444 | 7,574 | 11 | % | ||||||||||||||||||||||||||||||
Interest rate contracts and other derivative income | 6,107 | 10,398 | (41) | % | 13,180 | 13,614 | (3) | % | ||||||||||||||||||||||||||||||
Net gains on sales of loans | 132 | 15 | 780 | % | 1,082 | 930 | 16 | % | ||||||||||||||||||||||||||||||
Gains on sales of AFS debt securities | 9,640 | 1,447 | 566 | % | 11,169 | 3,008 | 271 | % | ||||||||||||||||||||||||||||||
Other investment income | 966 | 706 | 37 | % | 2,887 | 1,908 | 51 | % | ||||||||||||||||||||||||||||||
Other income | 1,321 | 3,077 | (57) | % | 4,505 | 5,088 | (11) | % | ||||||||||||||||||||||||||||||
Total noninterest income | $ | 58,637 | $ | 52,759 | 11 | % | $ | 112,686 | $ | 94,890 | 19 | % | ||||||||||||||||||||||||||
74
Noninterest income comprised 15% and 14% of total revenue for the second quarter and the first half of 2020, respectively, compared with 13% and 12% for the second quarter and the first half of 2019, respectively. Second quarter 2020 noninterest income was $58.6 million, an increase of $5.9 million or 11%, compared with $52.8 million for the same period in 2019. This increase was primarily due to increases in gains on sale of AFS debt securities and lending fees, partially offset by decreases in interest rate contracts and other derivative income, foreign exchange income and other income. First half 2020 noninterest income was $112.7 million, an increase of $17.8 million or 19%, compared with $94.9 million for the first half of 2019. This increase was primarily due to increases in gains on sale of AFS debt securities and lending fees, partially offset by decreases in other income and interest rate contracts and other derivative income. The following discussion provides the composition of the major changes in noninterest income:
Lending fees increased by $5.5 million or 34% to $21.9 million for the second quarter of 2020, and increased by $6.3 million or 20% to $37.7 million for the first half of 2020, as compared with the same periods in 2019. These increases primarily reflected an increase in the valuation of warrants received as part of lending relationships.
Foreign exchange income decreased by $2.7 million or 37% to $4.6 million for the second quarter of 2020, and was essentially flat at $12.4 million for the first half of 2020, as compared with the same periods in 2019. The decrease in the second quarter of 2020 was primarily driven by the unfavorable revaluation of certain foreign currency-denominated balance sheet items and a decrease in customer-driven transactions.
Interest rate contracts and other derivative income decreased $4.3 million or 41% to $6.1 million for the second quarter of 2020, and decreased by $434 thousand or 3% to $13.2 million for the first half of 2020, as compared with the same periods in 2019. These decreases primarily reflected the impact of negative credit valuation adjustments due to higher loss probabilities for borrowers impacted by COVID-19.
Gains on sales of AFS debt securities increased by $8.2 million or 566% to $9.6 million for the second quarter of 2020, and increased by $8.2 million or 271% to $11.2 million for the first half of 2020, as compared with the same periods in 2019. These increases were primarily driven by $131.6 million in sales of municipal bonds during the second quarter of 2020.
Other income decreased by $1.8 million or 57% to $1.3 million for the second quarter of 2020, and decreased by $583 thousand or 11% to $4.5 million for the first half of 2020, as compared with the same periods in 2019. These decreases primarily reflected losses recognized on the cash surrender value of bank-owned life insurance policies.
Noninterest Expense
The following table presents the components of noninterest expense for the second quarters and first half of 2020 and 2019:
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
Compensation and employee benefits | $ | 96,955 | $ | 100,531 | (4) | % | $ | 198,915 | $ | 202,830 | (2) | % | ||||||||||||||||||||||||||
Occupancy and equipment expense | 16,217 | 17,362 | (7) | % | 33,293 | 34,680 | (4) | % | ||||||||||||||||||||||||||||||
Deposit insurance premiums and regulatory assessments | 3,700 | 2,919 | 27 | % | 7,127 | 6,007 | 19 | % | ||||||||||||||||||||||||||||||
Legal expense | 1,530 | 2,355 | (35) | % | 4,727 | 4,580 | 3 | % | ||||||||||||||||||||||||||||||
Data processing | 4,480 | 3,460 | 29 | % | 8,306 | 6,617 | 26 | % | ||||||||||||||||||||||||||||||
Consulting expense | 1,413 | 2,069 | (32) | % | 2,630 | 4,128 | (36) | % | ||||||||||||||||||||||||||||||
Deposit related expense | 3,353 | 3,338 | 0 | % | 6,916 | 6,842 | 1 | % | ||||||||||||||||||||||||||||||
Computer software expense | 7,301 | 6,211 | 18 | % | 13,467 | 12,289 | 10 | % | ||||||||||||||||||||||||||||||
Other operating expense | 19,248 | 22,679 | (15) | % | 40,367 | 44,968 | (10) | % | ||||||||||||||||||||||||||||||
Amortization of tax credit and other investments | 24,759 | 16,739 | 48 | % | 42,084 | 41,644 | 1 | % | ||||||||||||||||||||||||||||||
Repurchase agreements’ extinguishment cost | 8,740 | — | 100 | % | 8,740 | — | 100 | % | ||||||||||||||||||||||||||||||
Total noninterest expense | $ | 187,696 | $ | 177,663 | 6 | % | $ | 366,572 | $ | 364,585 | 1 | % | ||||||||||||||||||||||||||
75
Second quarter 2020 noninterest expense was $187.7 million, an increase of $10.0 million or 6%, compared with $177.7 million for the same period in 2019. This increase was primarily due to repurchase agreements’ extinguishment cost and the amortization of tax credit and other investments, partially offset by decreases in compensation and employee benefits and other operating expenses. First half 2020 noninterest expense was $366.6 million, an increase of $2.0 million or 1%, compared with $364.6 million for the first half of 2019. This increase was primarily due to repurchase agreements’ extinguishment cost and additional data processing expense, partially offset by decreases in other operating expenses and compensation and employee benefits.
Compensation and employee benefits decreased by $3.6 million or 4% to $97.0 million for the second quarter of 2020, and decreased by $3.9 million or 2% to $198.9 million for the first half of 2020, as compared with the same periods in 2019. These decreases were primarily driven by increased deferred loan costs as a result of increased loan originations and a reduction in bonus accruals, partially offset by annual merit increases and greater temporary staffing costs.
Data processing increased by $1.0 million or 29% to $4.5 million for the second quarter of 2020, and increased by $1.7 million or 26% to $8.3 million for the first half of 2020, as compared with the same periods in 2019. These increases were primarily driven by an increase in electronic data processing fees.
Other operating expense primarily consists of telecommunications and postage, loan related expenses, charitable contributions, marketing, travel, and other miscellaneous expense categories. Other operating expense decreased by $3.4 million or 15% to $19.2 million for the second quarter of 2020, and decreased by $4.6 million or 10% to $40.4 million for the first half of 2020, as compared with the same periods in the 2019. These decreases were primarily driven by decreases in travel, marketing and other miscellaneous expense categories, largely due to COVID-19.
Amortization of tax credit and other investments increased $8.0 million or 48% to $24.8 million for the second quarter of 2020, compared with the second quarter of 2019, and increased by $440 thousand or 1% to $42.1 million for the first half of 2020, as compared with the same periods in 2019. These increases were mainly attributable to a reduction in value for investments accounted for under the equity method and an increase in amortization expense from tax credit investments placed in service in 2020, partially offset by a decrease in impairment charges. In the first quarter of 2019, the Company fully wrote off the tax credit investments related to DC Solar and recorded a $7.0 million impairment charge. In the second quarter of 2019, the Company recorded $2.9 million of other-than-temporary impairment (“OTTI”) charges related to a historic tax credit investment and a Community Reinvestment Act investment. In comparison, $624 thousand and $474 thousand of impairment charges net of recoveries were recorded in the second quarter and first half of 2020, respectively.
During the second quarter of 2020, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million. No such expense was incurred in the second quarter and first half of 2019.
Income Taxes
($ in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
Income before income taxes | $ | 112,273 | $ | 223,177 | (50) | % | $ | 276,283 | $ | 418,268 | (34) | % | ||||||||||||||||||||||||||
Income tax expense | $ | 12,921 | $ | 72,797 | (82 | %) | $ | 32,107 | $ | 103,864 | (69 | %) | ||||||||||||||||||||||||||
Effective tax rate | 11.5 | % | 32.6 | % | (65 | %) | 11.6 | % | 24.8 | % | (53 | %) | ||||||||||||||||||||||||||
The income tax expense was $12.9 million and the effective tax rate was 11.5% in the second quarter of 2020, compared with an income tax expense of $72.8 million and an effective tax rate of 32.6% for the same period in 2019. The income tax expense was $32.1 million and the effective tax rate was 11.6% in the first half of 2020, compared with an income tax expense of $103.9 million and an effective tax rate of 24.8% for the same period in 2019. The higher effective tax rates of 32.6% and 24.8% during the second quarter and first half of 2019, respectively, were primarily due to $30.1 million of additional income tax expense recorded to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar. Excluding this $30.1 million of additional income tax expense, non-GAAP effective tax rates for the second quarter and first half of 2019 were 19.1% and 17.6%, respectively. For more details, see reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q. The year-over-year decrease in the effective tax rate was primarily due to the decreases in pre-tax income during the second quarter and first half of 2020, as compared with the same periods of 2019, combined with a year-over-year increase in tax credits recognized from investments in renewable energy and solar tax credit projects.
76
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 served and the related products and services provided. The segments reflect how financial information is currently evaluated by management. For additional description of the Company’s internal management reporting process, including the segment cost allocation methodology, see Note 15 — Business Segments to the Consolidated Financial Statements in this Form 10-Q.
Net interest income before provision for credit losses of each segment represents the difference between actual interest income earned on loans and interest expense paid on customer deposits of the segment, adjusted for funding charges for loans or funding credits for deposits through the Company’s internal funds transfer pricing (“FTP”) process. During the third quarter of 2019, the Company enhanced its FTP methodology related to deposits by setting a minimum floor rate for the FTP credits for deposits in consideration of the flattened and inverted yield curve. This methodology has been retrospectively applied to the segment financial results for the second quarter and first half of 2019.
The following tables present selected segment information for the second quarter and first half of 2020 and 2019:
($ in thousands) | Three Months Ended June 30, 2020 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 124,926 | $ | 183,796 | $ | 35,053 | $ | 343,775 | ||||||||||||||||||
Provision for credit losses | 5,590 | 96,853 | — | 102,443 | ||||||||||||||||||||||
Noninterest income | 13,943 | 33,887 | 10,807 | 58,637 | ||||||||||||||||||||||
Noninterest expense | 80,164 | 64,900 | 42,632 | 187,696 | ||||||||||||||||||||||
Segment income before income taxes | 53,115 | 55,930 | 3,228 | 112,273 | ||||||||||||||||||||||
Segment net income | $ | 38,058 | $ | 40,178 | $ | 21,116 | $ | 99,352 | ||||||||||||||||||
Average loans | $ | 12,011,203 | $ | 25,130,570 | $ | — | $ | 37,141,773 | ||||||||||||||||||
Average deposits | $ | 27,004,689 | $ | 10,642,686 | $ | 2,253,153 | $ | 39,900,528 | ||||||||||||||||||
($ in thousands) | Three Months Ended June 30, 2019 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 180,911 | $ | 158,941 | $ | 27,474 | $ | 367,326 | ||||||||||||||||||
Provision for credit losses | 1,616 | 17,629 | — | 19,245 | ||||||||||||||||||||||
Noninterest income | 14,503 | 33,656 | 4,600 | 52,759 | ||||||||||||||||||||||
Noninterest expense | 83,656 | 67,303 | 26,704 | 177,663 | ||||||||||||||||||||||
Segment income before income taxes | 110,142 | 107,665 | 5,370 | 223,177 | ||||||||||||||||||||||
Segment net income (loss) | $ | 78,741 | $ | 76,885 | $ | (5,246) | $ | 150,380 | ||||||||||||||||||
Average loans | $ | 10,529,143 | $ | 22,452,231 | $ | — | $ | 32,981,374 | ||||||||||||||||||
Average deposits | $ | 25,010,526 | $ | 8,350,204 | $ | 1,965,655 | $ | 35,326,385 | ||||||||||||||||||
77
($ in thousands) | Six Months Ended June 30, 2020 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 277,517 | $ | 367,297 | $ | 61,668 | $ | 706,482 | ||||||||||||||||||
Provision for credit losses | 13,378 | 162,935 | — | 176,313 | ||||||||||||||||||||||
Noninterest income | 30,345 | 66,343 | 15,998 | 112,686 | ||||||||||||||||||||||
Noninterest expense | 167,128 | 135,026 | 64,418 | 366,572 | ||||||||||||||||||||||
Segment income before income taxes | 127,356 | 135,679 | 13,248 | 276,283 | ||||||||||||||||||||||
Segment net income | $ | 91,253 | $ | 97,309 | $ | 55,614 | $ | 244,176 | ||||||||||||||||||
Average loans | $ | 11,640,346 | $ | 24,507,525 | $ | — | $ | 36,147,871 | ||||||||||||||||||
Average deposits | $ | 26,298,876 | $ | 9,909,058 | $ | 2,478,850 | $ | 38,686,784 | ||||||||||||||||||
($ in thousands) | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||
Consumer and Business Banking | Commercial Banking | Other | Total | |||||||||||||||||||||||
Net interest income before provision for credit losses | $ | 365,970 | $ | 311,649 | $ | 52,168 | $ | 729,787 | ||||||||||||||||||
Provision for credit losses | 4,629 | 37,195 | — | 41,824 | ||||||||||||||||||||||
Noninterest income | 28,275 | 58,200 | 8,415 | 94,890 | ||||||||||||||||||||||
Noninterest expense | 171,562 | 137,847 | 55,176 | 364,585 | ||||||||||||||||||||||
Segment income before income taxes | 218,054 | 194,807 | 5,407 | 418,268 | ||||||||||||||||||||||
Segment net income | $ | 155,887 | $ | 139,219 | $ | 19,298 | $ | 314,404 | ||||||||||||||||||
Average loans | $ | 10,440,946 | $ | 22,258,698 | $ | — | $ | 32,699,644 | ||||||||||||||||||
Average deposits | $ | 25,029,425 | $ | 8,186,361 | $ | 1,910,208 | $ | 35,125,994 | ||||||||||||||||||
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 $38.1 million for the second quarter of 2020, compared with $78.7 million for the same period in 2019. The decrease in segment net income of $40.6 million or 52% was primarily due to a decrease in net interest income before provision for credit losses.
Second quarter 2020 net interest income before provision for credit losses for this segment was $124.9 million, a decrease of $56.0 million or 31%, compared with $180.9 million for the same period in 2019. Interest income earned on loans decreased by 3%, driven by a decrease in average loan yields, partially offset by average loan growth; interest expense paid on deposits decreased by 52%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the loans FTP rate, and FTP credits received for deposits also decreased, reflecting a decline in the deposits FTP rate. Combined, these factors contributed to a 31% decrease in segment net interest income before provision for credit losses, with the largest driver of the unfavorable result being lower FTP credits received for deposits.
Second quarter 2020 average loans for this segment were $12.01 billion, an increase of $1.48 billion or 14% from $10.53 billion for the same period in 2019, primarily driven by an increase in single-family residential portfolio. Second quarter 2020 average deposits for this segment were $27.00 billion, an increase of $1.99 billion or 8% from $25.01 billion for the same period in 2019, primarily driven by increases in noninterest-bearing demand and money market deposits.
The Consumer and Business Banking segment reported net income of $91.3 million for the first half of 2020, compared with $155.9 million for the same period in 2019. The decrease in segment net income of $64.6 million or 41% was primarily due to a decrease in net interest income before provision for credit losses.
78
First half 2020 net interest income before provision for credit losses for this segment was $277.5 million, a decrease of $88.5 million or 24%, compared with $366.0 million for the same period in 2019. Interest income earned on loans remained relatively flat; interest expense paid on deposits decreased by 36%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the loans FTP rate, and FTP credits received for deposits also decreased, reflecting a decline in the deposits FTP rate. Combined, these factors drove a 24% decrease in segment net interest income before provision for credit losses, with the largest driver of the unfavorable result being lower FTP credits received for deposits.
First half 2020 average loans for this segment were $11.64 billion, an increase of $1.20 billion or 11% from $10.44 billion for the same period in 2019, primarily driven by an increase in single-family residential portfolio. First half 2020 average deposits for this segment were $26.30 billion, an increase of $1.27 billion or 5% from $25.03 billion for the same period in 2019, primarily driven by increases in noninterest-bearing demand and money market deposits.
Commercial Banking
The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction and land lending, affordable housing loans and letters of credit, asset-based lending, and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity risk hedging.
The Commercial Banking segment reported segment net income of $40.2 million for the second quarter of 2020, compared with $76.9 million for the same period in 2019. The decrease in segment net income of $36.7 million or 48% reflected an increase in provision for credit losses, partially offset by an increase in net interest income before provision for credit losses. Second quarter 2020 provision for credit losses was $96.9 million, an increase of $79.3 million or 449%, compared with $17.6 million for the same period in 2019. This increase was primarily due to deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, as well as due to loan risk rating downgrades.
Second quarter 2020 net interest income before provision for credit losses for this segment was $183.8 million, an increase of $24.9 million or 16% compared with $158.9 million for the same period in 2019. Interest income earned on loans decreased by 21%, driven by a decrease in average loan yields, which more than offset the income growth driven by the average loan growth; interest expense paid on deposits decreased by 46%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the FTP rate on loans, and FTP credits received for deposits also decreased, reflecting a decline in the FTP rate on deposits. Combined, these factors contributed to an increase of 16% in segment net interest income before provision for credit losses, which were primarily driven by lower FTP funding charges assessed for loans.
Second quarter 2020 average loans for this segment were $25.13 billion, an increase of $2.68 billion or 12% from $22.45 billion for the same period in 2019, primarily driven by the growth in CRE and C&I loan portfolios. Second quarter 2020 average deposits were $10.64 billion, an increase of $2.29 billion or 27% from $8.35 billion for the same period in 2019, primarily driven by an increase in noninterest-bearing demand deposits.
The Commercial Banking segment reported segment net income of $97.3 million for the first half of 2020, compared with $139.2 million for the same period in 2019. The decrease in segment net income of $41.9 million or 30% reflected an increase in provision for credit losses, partially offset by increases in net interest income before provision for credit losses and noninterest income. First half 2020 provision for credit losses was $162.9 million, an increase of $125.7 million or 338%, compared with $37.2 million for the same period in 2019. This increase was primarily due to deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, as well as due to loan risk rating downgrades.
79
First half 2020 net interest income before provision for credit losses for this segment was $367.3 million, an increase of $55.7 million or 18% compared with $311.6 million for the same period in 2019. Interest income earned on loans decreased by 13%, which was primarily attributable to a decrease in average loan yields, which more than offset income growth driven by average loan growth; interest expense paid on deposits decreased by 31%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the FTP rate on loans; FTP credits received for deposits also decreased, reflecting a decline in the FTP rate on deposits. Combined, these factors drove an increase of 18% in segment net interest income before provision for credit losses, which were primarily driven by lower FTP funding charges assessed for loans. First half 2020 noninterest income was $66.3 million, an increase of $8.1 million or 14%, compared with $58.2 million for the same period in 2019. This increase was mainly attributable to an increase in the valuation of warrants received as part of lending relationships.
First half 2020 average loans for this segment were $24.51 billion, an increase of $2.25 billion or 10% from $22.26 billion for the same period in 2019, primarily driven by the growth in CRE and C&I loan portfolios. First half 2020 average deposits for this segment were $9.91 billion, an increase of $1.72 billion or 21% from $8.19 billion for the same period in 2019, primarily driven by increases in noninterest-bearing demand 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, namely the Consumer and Business Banking and the Commercial Banking segments.
The Other segment reported segment income before income taxes of $3.2 million and segment net income of $21.1 million for the second quarter of 2020, reflecting an income tax benefit of $17.9 million. In comparison, the Other segment reported segment income before income taxes of $5.4 million and segment net loss of $5.2 million for the second quarter of 2019, reflecting an income tax expense of $10.6 million.
The decrease in second quarter 2020 segment income before income taxes was primarily driven by an increase in noninterest expense, partially offset by increases in net interest income before provision for credit losses and noninterest income. Noninterest expense was $42.6 million, an increase of $15.9 million or 60%, compared with $26.7 million for the same period in 2019. The increase was mainly attributable to a reduction in value for investments accounted for under the equity method and an increase in amortization expense from tax credit investments placed in service in 2020. In addition, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million during the second quarter of 2020. Second quarter 2020 net interest income before provision for credit losses was $35.1 million, an increase of $7.6 million or 28%, compared with $27.5 million for the same period in 2019. The increase mainly reflected a 67% decrease in interest expense paid on deposits, driven by a decline in average cost of deposits and an increase in FTP net spread. FTP net spread is the difference between the total internal FTP charges and credits and is recorded as part of net interest income in the Other segment. The favorable impact on net interest income before provision for credit losses was partially offset by a decrease in interest income on investment. Second quarter 2020 noninterest income was $10.8 million, an increase of $6.2 million or 135%, compared with $4.6 million for the same period in 2019, driven by an increase in gains on sales of municipal bonds during the second quarter of 2020.
The Other segment reported segment income before income taxes of $13.2 million and segment net income of $55.6 million for the first half of 2020, reflecting an income tax benefit of $42.4 million. In comparison, the Other segment reported segment income before income taxes of $5.4 million and segment net income of $19.3 million for the first half of 2019, reflecting an income tax benefit of $13.9 million.
The increase in segment income before income taxes was primarily driven by increases in net interest income before provision for credit losses and noninterest income, partially offset by an increase in noninterest expense. First half 2020 net interest income before provision for credit losses was $61.7 million, an increase of $9.5 million or 18%, compared with $52.2 million for the same period in 2019. The increase reflected a 42% decrease in interest expense paid on deposits, driven by a decline in the average cost of deposits and an increase in FTP net spread. The favorable impact on net interest income before provision for credit losses was partially offset by a decrease in interest income on investments. First half 2020 noninterest income was $16.0 million, an increase of $7.6 million or 90%, compared with $8.4 million for the same period in 2019, primarily driven by the aforementioned sales of municipal bonds during the second quarter of 2020. First half 2020 noninterest expense was $64.4 million, an increase of $9.2 million or 17%, compared with $55.2 million for the same period in 2019. The increase was primarily due to the aforementioned debt extinguishment cost of $8.7 million during the second quarter of 2020.
80
The income tax expense or benefit in the Other segment consists of the remaining unallocated income tax expense or benefit after allocating income tax expense to the two core segments. Income tax expense is allocated to the Consumer and Business Banking and the Commercial Banking segments by applying statutory income tax rates to the segment income before income taxes.
Balance Sheet Analysis
The following table presents a discussion of the significant changes between June 30, 2020 and December 31, 2019:
Selected Consolidated Balance Sheet Data
($ in thousands) | June 30, 2020 | December 31, 2019 | Change | |||||||||||||||||||||||
$ | % | |||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,533,502 | $ | 3,261,149 | $ | 1,272,353 | 39 | % | ||||||||||||||||||
Interest-bearing deposits with banks | 531,591 | 196,161 | 335,430 | 171 | % | |||||||||||||||||||||
Resale agreements | 1,260,000 | 860,000 | 400,000 | 47 | % | |||||||||||||||||||||
AFS debt securities, at fair value (amortized cost of $3,823,714 in 2020) | 3,884,574 | 3,317,214 | 567,360 | 17 | % | |||||||||||||||||||||
Restricted equity securities, at cost | 78,963 | 78,580 | 383 | 0 | % | |||||||||||||||||||||
Loans held-for-sale | 3,875 | 434 | 3,441 | 793 | % | |||||||||||||||||||||
Loans held-for-investment (net of allowance for loan losses of $632,071 in 2020 and $358,287 in 2019) | 36,597,341 | 34,420,252 | 2,177,089 | 6 | % | |||||||||||||||||||||
Investments in qualified affordable housing partnerships, net | 201,888 | 207,037 | (5,149) | (2) | % | |||||||||||||||||||||
Investments in tax credit and other investments, net | 251,318 | 254,140 | (2,822) | (1) | % | |||||||||||||||||||||
Premises and equipment, net | 110,709 | 118,364 | (7,655) | (6) | % | |||||||||||||||||||||
Goodwill | 465,697 | 465,697 | — | — | % | |||||||||||||||||||||
Operating lease right-of-use assets | 94,898 | 99,973 | (5,075) | (5) | % | |||||||||||||||||||||
Other assets | 1,393,23 |