EAST WEST BANCORP INC - Quarter Report: 2020 March (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 March 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-24939
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-4703316
(I.R.S. Employer Identification No.)
135 North Los Robles Ave., 7th Floor, Pasadena, 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, $0.001 Par Value | EWBC | The Nasdaq Global Select Market | |||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 141,486,290 shares as of April 30, 2020.
TABLE OF CONTENTS
Page | |||
2
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 427,415 | $ | 536,221 | ||||
Interest-bearing cash with banks | 2,652,627 | 2,724,928 | ||||||
Cash and cash equivalents | 3,080,042 | 3,261,149 | ||||||
Interest-bearing deposits with banks | 293,509 | 196,161 | ||||||
Securities purchased under resale agreements (“resale agreements”) | 860,000 | 860,000 | ||||||
Securities: | ||||||||
Available-for-sale (''AFS'') debt securities, at fair value (amortized cost of $3,660,413 in 2020; includes assets pledged as collateral of $742,410 in 2020 and $479,432 in 2019) | 3,695,943 | 3,317,214 | ||||||
Restricted equity securities, at cost | 78,745 | 78,580 | ||||||
Loans held-for-sale | 1,594 | 434 | ||||||
Loans held-for-investment (net of allowance for loan losses of $557,003 in 2020 and $358,287 in 2019; includes assets pledged as collateral of $23,107,287 in 2020 and $22,431,092 in 2019) | 35,336,390 | 34,420,252 | ||||||
Investments in qualified affordable housing partnerships, net | 198,653 | 207,037 | ||||||
Investments in tax credit and other investments, net | 268,330 | 254,140 | ||||||
Premises and equipment (net of accumulated depreciation of $120,156 in 2020 and $116,790 in 2019) | 115,393 | 118,364 | ||||||
Goodwill | 465,697 | 465,697 | ||||||
Operating lease right-of-use assets | 101,381 | 99,973 | ||||||
Other assets | 1,452,868 | 917,095 | ||||||
TOTAL | $ | 45,948,545 | $ | 44,196,096 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 11,833,397 | $ | 11,080,036 | ||||
Interest-bearing | 26,853,561 | 26,244,223 | ||||||
Total deposits | 38,686,958 | 37,324,259 | ||||||
Short-term borrowings | 66,924 | 28,669 | ||||||
Federal Home Loan Bank (“FHLB”) advances | 646,336 | 745,915 | ||||||
Securities sold under repurchase agreements (“repurchase agreements”) | 450,000 | 200,000 | ||||||
Long-term debt and finance lease liabilities | 152,162 | 152,270 | ||||||
Operating lease liabilities | 109,356 | 108,083 | ||||||
Accrued expenses and other liabilities | 933,824 | 619,283 | ||||||
Total liabilities | 41,045,560 | 39,178,479 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized; 167,091,420 and 166,621,959 shares issued in 2020 and 2019, respectively | 167 | 167 | ||||||
Additional paid-in capital | 1,833,617 | 1,826,345 | ||||||
Retained earnings | 3,695,759 | 3,689,377 | ||||||
Treasury stock, at cost — 25,656,321 shares in 2020 and 20,996,574 shares in 2019 | (633,439 | ) | (479,864 | ) | ||||
Accumulated other comprehensive loss (“AOCI”), net of tax | 6,881 | (18,408 | ) | |||||
Total stockholders’ equity | 4,902,985 | 5,017,617 | ||||||
TOTAL | $ | 45,948,545 | $ | 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 March 31, | ||||||||
2020 | 2019 | |||||||
INTEREST AND DIVIDEND INCOME | ||||||||
Loans receivable, including fees | $ | 411,869 | $ | 423,534 | ||||
AFS debt securities | 20,142 | 15,748 | ||||||
Resale agreements | 5,565 | 7,846 | ||||||
Restricted equity securities | 446 | 713 | ||||||
Interest-bearing cash and deposits with banks | 11,168 | 15,470 | ||||||
Total interest and dividend income | 449,190 | 463,311 | ||||||
INTEREST EXPENSE | ||||||||
Deposits | 76,403 | 92,005 | ||||||
Federal funds purchased and other short-term borrowings | 556 | 616 | ||||||
FHLB advances | 4,166 | 2,979 | ||||||
Repurchase agreements | 3,991 | 3,492 | ||||||
Long-term debt and finance lease liabilities | 1,367 | 1,758 | ||||||
Total interest expense | 86,483 | 100,850 | ||||||
Net interest income before provision for credit losses | 362,707 | 362,461 | ||||||
Provision for credit losses | 73,870 | 22,579 | ||||||
Net interest income after provision for credit losses | 288,837 | 339,882 | ||||||
NONINTEREST INCOME | ||||||||
Lending fees | 15,773 | 14,969 | ||||||
Deposit account fees | 10,447 | 9,468 | ||||||
Foreign exchange income | 7,819 | 5,015 | ||||||
Wealth management fees | 5,357 | 3,812 | ||||||
Interest rate contracts and other derivative income | 7,073 | 3,216 | ||||||
Net gains on sales of loans | 950 | 915 | ||||||
Net gains on sales of AFS debt securities | 1,529 | 1,561 | ||||||
Other investment income | 1,921 | 1,202 | ||||||
Other income | 3,180 | 1,973 | ||||||
Total noninterest income | 54,049 | 42,131 | ||||||
NONINTEREST EXPENSE | ||||||||
Compensation and employee benefits | 101,960 | 102,299 | ||||||
Occupancy and equipment expense | 17,076 | 17,318 | ||||||
Deposit insurance premiums and regulatory assessments | 3,427 | 3,088 | ||||||
Legal expense | 3,197 | 2,225 | ||||||
Data processing | 3,826 | 3,157 | ||||||
Consulting expense | 1,217 | 2,059 | ||||||
Deposit related expense | 3,563 | 3,504 | ||||||
Computer software expense | 6,166 | 6,078 | ||||||
Other operating expense | 21,119 | 22,289 | ||||||
Amortization of tax credit and other investments | 17,325 | 24,905 | ||||||
Total noninterest expense | 178,876 | 186,922 | ||||||
INCOME BEFORE INCOME TAXES | 164,010 | 195,091 | ||||||
INCOME TAX EXPENSE | 19,186 | 31,067 | ||||||
NET INCOME | $ | 144,824 | $ | 164,024 | ||||
EARNINGS PER SHARE (“EPS”) | ||||||||
BASIC | $ | 1.00 | $ | 1.13 | ||||
DILUTED | $ | 1.00 | $ | 1.12 | ||||
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||
BASIC | 144,814 | 145,256 | ||||||
DILUTED | 145,285 | 145,921 | ||||||
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 March 31, | ||||||||
2020 | 2019 | |||||||
Net income | $ | 144,824 | $ | 164,024 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Net changes in unrealized gains on AFS debt securities | 27,453 | 22,011 | ||||||
Foreign currency translation adjustments | (2,164 | ) | 3,180 | |||||
Other comprehensive income | 25,289 | 25,191 | ||||||
COMPREHENSIVE INCOME | $ | 170,113 | $ | 189,215 | ||||
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, January 1, 2019 | 144,961,363 | $ | 1,789,977 | $ | 3,160,132 | $ | (467,961 | ) | $ | (58,174 | ) | $ | 4,423,974 | ||||||||||
Cumulative-effect of change in accounting principle related to leases (1) | — | — | 14,668 | — | — | 14,668 | |||||||||||||||||
Net income | — | — | 164,024 | — | — | 164,024 | |||||||||||||||||
Other comprehensive loss | — | — | — | — | 25,191 | 25,191 | |||||||||||||||||
Warrants exercised | 180,226 | 1,711 | — | 2,732 | — | 4,443 | |||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | 359,712 | 7,436 | — | (14,036 | ) | — | (6,600 | ) | |||||||||||||||
Cash dividends on common stock ($0.23 per share) | — | — | (33,770 | ) | — | — | (33,770 | ) | |||||||||||||||
BALANCE, MARCH 31, 2019 | 145,501,301 | $ | 1,799,124 | $ | 3,305,054 | $ | (479,265 | ) | $ | (32,983 | ) | $ | 4,591,930 | ||||||||||
Balance, January 1, 2020 | 145,625,385 | $ | 1,826,512 | $ | 3,689,377 | $ | (479,864 | ) | $ | (18,408 | ) | $ | 5,017,617 | ||||||||||
Cumulative-effect of change in accounting principle related to credit losses (2) | — | — | (97,967 | ) | — | — | (97,967 | ) | |||||||||||||||
Net income | — | — | 144,824 | — | — | 144,824 | |||||||||||||||||
Other comprehensive income | — | — | — | — | 25,289 | 25,289 | |||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | 281,396 | 7,272 | — | (7,609 | ) | — | (337 | ) | |||||||||||||||
Repurchase of common stock pursuant to the Stock Repurchase Program | (4,471,682 | ) | — | — | (145,966 | ) | — | (145,966 | ) | ||||||||||||||
Cash dividends on common stock ($0.275 per share) | — | — | (40,475 | ) | — | — | (40,475 | ) | |||||||||||||||
BALANCE, MARCH 31, 2020 | 141,435,099 | $ | 1,833,784 | $ | 3,695,759 | $ | (633,439 | ) | $ | 6,881 | $ | 4,902,985 | |||||||||||
(1) | Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and subsequent related 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 — 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)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 144,824 | $ | 164,024 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 31,186 | 39,498 | ||||||
Accretion of discount and amortization of premiums, net | (4,519 | ) | (4,414 | ) | ||||
Stock compensation costs | 7,209 | 7,444 | ||||||
Deferred income tax expense (benefit) | 28 | (406 | ) | |||||
Provision for credit losses | 73,870 | 22,579 | ||||||
Net gains on sales of loans | (950 | ) | (915 | ) | ||||
Net gains on sales of AFS debt securities | (1,529 | ) | (1,561 | ) | ||||
Net loss on sales of fixed assets | 3 | — | ||||||
Loans held-for-sale: | ||||||||
Originations and purchases | (5,802 | ) | (2,167 | ) | ||||
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | 4,657 | 2,454 | ||||||
Proceeds from distributions received from equity method investees | 973 | 1,150 | ||||||
Net change in accrued interest receivable and other assets | (462,766 | ) | (27,639 | ) | ||||
Net change in accrued expenses and other liabilities | 304,680 | (60,806 | ) | |||||
Other net operating activities | (161 | ) | — | |||||
Total adjustments | (53,121 | ) | (24,783 | ) | ||||
Net cash provided by operating activities | 91,703 | 139,241 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net (increase) decrease in: | ||||||||
Investments in qualified affordable housing partnerships, tax credit and other investments | (27,581 | ) | (33,261 | ) | ||||
Interest-bearing deposits with banks | (115,419 | ) | 245,375 | |||||
Resale agreements: | ||||||||
Proceeds from paydowns and maturities | 250,000 | — | ||||||
AFS debt securities: | ||||||||
Proceeds from sales | 306,463 | 151,339 | ||||||
Proceeds from repayments, maturities and redemptions | 308,620 | 55,712 | ||||||
Purchases | (987,130 | ) | (69,805 | ) | ||||
Loans held-for-investment: | ||||||||
Proceeds from sales of loans originally classified as held-for-investment | 110,945 | 92,887 | ||||||
Purchases | (133,185 | ) | (147,938 | ) | ||||
Other changes in loans held-for-investment, net | (1,116,358 | ) | (409,930 | ) | ||||
Premises and equipment: | ||||||||
Purchases | (916 | ) | (3,336 | ) | ||||
Proceeds from sales of other real estate owned (“OREO”) | 295 | — | ||||||
Proceeds from distributions received from equity method investees | 374 | 1,005 | ||||||
Other net investing activities | (1,438 | ) | (729 | ) | ||||
Net cash used in investing activities | (1,405,330 | ) | (118,681 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase in deposits | 1,374,287 | 800,053 | ||||||
Net increase (decrease) in short-term borrowings | 39,962 | (19,514 | ) | |||||
FHLB advances: | ||||||||
Proceeds | — | 300,000 | ||||||
Repayment | (99,999 | ) | (282,000 | ) | ||||
Repayment of long-term debt and lease liabilities | (289 | ) | (217 | ) | ||||
Common stock: | ||||||||
Repurchase of common stock pursuant to the Stock Repurchase Program | (145,966 | ) | — | |||||
Stocks tendered for payment of withholding taxes | (7,609 | ) | (14,036 | ) | ||||
Cash dividends paid | (41,358 | ) | (34,916 | ) | ||||
Net cash provided by financing activities | 1,119,028 | 749,370 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 13,492 | 14,018 | ||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (181,107 | ) | 783,948 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 3,261,149 | 3,001,377 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 3,080,042 | $ | 3,785,325 | ||||
See accompanying Notes to Consolidated Financial Statements.
7
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
(Continued)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 88,520 | $ | 97,930 | ||||
Income taxes, net | $ | 2,904 | $ | 303 | ||||
Noncash investing and financing activities: | ||||||||
Loans transferred from held-for-investment to held-for-sale | $ | 110,223 | $ | 92,228 | ||||
Loans transferred to OREO | $ | 19,504 | $ | — | ||||
See accompanying Notes to Consolidated Financial Statements.
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 March 31, 2020, East West also has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Trusts are not included on the Consolidated Financial Statements. East West also owns East West Insurance Services, Inc. In 2019, the Company acquired Enstream Capital Markets, LLC, a private broker dealer and also established East West Investment Management LLC, a registered investment adviser. Both East West Markets, LLC and East West Investment Management LLC are wholly-owned subsidiaries of East West.
The unaudited interim Consolidated Financial Statements are presented in accordance with United States (“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 period Consolidated Financial Statements. Certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.
The current period’s results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. While the COVID-19 outbreak had a material impact on our provision for credit losses, the Company is unable to fully predict the impact that COVID-19 will have on its financial position and results of operations due to numerous uncertainties, and will continue to assess the potential impacts on its financial position and results of operations. Events subsequent to the Consolidated Balance Sheet date have been evaluated through the date the Consolidated Financial Statements are issued for inclusion in the accompanying Consolidated Financial Statements. The unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto, included in the Company’s 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 also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). The guidance should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The new guidance also allows optional relief for certain instruments measured at amortized cost with an option to irrevocably elect the fair value option under ASC Topic 825, Financial Instruments. | The Company adopted ASU 2016-13 using a modified retrospective approach on January 1, 2020 without electing the fair value option on eligible financial instruments under ASU 2019-05. The Company has completed its implementation efforts, which includes the implementation of new processes and controls over the new credit and loss aggregation models, completion of parallel runs, updates to the allowance documentation, policies and reporting processes. The adoption of this ASU increased the allowance for loan losses by $125.2 million, and allowance for unfunded credit commitments by $10.5 million. The Company also recorded an after-tax decrease to opening retained earnings of $98.0 million on January 1, 2020. The increase to allowance for loan losses was primarily related to the commercial and industrial (“C&I”) and commercial real estate (“CRE”) loan portfolios. The Company did not record an allowance for credit losses on the Company’s AFS debt securities as a result of this adoption. Disclosures for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in the Company’s 2019 Form 10-K. The Company has elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital for two years, followed by a three-year transition period. |
ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | January 1, 2020 Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017. | The ASU simplifies the accounting for goodwill impairment. Under this guidance, an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, an impairment loss will be recognized when the carrying amount of a reporting unit exceeds its fair value. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting units with a zero or negative carrying amount. This guidance should be applied prospectively. | The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements. |
10
New Accounting Pronouncements Adopted
Standard | Required Date of Adoption | Description | Effect on Financial Statements |
Standards Adopted in 2020 | |||
ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | January 1, 2020 | The ASU amends ASC Topic 350-40 to align the accounting for costs incurred in a cloud computing arrangement with the guidance on developing internal use software. Specifically, if a cloud computing arrangement is deemed to be a service contract, certain implementation costs are eligible for capitalization. The new guidance prescribes the balance sheet and income statement presentation and cash flow classification for the capitalized costs and related amortization expense. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. | The Company adopted this guidance on a prospective basis on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements. |
Recent Accounting Pronouncements
Standard | Required Date of Adoption | Description | Effect on Financial Statements |
Standard Not Yet Adopted | |||
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | Effective for all entities as of March 12, 2020 through December 31, 2022. | In March 2020, the FASB issued a new accounting standard related to contracts or hedging relationships that reference LIBOR or other reference rates that are expected to be discontinued due to reference rate reform. This ASU provide optional expedients and exceptions regarding the accounting related to the modification of certain contracts, hedging relationships and other transactions that are affected by the reference rate reform. The guidance permits the Company not to apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the dedesignation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. This one time election may be made at any time after March 12, 2020, but no later than December 31, 2022. | The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment. We will continue to assess the impact as the reference rate transition occurs over the next two years. |
Summary of Significant Accounting Policies
The Company has revised the following significant accounting policies as a result of the adoption of ASU 2016-13.
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 periodic review of the collectability of the loans, and more often if deemed necessary. The Company develops and documents the allowance for loan losses methodology at the portfolio segment level — commercial loan portfolio comprising C&I, CRE, multifamily residential, and construction and land loans; and the consumer loan portfolio comprising single-family residential, home equity lines of credit (“HELOC”) and other consumer loans.
The allowance for loan losses represents the portion of the loan’s amortized cost basis that the Company does not expect to collect due to anticipated credit losses over the loan’s contractual life. The Company measures the expected loan losses on a collective pool basis when similar risk characteristics exist. Models consisting of quantitative and qualitative components are designed for each pool to develop the expected credit loss estimates. Reasonable and supportable forecast periods vary by loan portfolio. The collectively evaluated loans include non-classified and classified loans that have been determined as not impaired. The Company has adopted lifetime loss rate models for the portfolios, which use historical loss rates and forecast economic variables to calculate the expected credit losses for each loan pool.
11
When the loans do not share similar risk characteristics, the Company evaluates the loan for expected credit losses on an individual basis (e.g., impaired loans). The Company considers loans to be impaired if, based on current information and events, it is probable that the Company will be unable to 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 not to recognize an allowance for credit losses for accrued interest receivables on nonaccrual loans since the Company timely reverses any previously accrued interest when the borrower remains in default for an extended period.
The allowance for loan losses is reported separately on the Consolidated Balance Sheet and the Provision for credit losses is reported on the Consolidated Statement of Income.
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, including unfunded lending commitments, letters of credit, SBLCs and recourse obligations for loans sold, the unfunded credit exposure is calculated using utilization assumptions based on the Company's historical utilization experience in related portfolio segments. Loss rates are applied to the calculated exposure balances to estimate the allowance for unfunded credit commitments. Other elements such as credit risk factors for loans outstanding, terms and expiration dates of the unfunded credit facilities, and other pertinent information are considered to determine the adequacy of the allowance.
The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. Changes to the allowance for unfunded credit commitments are included in Provision for credit losses on the Consolidated Income Statements.
Allowance for Credit Losses on Available-for-Sale Debt Securities — ASU 2016-13 modifies the impairment model for AFS debt securities. For each reporting period, AFS debt securities that are in an unrealized loss position are individually analyzed as part of the Company’s ongoing assessments to determine whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. The initial indicator of impairment is a decline in fair value below the amortized cost, excluding accrued interest, of the AFS debt security. In determining whether an impairment is due to credit related factors, the Company considers the severity of the decline in fair value, the financial condition of the issuer, changes in the AFS debt securities’ ratings and other qualitative factors, as well as whether the Company either plans to sell the debt security or it is more-likely-than-not that it will be required to sell the debt security before recovery of the amortized cost. ASU 2016-13 removes the ability to consider the length of time the debt security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist.
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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), 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 not to measure an allowance for credit losses for accrued interest receivables on AFS debt securities since the Company timely reverses any previously accrued interest when the debt security remains in default for an extended period. As each AFS debt security has a 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.
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 in which the borrower must continually adjust the collateral securing the asset to reflect changes in the collateral’s fair value (e.g., resale agreements), the Company 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.
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 (“PCD”). The Company adopted ASU 2016-13 using the prospective transition approach for PCD 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 on 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.
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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.
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Equity Securities — Equity securities consisted of mutual funds as of both March 31, 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. 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 March 31, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts and has determined that the credit valuation adjustments 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 March 31, 2020 and December 31, 2019, the Company 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.
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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 March 31, 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.
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The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:
($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 2020 | |||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||
AFS debt securities: | ||||||||||||||||
U.S. Treasury securities | $ | 51,428 | $ | — | $ | — | $ | 51,428 | ||||||||
U.S. government agency and U.S. government- sponsored enterprise debt securities | — | 518,408 | — | 518,408 | ||||||||||||
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | — | 697,948 | — | 697,948 | ||||||||||||
Residential mortgage-backed securities | — | 1,352,367 | — | 1,352,367 | ||||||||||||
Municipal securities | — | 309,626 | — | 309,626 | ||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | — | 87,114 | — | 87,114 | ||||||||||||
Residential mortgage-backed securities | — | 62,134 | — | 62,134 | ||||||||||||
Corporate debt securities | — | 10,963 | — | 10,963 | ||||||||||||
Foreign bonds | — | 284,521 | — | 284,521 | ||||||||||||
Asset-backed securities | — | 61,556 | — | 61,556 | ||||||||||||
Collateralized loan obligations (“CLOs”) | — | 259,878 | — | 259,878 | ||||||||||||
Total AFS debt securities | $ | 51,428 | $ | 3,644,515 | $ | — | $ | 3,695,943 | ||||||||
Investments in tax credit and other investments: | ||||||||||||||||
Equity securities (1) | $ | 22,195 | $ | 8,135 | $ | — | $ | 30,330 | ||||||||
Total investments in tax credit and other investments | $ | 22,195 | $ | 8,135 | $ | — | $ | 30,330 | ||||||||
Derivative assets: | ||||||||||||||||
Interest rate contracts | $ | — | $ | 605,122 | $ | — | $ | 605,122 | ||||||||
Foreign exchange contracts | — | 64,383 | — | 64,383 | ||||||||||||
Credit contracts | — | 8 | — | 8 | ||||||||||||
Equity contracts | — | 415 | 713 | 1,128 | ||||||||||||
Commodity contracts | — | 163,563 | — | 163,563 | ||||||||||||
Gross derivative assets | $ | — | $ | 833,491 | $ | 713 | $ | 834,204 | ||||||||
Netting adjustments (2) | $ | — | $ | (178,774 | ) | $ | — | $ | (178,774 | ) | ||||||
Net derivative assets | $ | — | $ | 654,717 | $ | 713 | $ | 655,430 | ||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate contracts | $ | — | $ | 403,351 | $ | — | $ | 403,351 | ||||||||
Foreign exchange contracts | — | 55,658 | — | 55,658 | ||||||||||||
Credit contracts | — | 218 | — | 218 | ||||||||||||
Commodity contracts | — | 199,288 | — | 199,288 | ||||||||||||
Gross derivative liabilities | $ | — | $ | 658,515 | $ | — | $ | 658,515 | ||||||||
Netting adjustments (2) | $ | — | $ | (243,101 | ) | $ | — | $ | (243,101 | ) | ||||||
Net derivative liabilities | $ | — | $ | 415,414 | $ | — | $ | 415,414 | ||||||||
(1) | Equity securities consist of mutual funds with readily determinable fair values. |
(2) | Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information. |
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($ 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. |
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For the three months ended March 31, 2020 and 2019, Level 3 fair value measurements that were measured on a recurring basis consist of warrants issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity warrants for the three months ended March 31, 2020 and 2019:
($ in thousands) | Three Months Ended March 31, | |||||||
2020 | 2019 | |||||||
Equity Contracts | ||||||||
Beginning balance | $ | 421 | $ | 673 | ||||
Total gains (losses) included in earnings (1) | 292 | (231 | ) | |||||
Ending balance | $ | 713 | $ | 442 | ||||
(1) | Includes unrealized gains (losses) of $292 thousand and $(43) thousand for the three months ended March 31, 2020 and 2019, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income. |
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of March 31, 2020 and December 31, 2019, respectively. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted- Average (1) | |||||||
March 31, 2020 | ||||||||||||
Derivative assets: | ||||||||||||
Equity contracts | $ | 713 | Black-Scholes option pricing model | Equity volatility | 72% — 86% | 82% | ||||||
Liquidity discount | 47% | 47% | ||||||||||
December 31, 2019 | ||||||||||||
Derivative assets: | ||||||||||||
Equity contracts | $ | 421 | Black-Scholes option pricing model | Equity volatility | 39% — 44% | 42% | ||||||
Liquidity discount | 47% | 47% | ||||||||||
(1) | Weighted-average is calculated based on fair value of equity warrants as of March 31, 2020 and December 31, 2019. |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis include certain loans, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, and loans held-for-sale. Nonrecurring fair value adjustments result from impairment on certain loans and investments in qualified affordable housing partnerships, tax credit and other investments, write-downs of OREO, or from the application of lower of cost or fair value on loans held-for-sale.
Impaired Loans — The Company typically adjusts the carrying amount of impaired loans when there is evidence of probable loss and when the expected fair value of the loan is less than its carrying amount. Impaired loans with specific reserves are classified as Level 3 assets. The following two methods are used to derive the fair value of impaired loans:
• | Discounted cash flows valuation techniques that consist of developing an expected stream of cash flows over the life of the loans and then valuing the loans at the present value by discounting the expected cash flows at a designated discount rate. |
• | A specific reserve is established for an impaired loan based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of the underlying collateral is generally based on third-party appraisals, or an internal valuation if a third-party appraisal is not required by regulations, which utilize one or more valuation techniques such as income, market and/or cost approaches. |
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Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of the Company’s monitoring process, the Company conducts ongoing due diligence on the Company’s investments in its qualified affordable housing partnerships, tax credit and other investments after the initial investment date and prior to the being placed in service date. After these investments are either acquired or placed into service, periodic monitoring is performed, which includes the quarterly review of the financial statements of the tax credit investment entity and the annual review of the financial statements of the guarantor (if any), as well as the review of the annual tax returns of the tax credit investment entity; and comparison of the actual cash distributions received against the financial projections prepared at the time when the investment was made. The Company assesses its tax credit investments for possible OTTI on an annual basis or when events or circumstances suggest that the carrying amount of the tax credit investments may not be realizable. These circumstances can include, but are not limited to the following factors:
• | The current fair value of the tax credit investment based upon the expected future cash flows is less than the carrying amount; |
• | Change in the economic, market or technological environment that could adversely affect the investee’s operations; and |
• | Other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment. |
All available evidence is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary.
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure or at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.
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 March 31, 2020 and December 31, 2019:
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of March 31, 2020 | |||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value Measurements | |||||||||||||
Impaired loans (1): | ||||||||||||||||
Commercial: | ||||||||||||||||
C&I | $ | — | $ | — | $ | 28,877 | $ | 28,877 | ||||||||
CRE: | ||||||||||||||||
CRE | — | — | 735 | 735 | ||||||||||||
Total commercial | — | — | 29,612 | 29,612 | ||||||||||||
Consumer: | ||||||||||||||||
Residential mortgage: | ||||||||||||||||
HELOCs | — | — | 1,798 | 1,798 | ||||||||||||
Other consumer | — | — | 2,491 | 2,491 | ||||||||||||
Total consumer | — | — | 4,289 | 4,289 | ||||||||||||
Total impaired loans | $ | — | $ | — | $ | 33,901 | $ | 33,901 | ||||||||
Investments in tax credit and other investments, net | $ | — | $ | — | $ | 3,076 | $ | 3,076 | ||||||||
Other nonperforming assets | $ | — | $ | — | $ | 867 | $ | 867 | ||||||||
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 31, 2019 | |||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value Measurements | |||||||||||||
Non-PCI impaired loans: | ||||||||||||||||
Commercial: | ||||||||||||||||
C&I | $ | — | $ | — | $ | 47,554 | $ | 47,554 | ||||||||
CRE: | ||||||||||||||||
CRE | — | — | 753 | 753 | ||||||||||||
Total commercial | — | — | 48,307 | 48,307 | ||||||||||||
Consumer: | ||||||||||||||||
Residential mortgage: | ||||||||||||||||
HELOCs | — | — | 1,372 | 1,372 | ||||||||||||
Total consumer | — | — | 1,372 | 1,372 | ||||||||||||
Total non-PCI impaired loans | $ | — | $ | — | $ | 49,679 | $ | 49,679 | ||||||||
OREO (2) | $ | — | $ | — | $ | 125 | $ | 125 | ||||||||
Investments in tax credit and other investments, net | $ | — | $ | — | $ | 3,076 | $ | 3,076 | ||||||||
(1) | The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total impaired loans as of March 31, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 includes only non-PCI loans. |
(2) | Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO. |
21
The following table presents the increase (decrease) in fair value of assets for which a fair value adjustment has been recognized for the three months ended March 31, 2020 and 2019, related to assets that were still held as of those dates:
($ in thousands) | Three Months Ended March 31, | |||||||
2020 | 2019 | |||||||
Impaired loans: | Total Impaired Loans (1) | Non-PCI Impaired Loans | ||||||
Commercial: | ||||||||
C&I | $ | (21,501 | ) | $ | (2,734 | ) | ||
CRE: | ||||||||
CRE | (5 | ) | 2 | |||||
Total commercial | (21,506 | ) | (2,732 | ) | ||||
Consumer: | ||||||||
Residential mortgage: | ||||||||
HELOCs | (193 | ) | (78 | ) | ||||
Other consumer | 2,491 | — | ||||||
Total consumer | 2,298 | (78 | ) | |||||
Total impaired loans | $ | (19,208 | ) | $ | (2,810 | ) | ||
Investments in tax credit and other investments, net | $ | 150 | $ | (6,978 | ) | |||
Other nonperforming assets | $ | (300 | ) | $ | — | |||
(1) | The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total impaired loans during the three months ended March 31, 2020 considers PCD loans, if impaired, whereas impaired loans during the three months ended March 31, 2019 includes only non-PCI loans. |
The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of March 31, 2020 and December 31, 2019:
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique(s) | Unobservable Input(s) | Range of Input(s) | Weighted- Average (1) | |||||||
March 31, 2020 | ||||||||||||
Impaired loans (1) | $ | 25,140 | Discounted cash flows | Discount | 4% — 15% | 12% | ||||||
$ | 5,712 | Fair value of collateral | Discount | 8% — 9% | 9% | |||||||
$ | 2,491 | Fair value of collateral | Contract value | NM | NM | |||||||
$ | 558 | Fair value of property | Selling cost | 8% | 8% | |||||||
Other nonperforming assets | $ | 867 | Fair value of collateral | Contract value | NM | NM | ||||||
Investments in tax credit and other investments, net | $ | 3,076 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | ||||||
December 31, 2019 | ||||||||||||
Non-PCI impaired loans | $ | 27,841 | Discounted cash flows | Discount | 4% — 15% | 14% | ||||||
$ | 1,014 | Fair value of collateral | Discount | 8% — 20% | 19% | |||||||
$ | 20,824 | Fair value of collateral | Contract value | NM | NM | |||||||
OREO | $ | 125 | Fair value of property | Selling cost | 8% | 8% | ||||||
Investments in tax credit and other investments, net | $ | 3,076 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | ||||||
NM — Not meaningful.
(1) | Presented on a total impaired loan basis due to the adoption of ASU 2016-13 PCD loans (formerly, PCI loans) are assessed for impairment in the same manner as non-PCD loans. |
(2) | Weighted-average is based on the relative fair value of the respective assets as of March 31, 2020 and December 31, 2019. |
22
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of March 31, 2020 and December 31, 2019, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in this Note. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable and mortgage servicing rights that are included in Other assets, and accrued interest payable that is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet.
($ in thousands) | March 31, 2020 | |||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 3,080,042 | $ | 3,080,042 | $ | — | $ | — | $ | 3,080,042 | ||||||||||
Interest-bearing deposits with banks | $ | 293,509 | $ | — | $ | 293,509 | $ | — | $ | 293,509 | ||||||||||
Resale agreements (1) | $ | 860,000 | $ | — | $ | 867,872 | $ | — | $ | 867,872 | ||||||||||
Restricted equity securities, at cost | $ | 78,745 | $ | — | $ | 78,745 | $ | — | $ | 78,745 | ||||||||||
Loans held-for-sale | $ | 1,594 | $ | — | $ | 1,594 | $ | — | $ | 1,594 | ||||||||||
Loans held-for-investment, net | $ | 35,336,390 | $ | — | $ | — | $ | 35,736,331 | $ | 35,736,331 | ||||||||||
Mortgage servicing rights | $ | 5,711 | $ | — | $ | — | $ | 7,926 | $ | 7,926 | ||||||||||
Accrued interest receivable | $ | 148,294 | $ | — | $ | 148,294 | $ | — | $ | 148,294 | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 28,720,425 | $ | — | $ | 28,720,425 | $ | — | $ | 28,720,425 | ||||||||||
Time deposits | $ | 9,966,533 | $ | — | $ | 9,992,060 | $ | — | $ | 9,992,060 | ||||||||||
Short-term borrowings | $ | 66,924 | $ | — | $ | 66,924 | $ | — | $ | 66,924 | ||||||||||
FHLB advances | $ | 646,336 | $ | — | $ | 657,859 | $ | — | $ | 657,859 | ||||||||||
Repurchase agreements (1) | $ | 450,000 | $ | — | $ | 470,230 | $ | — | $ | 470,230 | ||||||||||
Long-term debt | $ | 147,169 | $ | — | $ | 152,942 | $ | — | $ | 152,942 | ||||||||||
Accrued interest payable | $ | 25,209 | $ | — | $ | 25,209 | $ | — | $ | 25,209 | ||||||||||
($ in thousands) | December 31, 2019 | |||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 3,261,149 | $ | 3,261,149 | $ | — | $ | — | $ | 3,261,149 | ||||||||||
Interest-bearing deposits with banks | $ | 196,161 | $ | — | $ | 196,161 | $ | — | $ | 196,161 | ||||||||||
Resale agreements (1) | $ | 860,000 | $ | — | $ | 856,025 | $ | — | $ | 856,025 | ||||||||||
Restricted equity securities, at cost | $ | 78,580 | $ | — | $ | 78,580 | $ | — | $ | 78,580 | ||||||||||
Loans held-for-sale | $ | 434 | $ | — | $ | 434 | $ | — | $ | 434 | ||||||||||
Loans held-for-investment, net | $ | 34,420,252 | $ | — | $ | — | $ | 35,021,300 | $ | 35,021,300 | ||||||||||
Mortgage servicing rights | $ | 6,068 | $ | — | $ | — | $ | 8,199 | $ | 8,199 | ||||||||||
Accrued interest receivable | $ | 144,599 | $ | — | $ | 144,599 | $ | — | $ | 144,599 | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 27,109,951 | $ | — | $ | 27,109,951 | $ | — | $ | 27,109,951 | ||||||||||
Time deposits | $ | 10,214,308 | $ | — | $ | 10,208,895 | $ | — | $ | 10,208,895 | ||||||||||
Short-term borrowings | $ | 28,669 | $ | — | $ | 28,669 | $ | — | $ | 28,669 | ||||||||||
FHLB advances | $ | 745,915 | $ | — | $ | 755,371 | $ | — | $ | 755,371 | ||||||||||
Repurchase agreements (1) | $ | 200,000 | $ | — | $ | 232,597 | $ | — | $ | 232,597 | ||||||||||
Long-term debt | $ | 147,101 | $ | — | $ | 152,641 | $ | — | $ | 152,641 | ||||||||||
Accrued interest payable | $ | 27,246 | $ | — | $ | 27,246 | $ | — | $ | 27,246 | ||||||||||
(1) | Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Out of gross repurchase agreements of $450.0 million, $0.0 million and $250.0 million as of March 31, 2020 and December 31, 2019, respectively, were eligible for netting against gross resale agreements |
23
Note 4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements
Resale Agreements
Gross resale agreements were $860.0 million and $1.11 billion as of March 31, 2020 and December 31, 2019, respectively. The weighted-average yields were 2.54% and 2.80% for the three months ended March 31, 2020 and 2019, respectively.
Repurchase Agreements
As of March 31, 2020, the collateral for the repurchase agreements comprised U.S. Treasury securities and U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities. Gross repurchase agreements were $450.0 million as of both March 31, 2020 and December 31, 2019. The weighted-average interest rates were 4.10% and 5.01% for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, $150.0 million of repurchase agreements will mature in 2022 and $300.0 million will mature in 2023.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that provide the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral received includes securities that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral received or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, and is usually delivered to and held by the third-party trustees. The collateral amounts received/pledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019:
($ in thousands) | March 31, 2020 | |||||||||||||||||||
Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Received | ||||||||||||||||||||
Resale agreements | $ | 860,000 | $ | — | $ | 860,000 | $ | (859,842 | ) | (1) | $ | 158 | ||||||||
Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Pledged | ||||||||||||||||||||
Repurchase agreements | $ | 450,000 | $ | — | $ | 450,000 | $ | (441,246 | ) | (2) | $ | 8,754 | ||||||||
24
($ in thousands) | December 31, 2019 | |||||||||||||||||||
Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Received | ||||||||||||||||||||
Resale agreements | $ | 1,110,000 | $ | (250,000 | ) | $ | 860,000 | $ | (856,058 | ) | (1) | $ | 3,942 | |||||||
Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||
Collateral Pledged | ||||||||||||||||||||
Repurchase agreements | $ | 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 March 31, 2020 and December 31, 2019:
($ in thousands) | March 31, 2020 | |||||||||||||||
Amortized Cost (1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
AFS debt securities: | ||||||||||||||||
U.S. Treasury securities | $ | 50,606 | $ | 822 | $ | — | $ | 51,428 | ||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 511,176 | 7,232 | — | 518,408 | ||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | 677,644 | 24,472 | (4,168 | ) | 697,948 | |||||||||||
Residential mortgage-backed securities | 1,316,009 | 38,770 | (2,412 | ) | 1,352,367 | |||||||||||
Municipal securities | 300,551 | 10,147 | (1,072 | ) | 309,626 | |||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Commercial mortgage-backed securities | 85,843 | 2,008 | (737 | ) | 87,114 | |||||||||||
Residential mortgage-backed securities | 64,112 | 156 | (2,134 | ) | 62,134 | |||||||||||
Corporate debt securities | 11,250 | 1 | (288 | ) | 10,963 | |||||||||||
Foreign bonds | 283,822 | 749 | (50 | ) | 284,521 | |||||||||||
Asset-backed securities | 65,400 | — | (3,844 | ) | 61,556 | |||||||||||
CLOs | 294,000 | — | (34,122 | ) | 259,878 | |||||||||||
Total AFS debt securities | $ | 3,660,413 | $ | 84,357 | $ | (48,827 | ) | $ | 3,695,943 | |||||||
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 March 31, 2020, the amortized cost of AFS debt securities excludes accrued interest receivable of $14.4 million which is included in Other assets on the Consolidated Balance Sheet. For our accounting policy related to AFS debt securities’ accrued interest receivable, see Note 2 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses of the Company’s AFS debt securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position as of March 31, 2020 and December 31, 2019.
($ in thousands) | March 31, 2020 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||
Commercial mortgage-backed securities | $ | 116,225 | $ | (2,277 | ) | $ | 19,252 | $ | (1,891 | ) | $ | 135,477 | $ | (4,168 | ) | |||||||||
Residential mortgage-backed securities | 192,572 | (2,408 | ) | 193 | (4 | ) | 192,765 | (2,412 | ) | |||||||||||||||
Municipal securities | 18,705 | (1,072 | ) | — | — | 18,705 | (1,072 | ) | ||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||
Commercial mortgage-backed securities | 31,087 | (737 | ) | — | — | 31,087 | (737 | ) | ||||||||||||||||
Residential mortgage-backed securities | 47,044 | (2,134 | ) | — | — | 47,044 | (2,134 | ) | ||||||||||||||||
Corporate debt securities | — | — | 9,713 | (288 | ) | 9,713 | (288 | ) | ||||||||||||||||
Foreign bonds | 49,950 | (50 | ) | — | — | 49,950 | (50 | ) | ||||||||||||||||
Asset-backed securities | 50,097 | (2,657 | ) | 11,459 | (1,187 | ) | 61,556 | (3,844 | ) | |||||||||||||||
CLOs | 259,878 | (34,122 | ) | — | — | 259,878 | (34,122 | ) | ||||||||||||||||
Total AFS debt securities | $ | 765,558 | $ | (45,457 | ) | $ | 40,617 | $ | (3,370 | ) | $ | 806,175 | $ | (48,827 | ) | |||||||||
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 | ) | |||||||||
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 — 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 Company believes that the credit support levels of the Company’s AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received even if the credit performance deteriorates under the impact of the COVID-19 pandemic.
As of March 31, 2020, the Company has the intent to 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, no allowance for credit losses as of March 31, 2020, nor provision for credit losses for the three months ended March 31, 2020 were recorded. In comparison, no OTTI credit loss was recognized for the three months ended March 31, 2019.
As of March 31, 2020, the Company had 56 AFS debt securities in a gross unrealized loss position with no credit impairment, primarily consisting of three CLOs, 32 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.
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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 months ended March 31, 2020 and 2019:
($ in thousands) | Three Months Ended March 31, | |||||||
2020 | 2019 | |||||||
Proceeds from sales | $ | 306,463 | $ | 151,339 | ||||
Gross realized gains | $ | 1,529 | $ | 1,561 | ||||
Related tax expense | ||||||||