EAST WEST BANCORP INC - Quarter Report: 2021 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, 2021
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, par value $0.001 per share | EWBC | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 141,863,399 shares as of April 30, 2021.
TABLE OF CONTENTS
Page | |||||||||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
March 31, 2021 | December 31, 2020 | |||||||||||||
(Unaudited) | ||||||||||||||
ASSETS | ||||||||||||||
Cash and due from banks | $ | 582,270 | $ | 592,117 | ||||||||||
Interest-bearing cash with banks | 4,036,863 | 3,425,854 | ||||||||||||
Cash and cash equivalents | 4,619,133 | 4,017,971 | ||||||||||||
Interest-bearing deposits with banks | 741,923 | 809,728 | ||||||||||||
Assets purchased under resale agreements (“resale agreements”) | 2,160,038 | 1,460,000 | ||||||||||||
Securities: | ||||||||||||||
Available-for-sale (“AFS”) debt securities, at fair value (amortized cost of $7,904,546 in 2021 and $5,470,523 in 2020; includes assets pledged as collateral of $590,858 in 2021 and $588,484 in 2020) | 7,789,213 | 5,544,658 | ||||||||||||
Restricted equity securities, at cost | 83,250 | 83,046 | ||||||||||||
Loans held-for-sale | — | 1,788 | ||||||||||||
Loans held-for-investment (net of allowance for loan losses of $607,506 in 2021 and $619,983 in 2020; includes assets pledged as collateral of $23,591,704 in 2021 and $23,263,517 in 2020) | 38,981,242 | 37,770,972 | ||||||||||||
Investments in qualified affordable housing partnerships, net | 284,862 | 213,555 | ||||||||||||
Investments in tax credit and other investments, net | 361,438 | 266,525 | ||||||||||||
Premises and equipment (net of accumulated depreciation of $130,926 in 2021 and $127,884 in 2020) | 102,120 | 103,251 | ||||||||||||
Goodwill | 465,697 | 465,697 | ||||||||||||
Operating lease right-of-use assets | 94,483 | 95,460 | ||||||||||||
Other assets | 1,190,747 | 1,324,262 | ||||||||||||
TOTAL | $ | 56,874,146 | $ | 52,156,913 | ||||||||||
LIABILITIES | ||||||||||||||
Deposits: | ||||||||||||||
Noninterest-bearing | $ | 18,919,298 | $ | 16,298,301 | ||||||||||
Interest-bearing | 30,627,838 | 28,564,451 | ||||||||||||
Total deposits | 49,547,136 | 44,862,752 | ||||||||||||
Short-term borrowings | — | 21,009 | ||||||||||||
Federal Home Loan Bank (“FHLB”) advances | 653,035 | 652,612 | ||||||||||||
Assets sold under repurchase agreements (“repurchase agreements”) | 300,000 | 300,000 | ||||||||||||
Long-term debt and finance lease liabilities | 152,195 | 151,739 | ||||||||||||
Operating lease liabilities | 101,828 | 102,830 | ||||||||||||
Accrued expenses and other liabilities | 834,925 | 796,796 | ||||||||||||
Total liabilities | 51,589,119 | 46,887,738 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized; 167,716,333 and 167,240,600 shares issued in 2021 and 2020, respectively | 168 | 167 | ||||||||||||
Additional paid-in capital | 1,865,933 | 1,858,352 | ||||||||||||
Retained earnings | 4,158,032 | 4,000,414 | ||||||||||||
Treasury stock, at cost 25,873,297 shares in 2021 and 25,675,371 shares in 2020 | (649,066) | (634,083) | ||||||||||||
Accumulated other comprehensive (loss) income (“AOCI”), net of tax | (90,040) | 44,325 | ||||||||||||
Total stockholders’ equity | 5,285,027 | 5,269,175 | ||||||||||||
TOTAL | $ | 56,874,146 | $ | 52,156,913 | ||||||||||
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, | ||||||||||||||
2021 | 2020 | |||||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||||
Loans receivable, including fees | $ | 342,008 | $ | 411,869 | ||||||||||
AFS debt securities | 29,100 | 20,142 | ||||||||||||
Resale agreements | 6,099 | 5,625 | ||||||||||||
Restricted equity securities | 547 | 446 | ||||||||||||
Interest-bearing cash and deposits with banks | 3,632 | 11,108 | ||||||||||||
Total interest and dividend income | 381,386 | 449,190 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||
Deposits | 21,822 | 76,403 | ||||||||||||
Short-term borrowings | 42 | 556 | ||||||||||||
FHLB advances | 3,069 | 4,166 | ||||||||||||
Repurchase agreements | 1,978 | 3,991 | ||||||||||||
Long-term debt and finance lease liabilities | 780 | 1,367 | ||||||||||||
Total interest expense | 27,691 | 86,483 | ||||||||||||
Net interest income before provision for credit losses | 353,695 | 362,707 | ||||||||||||
Provision for credit losses | — | 73,870 | ||||||||||||
Net interest income after provision for credit losses | 353,695 | 288,837 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||
Lending fees | 18,357 | 15,773 | ||||||||||||
Deposit account fees | 15,383 | 10,447 | ||||||||||||
Interest rate contracts and other derivative income | 16,997 | 7,073 | ||||||||||||
Foreign exchange income | 9,526 | 7,819 | ||||||||||||
Wealth management fees | 6,911 | 5,353 | ||||||||||||
Net gains on sales of loans | 1,781 | 950 | ||||||||||||
Gains on sales of AFS debt securities | 192 | 1,529 | ||||||||||||
Other investment income | 925 | 3,378 | ||||||||||||
Other income | 2,794 | 3,184 | ||||||||||||
Total noninterest income | 72,866 | 55,506 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||
Compensation and employee benefits | 107,808 | 101,960 | ||||||||||||
Occupancy and equipment expense | 15,922 | 17,076 | ||||||||||||
Deposit insurance premiums and regulatory assessments | 3,876 | 3,427 | ||||||||||||
Deposit account expense | 3,892 | 3,563 | ||||||||||||
Data processing | 4,478 | 3,826 | ||||||||||||
Computer software expense | 7,159 | 6,166 | ||||||||||||
Consulting expense | 1,475 | 1,217 | ||||||||||||
Legal expense | 1,502 | 3,197 | ||||||||||||
Other operating expense | 19,607 | 21,119 | ||||||||||||
Amortization of tax credit and other investments | 25,358 | 18,782 | ||||||||||||
Total noninterest expense | 191,077 | 180,333 | ||||||||||||
INCOME BEFORE INCOME TAXES | 235,484 | 164,010 | ||||||||||||
INCOME TAX EXPENSE | 30,490 | 19,186 | ||||||||||||
NET INCOME | $ | 204,994 | $ | 144,824 | ||||||||||
EARNINGS PER SHARE (“EPS”) | ||||||||||||||
BASIC | $ | 1.45 | $ | 1.00 | ||||||||||
DILUTED | $ | 1.44 | $ | 1.00 | ||||||||||
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||||||||
BASIC | 141,646 | 144,814 | ||||||||||||
DILUTED | 142,844 | 145,285 | ||||||||||||
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, | ||||||||||||||
2021 | 2020 | |||||||||||||
Net income | $ | 204,994 | $ | 144,824 | ||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||
Net changes in unrealized (losses) gains on AFS debt securities | (133,448) | 27,453 | ||||||||||||
Net changes in unrealized gains on cash flow hedges | 432 | — | ||||||||||||
Foreign currency translation adjustments | (1,349) | (2,164) | ||||||||||||
Other comprehensive (loss) income | (134,365) | 25,289 | ||||||||||||
COMPREHENSIVE INCOME | $ | 70,629 | $ | 170,113 | ||||||||||
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, 2020 | 145,625,385 | $ | 1,826,512 | $ | 3,689,377 | $ | (479,864) | $ | (18,408) | $ | 5,017,617 | |||||||||||||||||||||||||||
— | — | (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 | |||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2021 | 141,565,229 | $ | 1,858,519 | $ | 4,000,414 | $ | (634,083) | $ | 44,325 | $ | 5,269,175 | |||||||||||||||||||||||||||
Net income | — | — | 204,994 | — | — | 204,994 | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | (134,365) | (134,365) | ||||||||||||||||||||||||||||||||
Net activity of common stock pursuant to various stock compensation plans and agreements | 277,807 | 7,582 | — | (14,983) | — | (7,401) | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.330 per share) | — | — | (47,376) | — | — | (47,376) | ||||||||||||||||||||||||||||||||
BALANCE, MARCH 31, 2021 | 141,843,036 | $ | 1,866,101 | $ | 4,158,032 | $ | (649,066) | $ | (90,040) | $ | 5,285,027 | |||||||||||||||||||||||||||
(1)Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326) on January 1, 2020.
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, | ||||||||||||||
2021 | 2020 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
Net income | $ | 204,994 | $ | 144,824 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | 37,490 | 31,186 | ||||||||||||
Amortization of premiums and accretion of discount , net | 5,770 | (4,519) | ||||||||||||
Stock compensation costs | 7,817 | 7,209 | ||||||||||||
Deferred income tax benefit | 224 | 28 | ||||||||||||
Provision for credit losses | — | 73,870 | ||||||||||||
Net gains on sales of loans | (1,781) | (950) | ||||||||||||
Gains on sales of AFS debt securities | (192) | (1,529) | ||||||||||||
Loans held-for-sale: | ||||||||||||||
Originations and purchases | (5,718) | (5,802) | ||||||||||||
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | 7,644 | 4,657 | ||||||||||||
Proceeds from distributions received from equity method investees | 2,505 | 973 | ||||||||||||
Net change in accrued interest receivable and other assets | 185,677 | (462,766) | ||||||||||||
Net change in accrued expenses and other liabilities | (72,935) | 304,680 | ||||||||||||
Other net operating activities | 20 | (158) | ||||||||||||
Total adjustments | 166,521 | (53,121) | ||||||||||||
Net cash provided by operating activities | 371,515 | 91,703 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
Net (increase) decrease in: | ||||||||||||||
Investments in qualified affordable housing partnerships, tax credit and other investments | (52,756) | (27,581) | ||||||||||||
Interest-bearing deposits with banks | 29,000 | (115,419) | ||||||||||||
Resale agreements: | ||||||||||||||
Proceeds from paydowns and maturities | 223,952 | 250,000 | ||||||||||||
Purchases | (923,990) | — | ||||||||||||
AFS debt securities: | ||||||||||||||
Proceeds from sales | 46,397 | 306,463 | ||||||||||||
Proceeds from repayments, maturities and redemptions | 473,808 | 308,620 | ||||||||||||
Purchases | (2,969,640) | (987,130) | ||||||||||||
Loans held-for-investment: | ||||||||||||||
Proceeds from sales of loans originally classified as held-for-investment | 147,115 | 110,945 | ||||||||||||
Purchases | (311,030) | (133,185) | ||||||||||||
Other changes in loans held-for-investment, net | (1,046,727) | (1,116,358) | ||||||||||||
Purchases of premises and equipment | (1,563) | (916) | ||||||||||||
Proceeds from distributions received from equity method investees | 2,832 | 374 | ||||||||||||
Other net investing activities | (1,307) | (1,143) | ||||||||||||
Net cash used in investing activities | (4,383,909) | (1,405,330) | ||||||||||||
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, | ||||||||||||||
2021 | 2020 | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||
Net increase in deposits | 4,559,929 | 1,374,287 | ||||||||||||
Net (decrease) increase in short-term borrowings | (21,143) | 39,962 | ||||||||||||
Repayment of FHLB advances | — | (99,999) | ||||||||||||
Repayment of long-term debt and lease liabilities | (315) | (289) | ||||||||||||
Common stock: | ||||||||||||||
Repurchase of common stocks pursuant to the Stock Repurchase Program | — | (145,966) | ||||||||||||
Stocks tendered for payment of withholding taxes | (14,983) | (7,609) | ||||||||||||
Cash dividends paid | (48,213) | (41,358) | ||||||||||||
Net cash provided by financing activities | 4,475,275 | 1,119,028 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 138,281 | 13,492 | ||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 601,162 | (181,107) | ||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 4,017,971 | 3,261,149 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 4,619,133 | $ | 3,080,042 | ||||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||||
Cash paid during the period for: | ||||||||||||||
Interest | $ | 29,680 | $ | 88,520 | ||||||||||
Income taxes, net | $ | — | $ | 2,904 | ||||||||||
Noncash investing and financing activities: | ||||||||||||||
Loans transferred from held-for-investment to held-for-sale | $ | 145,872 | $ | 110,223 | ||||||||||
Loans transferred to other real estate owned (“OREO”) and other nonperforming assets | $ | 10,360 | $ | 23,394 | ||||||||||
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 Quarterly Report on Form 10-Q (“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, 2021, East West also has six wholly owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Trusts are not included on the Consolidated Financial Statements.
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 presentation of the interim Consolidated Financial Statements. Certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.
The current period’s results of operations are not necessarily indicative of results that may be expected for any future interim period or for the year as a whole. Events subsequent to the Consolidated Balance Sheet date have been evaluated through the date the Consolidated Financial Statements are issued for inclusion in the accompanying Consolidated Financial Statements. The unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission on February 26, 2021 (the “Company’s 2020 Form 10-K”).
9
Note 2 — Current Accounting Developments
New Accounting Pronouncements Adopted
Standard | Required Date of Adoption | Description | Effect on Financial Statements | ||||||||
Standards Adopted in 2021 | |||||||||||
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and subsequent related ASU 2021-01, Reference Rate Reform (Topic 848): Scope | Effective for all entities from the dates of issuance through December 31, 2022. | In March 2020, the FASB issued an ASU related to contracts or hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or other reference rates that are expected to be discontinued due to reference rate reform. This ASU provides temporary optional expedients and exceptions regarding the accounting requirements related to the modification of certain contracts, hedging relationships and other transactions that are affected by the reference rate reform. The guidance permits the Company to make a one-time election to sell and/or transfer qualifying held-to-maturity securities, and not to apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation criteria of the hedging relationships 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. In January 2021, the FASB issued ASU 2021-01 as subsequent amendments, which expanded the scope of Topic 848 to include all affected derivatives and clarified certain optional expedients and exceptions regarding the hedge accounting for derivative contracts affected by the discounting transition. The amendments of this guidance could be elected retrospectively or prospectively to new modifications made on or after the date of issuance of this ASU, January 7, 2021. | The Company adopted this guidance on a prospective basis in January 2021. At the time of adoption, the guidance did not have a material impact on the Company’s Consolidated Financial Statements. The Company will continue to track the exposure as of each reporting period and to assess the impact as the reference rate transition occurs through the cessation of LIBOR. | ||||||||
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | January 1, 2021 Early adoption is permitted on January 1, 2020. | This ASU simplifies the accounting for income taxes by removing certain exceptions to the existing guidance. This includes removing exceptions to: 1) the incremental approach for intraperiod tax allocation, 2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, 3) the ability not to recognize a deferred tax liability when a foreign equity method investment becomes a subsidiary, and 4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. In addition, this ASU simplifies the accounting for income taxes related to franchise taxes, the tax basis of goodwill and the method for recognizing an enacted change in tax laws. This ASU also specifies that an entity is not required to allocate the consolidated amount of tax expense to a legal entity that is not subject to tax in its separate financial statements. This ASU also makes improvements in the accounting for income taxes related to employee stock ownership plans and equity method investments in qualified affordable housing projects. This guidance should be applied on either a retrospective, modified retrospective or prospective basis depending on the amendments. | The Company adopted this guidance in January 2021 using the transition guidance prescribed by this ASU. At the time of adoption, this guidance did not have a material impact on the Company’s Consolidated Financial Statements. | ||||||||
10
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 prices derived from 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 significant 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.
11
Equity Securities — Equity securities consisted of mutual funds as of both March 31, 2021 and December 31, 2020. The Company invested in these mutual funds for Community Reinvestment Act (“CRA”) purposes. 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 that are not designated as hedging instruments 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 certain variable interest rate borrowings. These interest rate swap contracts with institutional counterparties were designated as cash flow hedges. 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, 2021 and December 31, 2020, 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. 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, 2021 and December 31, 2020, the Bank held foreign currency non-deliverable forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. dollar (“USD”) functional currency subsidiary in China. These foreign currency non-deliverable forward contracts were designated as net investment hedges. The fair value of foreign currency contracts is determined by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include spot rates and forward rates of the contractual currencies. Foreign exchange forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.
Credit Contracts — The Company may periodically enter into credit risk participation agreements (“RPAs”) to manage the credit exposure on interest rate contracts associated with the syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The majority of the inputs used to value the RPAs are observable; accordingly, RPAs fall within Level 2.
12
Equity Contracts — As part of the loan origination process, the Company periodically obtains warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans. As of March 31, 2021, the warrants included on the Consolidated Financial Statements were only from private companies. As of December 31, 2020, 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. 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. 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. 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 generally 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.
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:
13
($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 2021 | |||||||||||||||||||||||||
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 | $ | 826,342 | $ | — | $ | — | $ | 826,342 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | — | 1,194,005 | — | 1,194,005 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 1,169,391 | — | 1,169,391 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 2,247,406 | — | 2,247,406 | ||||||||||||||||||||||
Municipal securities | — | 420,065 | — | 420,065 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 281,027 | — | 281,027 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 523,500 | — | 523,500 | ||||||||||||||||||||||
Corporate debt securities | — | 496,643 | — | 496,643 | ||||||||||||||||||||||
Foreign government bonds | — | 276,328 | — | 276,328 | ||||||||||||||||||||||
Asset-backed securities | — | 63,040 | — | 63,040 | ||||||||||||||||||||||
Collateralized loan obligations (“CLOs”) | — | 291,466 | — | 291,466 | ||||||||||||||||||||||
Total AFS debt securities | $ | 826,342 | $ | 6,962,871 | $ | — | $ | 7,789,213 | ||||||||||||||||||
Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities (1) | $ | 22,233 | $ | 4,460 | $ | — | $ | 26,693 | ||||||||||||||||||
Total investments in tax credit and other investments | $ | 22,233 | $ | 4,460 | $ | — | $ | 26,693 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 319,049 | $ | — | $ | 319,049 | ||||||||||||||||||
Foreign exchange contracts | — | 39,562 | — | 39,562 | ||||||||||||||||||||||
Credit contracts | — | 5 | — | 5 | ||||||||||||||||||||||
Equity contracts | — | — | 272 | 272 | ||||||||||||||||||||||
Commodity contracts | — | 98,429 | — | 98,429 | ||||||||||||||||||||||
Gross derivative assets | $ | — | $ | 457,045 | $ | 272 | $ | 457,317 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (108,235) | $ | — | $ | (108,235) | ||||||||||||||||||
Net derivative assets | $ | — | $ | 348,810 | $ | 272 | $ | 349,082 | ||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 230,290 | $ | — | $ | 230,290 | ||||||||||||||||||
Foreign exchange contracts | — | 27,287 | — | 27,287 | ||||||||||||||||||||||
Credit contracts | — | 153 | — | 153 | ||||||||||||||||||||||
Commodity contracts | — | 86,405 | — | 86,405 | ||||||||||||||||||||||
Gross derivative liabilities | $ | — | $ | 344,135 | $ | — | $ | 344,135 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (186,687) | $ | — | $ | (186,687) | ||||||||||||||||||
Net derivative liabilities | $ | — | $ | 157,448 | $ | — | $ | 157,448 | ||||||||||||||||||
(1)Equity securities consist of mutual funds with readily determinable fair values. The Company invested in these mutual funds for CRA purposes.
(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, 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 | $ | 50,761 | $ | — | $ | — | $ | 50,761 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | — | 814,319 | — | 814,319 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 1,153,770 | — | 1,153,770 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 1,660,894 | — | 1,660,894 | ||||||||||||||||||||||
Municipal securities | — | 396,073 | — | 396,073 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 239,842 | — | 239,842 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 289,775 | — | 289,775 | ||||||||||||||||||||||
Corporate debt securities | — | 405,968 | — | 405,968 | ||||||||||||||||||||||
Foreign government bonds | — | 182,531 | — | 182,531 | ||||||||||||||||||||||
Asset-backed securities | — | 63,231 | — | 63,231 | ||||||||||||||||||||||
CLOs | — | 287,494 | — | 287,494 | ||||||||||||||||||||||
Total AFS debt securities | $ | 50,761 | $ | 5,493,897 | $ | — | $ | 5,544,658 | ||||||||||||||||||
Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities (1) | $ | 22,548 | $ | 8,724 | $ | — | $ | 31,272 | ||||||||||||||||||
Total investments in tax credit and other investments | $ | 22,548 | $ | 8,724 | $ | — | $ | 31,272 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 489,132 | $ | — | $ | 489,132 | ||||||||||||||||||
Foreign exchange contracts | — | 30,300 | — | 30,300 | ||||||||||||||||||||||
Credit contracts | — | 13 | — | 13 | ||||||||||||||||||||||
Equity contracts | — | 585 | 273 | 858 | ||||||||||||||||||||||
Commodity contracts | — | 82,451 | — | 82,451 | ||||||||||||||||||||||
Gross derivative assets | $ | — | $ | 602,481 | $ | 273 | $ | 602,754 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (101,512) | $ | — | $ | (101,512) | ||||||||||||||||||
Net derivative assets | $ | — | $ | 500,969 | $ | 273 | $ | 501,242 | ||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 317,698 | $ | — | $ | 317,698 | ||||||||||||||||||
Foreign exchange contracts | — | 22,759 | — | 22,759 | ||||||||||||||||||||||
Credit contracts | — | 206 | — | 206 | ||||||||||||||||||||||
Commodity contracts | — | 84,165 | — | 84,165 | ||||||||||||||||||||||
Gross derivative liabilities | $ | — | $ | 424,828 | $ | — | $ | 424,828 | ||||||||||||||||||
Netting adjustments (2) | $ | — | $ | (184,697) | $ | — | $ | (184,697) | ||||||||||||||||||
Net derivative liabilities | $ | — | $ | 240,131 | $ | — | $ | 240,131 | ||||||||||||||||||
(1)Equity securities consist of mutual funds with readily determinable fair values. The Company invested in these mutual funds for CRA purposes.
(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.
15
For the three months ended March 31, 2021 and 2020, Level 3 fair value measurements that were measured on a recurring basis consisted 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, 2021 and 2020:
($ in thousands) | Three Months Ended March 31, | |||||||||||||
2021 | 2020 | |||||||||||||
Equity Contracts | ||||||||||||||
Beginning balance | $ | 273 | $ | 421 | ||||||||||
Total (losses) gains included in earnings (1) | (1) | 292 | ||||||||||||
Ending balance | $ | 272 | $ | 713 | ||||||||||
(1)Includes unrealized (losses) gains of $(1) thousand and $292 thousand for the three months ended March 31, 2021 and 2020, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income.
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of March 31, 2021 and December 31, 2020, respectively. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted- Average (1) | |||||||||||||||||||||||||||
March 31, 2021 | ||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Equity contracts | $ | 272 | Black-Scholes option pricing model | Equity volatility | 48% — 56% | 52% | ||||||||||||||||||||||||||
Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Equity contracts | $ | 273 | Black-Scholes option pricing model | Equity volatility | 46% — 61% | 53% | ||||||||||||||||||||||||||
Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
(1)Weighted-average is calculated based on the fair value of equity warrants as of March 31, 2021 and December 31, 2020.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis include certain individually evaluated loans held-for-investment, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, loans held-for-sale, and other nonperforming assets. Nonrecurring fair value adjustments result from impairment on certain individually evaluated loans held-for-investment and investments in qualified affordable housing partnerships, tax credit and other investments, write-downs of OREO and other nonperforming assets, or from the application of lower of cost or fair value on loans held-for-sale.
Individually Evaluated Loans Held-For-Investment — Individually evaluated loans held-for-investment are classified as Level 3 assets. The following two methods are used to derive the fair value of individually evaluated loans held-for-investment:
•Discounted cash flow valuation techniques that consist of developing an expected stream of cash flows over the life of the loans, and then calculating the present value of the loans by discounting the expected cash flows at a designated discount rate.
•When an individually evaluated loan is collateral-dependent, the fair value of the loan is determined 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, or unavailable. An internal valuation utilizes one or more valuation techniques such as the income, market and/or cost approaches.
16
Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — The Company conducts due diligence on its investments in qualified affordable housing partnerships, tax credit and other investments prior to the initial investment date and through the placed-in-service date. After these investments are either acquired or placed into service, the Company continues its periodic monitoring process, which includes the quarterly review of the financial statements, the annual review of tax returns of the investment entity, the annual review of the financial statements of the guarantor (if any) and a comparison of the actual performance of the investment against the financial projections prepared at the time when the investment was made. The Company assesses its tax credit and other investments for possible other-than-temporary impairment (“OTTI”) on an annual basis or when events or circumstances suggest that the carrying amount of the investments may not be realizable. These circumstances can include, but are not limited to the following factors:
•expected future cash flows that are less than the carrying amount of the investment;
•changes in the economic, market or technological environment that could adversely affect the investee’s operations; and
•other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment.
All available evidence is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary.
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure and 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.
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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, 2021 and December 31, 2020:
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of March 31, 2021 | |||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value Measurements | |||||||||||||||||||||||
Loans held-for-investment: | ||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
Commercial and industrial (“C&I”) | $ | — | $ | — | $ | 143,630 | $ | 143,630 | ||||||||||||||||||
Commercial real estate (“CRE”): | ||||||||||||||||||||||||||
CRE | — | — | 47,639 | 47,639 | ||||||||||||||||||||||
Multifamily residential | — | — | 2,332 | 2,332 | ||||||||||||||||||||||
Construction and land | — | — | 4,191 | 4,191 | ||||||||||||||||||||||
Total commercial | — | — | 197,792 | 197,792 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
Home equity lines of credit (“HELOCs”) | — | — | 4,791 | 4,791 | ||||||||||||||||||||||
Total consumer | — | — | 4,791 | 4,791 | ||||||||||||||||||||||
Total loans held-for-investment | $ | — | $ | — | $ | 202,583 | $ | 202,583 | ||||||||||||||||||
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 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 | |||||||||||||||||||||||
Loans held-for-investment: | ||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | $ | — | $ | — | $ | 143,331 | $ | 143,331 | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | — | — | 42,894 | 42,894 | ||||||||||||||||||||||
Total commercial | — | — | 186,225 | 186,225 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
HELOCs | — | — | 1,146 | 1,146 | ||||||||||||||||||||||
Other consumer | — | — | 2,491 | 2,491 | ||||||||||||||||||||||
Total consumer | — | — | 3,637 | 3,637 | ||||||||||||||||||||||
Total loans held-for-investment | $ | — | $ | — | $ | 189,862 | $ | 189,862 | ||||||||||||||||||
Investments in tax credit and other investments, net | $ | — | $ | — | $ | 3,140 | $ | 3,140 | ||||||||||||||||||
OREO (1) | $ | — | $ | — | $ | 15,824 | $ | 15,824 | ||||||||||||||||||
(1)Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO.
18
The following table presents the increase (decrease) in fair value of assets for which a nonrecurring fair value adjustment has been recognized for the three months ended March 31, 2021 and 2020:
($ in thousands) | Three Months Ended March 31, | |||||||||||||
2021 | 2020 | |||||||||||||
Loans held-for-investment: | ||||||||||||||
Commercial: | ||||||||||||||
C&I | $ | (5,309) | $ | (21,501) | ||||||||||
CRE: | ||||||||||||||
CRE | (7,062) | (5) | ||||||||||||
Multifamily residential | (16) | — | ||||||||||||
Construction and land | (71) | — | ||||||||||||
Total commercial | (12,458) | (21,506) | ||||||||||||
Consumer: | ||||||||||||||
Residential mortgage: | ||||||||||||||
HELOCs | (37) | (193) | ||||||||||||
Other consumer | — | 2,491 | ||||||||||||
Total consumer | (37) | 2,298 | ||||||||||||
Total loans held-for-investment | $ | (12,495) | $ | (19,208) | ||||||||||
Investments in tax credit and other investments, net | $ | — | $ | 150 | ||||||||||
Other nonperforming assets | $ | (3,890) | $ | (300) | ||||||||||
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, 2021 and December 31, 2020:
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Techniques | Unobservable Inputs | Range of Inputs | Weighted- Average of Inputs (1) | |||||||||||||||||||||||||||
March 31, 2021 | ||||||||||||||||||||||||||||||||
Loans held-for-investment | $ | 108,918 | Discounted cash flows | Discount | 4% — 15% | 11% | ||||||||||||||||||||||||||
$ | 24,356 | Fair value of collateral | Discount | 10% — 20% | 15% | |||||||||||||||||||||||||||
$ | 9,902 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||
$ | 59,407 | Fair value of property | Selling cost | 8% — 26% | 9% | |||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||
Loans held-for-investment | $ | 104,783 | Discounted cash flows | Discount | 3% — 15% | 11% | ||||||||||||||||||||||||||
$ | 22,207 | Fair value of collateral | Discount | 10% — 26% | 15% | |||||||||||||||||||||||||||
$ | 15,879 | Fair value of collateral | Contract value | NM | NM | |||||||||||||||||||||||||||
$ | 46,993 | Fair value of property | Selling cost | 7% — 26% | 10% | |||||||||||||||||||||||||||
Investments in tax credit and other investments, net | $ | 3,140 | Individual analysis of each investment | Expected future tax benefits and distributions | NM | NM | ||||||||||||||||||||||||||
OREO | $ | 15,824 | Fair value of property | Selling cost | 8% | 8% | ||||||||||||||||||||||||||
NM — Not meaningful.
(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of March 31, 2021 and December 31, 2020.
19
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of March 31, 2021 and December 31, 2020, 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, 2021 | |||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,619,133 | $ | 4,619,133 | $ | — | $ | — | $ | 4,619,133 | ||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 741,923 | $ | — | $ | 741,923 | $ | — | $ | 741,923 | ||||||||||||||||||||||
Resale agreements | $ | 2,160,038 | $ | — | $ | 2,152,392 | $ | — | $ | 2,152,392 | ||||||||||||||||||||||
Restricted equity securities, at cost | $ | 83,250 | $ | — | $ | 83,250 | $ | — | $ | 83,250 | ||||||||||||||||||||||
Loans held-for-investment, net | $ | 38,981,242 | $ | — | $ | — | $ | 38,922,550 | $ | 38,922,550 | ||||||||||||||||||||||
Mortgage servicing rights | $ | 5,506 | $ | — | $ | — | $ | 8,740 | $ | 8,740 | ||||||||||||||||||||||
Accrued interest receivable | $ | 149,953 | $ | — | $ | 149,953 | $ | — | $ | 149,953 | ||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 40,748,303 | $ | — | $ | 40,748,303 | $ | — | $ | 40,748,303 | ||||||||||||||||||||||
Time deposits | $ | 8,798,833 | $ | — | $ | 8,811,048 | $ | — | $ | 8,811,048 | ||||||||||||||||||||||
FHLB advances | $ | 653,035 | $ | — | $ | 657,460 | $ | — | $ | 657,460 | ||||||||||||||||||||||
Repurchase agreements | $ | 300,000 | $ | — | $ | 316,099 | $ | — | $ | 316,099 | ||||||||||||||||||||||
Long-term debt | $ | 147,445 | $ | — | $ | 151,015 | $ | — | $ | 151,015 | ||||||||||||||||||||||
Accrued interest payable | $ | 9,966 | $ | — | $ | 9,966 | $ | — | $ | 9,966 | ||||||||||||||||||||||
($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,017,971 | $ | 4,017,971 | $ | — | $ | — | $ | 4,017,971 | ||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 809,728 | $ | — | $ | 809,728 | $ | — | $ | 809,728 | ||||||||||||||||||||||
Resale agreements | $ | 1,460,000 | $ | — | $ | 1,464,635 | $ | — | $ | 1,464,635 | ||||||||||||||||||||||
Restricted equity securities, at cost | $ | 83,046 | $ | — | $ | 83,046 | $ | — | $ | 83,046 | ||||||||||||||||||||||
Loans held-for-sale | $ | 1,788 | $ | — | $ | 1,788 | $ | — | $ | 1,788 | ||||||||||||||||||||||
Loans held-for-investment, net | $ | 37,770,972 | $ | — | $ | — | $ | 37,803,940 | $ | 37,803,940 | ||||||||||||||||||||||
Mortgage servicing rights | $ | 5,522 | $ | — | $ | — | $ | 8,435 | $ | 8,435 | ||||||||||||||||||||||
Accrued interest receivable | $ | 150,140 | $ | — | $ | 150,140 | $ | — | $ | 150,140 | ||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 35,862,403 | $ | — | $ | 35,862,403 | $ | — | $ | 35,862,403 | ||||||||||||||||||||||
Time deposits | $ | 9,000,349 | $ | — | $ | 9,016,884 | $ | — | $ | 9,016,884 | ||||||||||||||||||||||
Short-term borrowings | $ | 21,009 | $ | — | $ | 21,009 | $ | — | $ | 21,009 | ||||||||||||||||||||||
FHLB advances | $ | 652,612 | $ | — | $ | 659,631 | $ | — | $ | 659,631 | ||||||||||||||||||||||
Repurchase agreements | $ | 300,000 | $ | — | $ | 317,850 | $ | — | $ | 317,850 | ||||||||||||||||||||||
Long-term debt | $ | 147,376 | $ | — | $ | 150,131 | $ | — | $ | 150,131 | ||||||||||||||||||||||
Accrued interest payable | $ | 11,956 | $ | — | $ | 11,956 | $ | — | $ | 11,956 | ||||||||||||||||||||||
20
Note 4 — Assets Purchased under Resale Agreements and Sold under Repurchase Agreements
Assets Purchased under Resale Agreements
In resale agreements, the Company is exposed to credit risk for both counterparties and the underlying collateral. The Company manages credit exposure from certain transactions by entering into master netting agreements and collateral arrangements with counterparties. The relevant agreements allow for the efficient closeout of the transaction, liquidation and set-off of collateral against the net amount owed by the counterparty following a default. It is also the Company’s policy to take possession, where possible, of the assets underlying resale agreements. As a result of the Company’s credit risk mitigation practices with respect to resale agreements as described above, the Company did not hold any reserves for credit impairment with respect to these agreements as of March 31, 2021 and December 31, 2020.
Securities Purchased under Resale Agreements — Total securities purchased under resale agreements were $1.31 billion and $1.16 billion as of March 31, 2021 and December 31, 2020, respectively. The weighted-average yields were 1.57% and 2.50% for the three months ended March 31, 2021 and 2020, respectively.
Loans Purchased under Resale Agreements — The Company participated in resale agreements collateralized with loans with multiple counterparties starting in the fourth quarter of 2020. Total loans purchased under resale agreements were $850.0 million and $300.0 million as of March 31, 2021 and December 31, 2020, respectively. The weighted-average yield was 2.02% for the three months ended March 31, 2021.
Assets Sold under Repurchase Agreements — As of March 31, 2021, the collateral for the repurchase agreements were comprised of U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities and U.S. Treasury securities. Gross repurchase agreements were $300.0 million as of both March 31, 2021 and December 31, 2020. The weighted-average interest rates were 2.67% and 4.10% for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, all repurchase agreements will mature in 2023.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that, in the event of default by the counterparty, provide the Company the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral received includes securities that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral received or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, and is usually delivered to and held by the third-party trustees.
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020:
($ in thousands) | March 31, 2021 | |||||||||||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Assets | Net Amount | |||||||||||||||||||||||||||||||
Collateral Received | ||||||||||||||||||||||||||||||||
Resale agreements | $ | 2,160,038 | $ | — | $ | 2,160,038 | $ | (2,138,721) | (1) | $ | 21,317 | |||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Liabilities | Net Amount | |||||||||||||||||||||||||||||||
Collateral Pledged | ||||||||||||||||||||||||||||||||
Repurchase agreements | $ | 300,000 | $ | — | $ | 300,000 | $ | (300,000) | (2) | $ | — | |||||||||||||||||||||
21
($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Assets | Net Amount | |||||||||||||||||||||||||||||||
Collateral Received | ||||||||||||||||||||||||||||||||
Resale agreements | $ | 1,460,000 | $ | — | $ | 1,460,000 | $ | (1,458,700) | (1) | $ | 1,300 | |||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | |||||||||||||||||||||||||||||
Liabilities | Net Amount | |||||||||||||||||||||||||||||||
Collateral Pledged | ||||||||||||||||||||||||||||||||
Repurchase agreements | $ | 300,000 | $ | — | $ | 300,000 | $ | (300,000) | (2) | $ | — | |||||||||||||||||||||
(1)Represents the fair value of securities the Company has received under resale agreements, limited to the amount of the recognized asset due from each counterparty for presentation purposes. 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 to the amount of the recognized liability due to each counterparty for presentation purpose. 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, 2021 and December 31, 2020:
($ in thousands) | March 31, 2021 | |||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 841,711 | $ | 328 | $ | (15,697) | $ | 826,342 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 1,236,446 | 5,145 | (47,586) | 1,194,005 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 1,178,238 | 16,407 | (25,254) | 1,169,391 | ||||||||||||||||||||||
Residential mortgage-backed securities | 2,271,645 | 17,026 | (41,265) | 2,247,406 | ||||||||||||||||||||||
Municipal securities | 417,676 | 7,348 | (4,959) | 420,065 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 281,099 | 4,311 | (4,383) | 281,027 | ||||||||||||||||||||||
Residential mortgage-backed securities | 525,560 | 1,599 | (3,659) | 523,500 | ||||||||||||||||||||||
Corporate debt securities | 517,309 | 4,677 | (25,343) | 496,643 | ||||||||||||||||||||||
Foreign government bonds | 278,100 | 320 | (2,092) | 276,328 | ||||||||||||||||||||||
Asset-backed securities | 62,762 | 292 | (14) | 63,040 | ||||||||||||||||||||||
CLOs | 294,000 | — | (2,534) | 291,466 | ||||||||||||||||||||||
Total AFS debt securities | $ | 7,904,546 | $ | 57,453 | $ | (172,786) | $ | 7,789,213 | ||||||||||||||||||
22
($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 50,310 | $ | 451 | $ | — | $ | 50,761 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 806,814 | 8,765 | (1,260) | 814,319 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 1,125,174 | 34,306 | (5,710) | 1,153,770 | ||||||||||||||||||||||
Residential mortgage-backed securities | 1,634,553 | 27,952 | (1,611) | 1,660,894 | ||||||||||||||||||||||
Municipal securities | 382,573 | 13,588 | (88) | 396,073 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 234,965 | 6,107 | (1,230) | 239,842 | ||||||||||||||||||||||
Residential mortgage-backed securities | 288,520 | 1,761 | (506) | 289,775 | ||||||||||||||||||||||
Corporate debt securities | 406,323 | 3,493 | (3,848) | 405,968 | ||||||||||||||||||||||
Foreign government bonds | 183,828 | 163 | (1,460) | 182,531 | ||||||||||||||||||||||
Asset-backed securities | 63,463 | 10 | (242) | 63,231 | ||||||||||||||||||||||
CLOs | 294,000 | — | (6,506) | 287,494 | ||||||||||||||||||||||
Total AFS debt securities | $ | 5,470,523 | $ | 96,596 | $ | (22,461) | $ | 5,544,658 | ||||||||||||||||||
As of March 31, 2021 and December 31, 2020, the amortized cost of AFS debt securities excluded accrued interest receivables of $22.9 million and $22.3 million, respectively, which are included in Other assets on the Consolidated Balance Sheet. For the Company’s accounting policy related to AFS debt securities’ accrued interest receivable, see Note 1 — Summary of Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in the Company’s 2020 Form 10-K.
23
Unrealized Losses
The following tables present the fair value and the associated gross unrealized losses of the Company’s AFS debt securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position as of March 31, 2021 and December 31, 2020.
($ in thousands) | March 31, 2021 | |||||||||||||||||||||||||||||||||||||
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 | $ | 775,801 | $ | (15,697) | $ | — | $ | — | $ | 775,801 | $ | (15,697) | ||||||||||||||||||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | 954,894 | (47,586) | — | — | 954,894 | (47,586) | ||||||||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 615,193 | (25,203) | 3,474 | (51) | 618,667 | (25,254) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 1,464,574 | (41,264) | 358 | (1) | 1,464,932 | (41,265) | ||||||||||||||||||||||||||||||||
Municipal securities | 199,225 | (4,959) | — | — | 199,225 | (4,959) | ||||||||||||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 114,971 | (4,374) | 15,578 | (9) | 130,549 | (4,383) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 391,444 | (3,659) | — | — | 391,444 | (3,659) | ||||||||||||||||||||||||||||||||
Corporate debt securities | 347,934 | (25,316) | 9,974 | (27) | 357,908 | (25,343) | ||||||||||||||||||||||||||||||||
Foreign government bonds | 155,299 | (2,092) | — | — | 155,299 | (2,092) | ||||||||||||||||||||||||||||||||
Asset-backed securities | 11,904 | (14) | — | — | 11,904 | (14) | ||||||||||||||||||||||||||||||||
CLOs | — | — | 291,466 | (2,534) | 291,466 | (2,534) | ||||||||||||||||||||||||||||||||
Total AFS debt securities | $ | 5,031,239 | $ | (170,164) | $ | 320,850 | $ | (2,622) | $ | 5,352,089 | $ | (172,786) | ||||||||||||||||||||||||||
($ in thousands) | December 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. Treasury securities | $ | 352,521 | $ | (1,260) | $ | — | $ | — | $ | 352,521 | $ | (1,260) | ||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 292,596 | (5,656) | 3,543 | (54) | 296,139 | (5,710) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 342,561 | (1,611) | — | — | 342,561 | (1,611) | ||||||||||||||||||||||||||||||||
Municipal securities | 24,529 | (88) | — | — | 24,529 | (88) | ||||||||||||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 58,738 | (1,230) | 7,920 | — | 66,658 | (1,230) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 90,156 | (506) | — | — | 90,156 | (506) | ||||||||||||||||||||||||||||||||
Corporate debt securities | 251,674 | (3,645) | 9,798 | (203) | 261,472 | (3,848) | ||||||||||||||||||||||||||||||||
Foreign government bonds | 106,828 | (1,460) | — | — | 106,828 | (1,460) | ||||||||||||||||||||||||||||||||
Asset-backed securities | — | — | 34,104 | (242) | 34,104 | (242) | ||||||||||||||||||||||||||||||||
CLOs | — | — | 287,494 | (6,506) | 287,494 | (6,506) | ||||||||||||||||||||||||||||||||
Total AFS debt securities | $ | 1,519,603 | $ | (15,456) | $ | 342,859 | $ | (7,005) | $ | 1,862,462 | $ | (22,461) | ||||||||||||||||||||||||||
24
As of March 31, 2021, the Company had a total of 291 AFS debt securities in a gross unrealized loss position with no credit impairment that were comprised primarily of 112 U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, 41 U.S. government agency and U.S. government sponsored enterprise debt securities and 26 corporate debt securities. In comparison, as of December 31, 2020, the Company had a total of 104 AFS debt securities in a gross unrealized loss position with no credit impairment that were comprised primarily of 46 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities and 17 corporate debt securities.
Allowance for Credit Losses
Each reporting period, the Company assesses each AFS debt security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for impairment related to credit losses, see Note 1 — Summary of Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in the Company’s 2020 Form 10-K.
The gross unrealized losses presented in the above tables were primarily attributable to yield curve movements and widened spreads. Securities that were in unrealized loss positions as of March 31, 2021 were mainly comprised of the following:
•U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities — The market value decline as of March 31, 2021 was primarily due to interest rate movement. Since these securities (issued by Fannie Mae, Ginnie Mae and Freddie Mac) are guaranteed or sponsored by agencies of the U.S. government, and the credit profiles are strong (rated Aaa, AA+ and AAA by Moody’s Investors Service (“Moody’s”), Standard and Poor's (“S&P”) and Fitch Ratings (“Fitch”), respectively), the Company expects to receive all contractual interest payments on-time, and believes the risk of credit losses on these securities is remote.
•U.S. government agency and U.S. government-sponsored enterprise debt securities — The market value decline as of March 31, 2021 was primarily due to interest rate movement. The securities consisted of the debt securities issued by:
–Federal Farm Credit Bank, Fannie Mae, Freddie Mac, and U.S. International Development Finance Corporation (rated Aaa, AA+ and AAA rated by Moody’s, S&P and Fitch, respectively).
–FHLB debt obligations (rated Aaa and AA+ rated by Moody’s and S&P, respectively).
As these securities are guaranteed or sponsored by the U.S. government and the credit profiles are strong, the Company expects to receive all contractual interest payments on time, and believes the risk of credit losses on these securities is remote.
•Corporate debt securities — The market value decline as of March 31, 2021 was primarily due to interest rate movement and the widening in spreads. Since credit profiles of the securities are strong (rated BBB- or higher by Moody’s, S&P, Kroll Bond Rating Agency and Fitch), and the contractual payments from these bonds have been and are expected to be received on time, the Company believes that the risk of credit losses on these securities is remote.
The impact of the Coronavirus Disease 2019 (“COVID-19”) pandemic has been muted by the government’s aggressive monetary policy, including benchmark rate cuts, and various relief measures that contributed to the gradual and steady recovery of the market to pre-pandemic levels. Overall, the Company believes that the credit support levels of the AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received even if near-term credit performance could possibly suffer from future unpredictable impacts of the COVID-19 pandemic.
As of March 31, 2021 and December 31, 2020, the Company had the intent to hold the AFS debt securities with unrealized losses through the anticipated recovery period and it was more-likely-than-not that the Company will not have to sell these securities before recovery of their amortized cost. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, there was no allowance for credit losses as of March 31, 2021 and December 31, 2020 provided against these securities. In addition, there was no provision for credit losses recognized for the three months ended March 31, 2021 and 2020.
25
Realized Gains and Losses
The following table presents the gross realized gains and tax expense related to the sales of AFS debt securities for the three months ended March 31, 2021 and 2020:
($ in thousands) | Three Months Ended March 31, | |||||||||||||
2021 | 2020 | |||||||||||||
Gross realized gains | $ | 192 | $ | 1,529 | ||||||||||
Related tax expense | $ | 57 | $ | 452 | ||||||||||
Contractual Maturities of Available-for-Sale Debt Securities
The following table presents the contractual maturities of AFS debt securities as of March 31, 2021. Expected maturities will differ from contractual maturities on certain securities as the issuers and borrowers of the underlying collateral may have the right to call or prepay obligations with or without prepayment penalties.
($ in thousands) | Amortized Cost | Fair Value | ||||||||||||
Due within one year | $ | 1,403,404 | $ | 1,347,808 | ||||||||||
Due after one year through five years | 688,387 | 681,602 | ||||||||||||
Due after five years through ten years | 1,427,893 | 1,414,362 | ||||||||||||
Due after ten years | 4,384,862 | 4,345,441 | ||||||||||||
Total AFS debt securities | $ | 7,904,546 | $ | 7,789,213 | ||||||||||
As of March 31, 2021 and December 31, 2020, AFS debt securities with fair value of $590.9 million and $588.5 million, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
Restricted Equity Securities
The following table presents the restricted equity securities on the Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020:
($ in thousands) | March 31, 2021 | December 31, 2020 | ||||||||||||
Federal Reserve Bank of San Francisco (“FRBSF”) stock | $ | 59,453 | $ | 59,249 | ||||||||||
FHLB stock | 23,797 | 23,797 | ||||||||||||
Total restricted equity securities | $ | 83,250 | $ | 83,046 | ||||||||||
Note 6 — Derivatives
The Company uses derivatives to manage exposure to market risk, primarily interest rate or foreign currency risk, as well as to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates do not significantly affect earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities, as well as the Bank’s investment in East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Derivatives to the Consolidated Financial Statements of the Company’s 2020 Form 10-K.
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The following table presents the total notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis as of March 31, 2021 and December 31, 2020. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of March 31, 2021 and December 31, 2020. The resulting net derivative asset and liability fair values are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.
($ in thousands) | March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 275,000 | $ | — | $ | 1,258 | $ | 275,000 | $ | — | $ | 1,864 | ||||||||||||||||||||||||||
Net investment hedges: | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | 83,936 | 908 | — | 84,269 | — | 235 | ||||||||||||||||||||||||||||||||
Total derivatives designated as hedging instruments | $ | 358,936 | $ | 908 | $ | 1,258 | $ | 359,269 | $ | — | $ | 2,099 | ||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | 17,891,960 | $ | 319,049 | $ | 229,032 | $ | 18,155,678 | $ | 489,132 | $ | 315,834 | ||||||||||||||||||||||||||
Foreign exchange contracts | 4,036,958 | 38,654 | 27,287 | 3,108,488 | 30,300 | 22,524 | ||||||||||||||||||||||||||||||||
Credit contracts | 76,992 | 5 | 153 | 76,992 | 13 | 206 | ||||||||||||||||||||||||||||||||
Equity contracts | — | 272 | — | — | 858 | — | ||||||||||||||||||||||||||||||||
Commodity contracts | — | 98,429 | 86,405 | — | 82,451 | 84,165 | ||||||||||||||||||||||||||||||||
Total derivatives not designated as hedging instruments | $ | 22,005,910 | $ | 456,409 | $ | 342,877 | $ | 21,341,158 | $ | 602,754 | $ | 422,729 | ||||||||||||||||||||||||||
Gross derivative assets/liabilities | $ | 457,317 | $ | 344,135 | $ | 602,754 | $ | 424,828 | ||||||||||||||||||||||||||||||
Less: Master netting agreements | (100,454) | (100,454) | (93,063) | (93,063) | ||||||||||||||||||||||||||||||||||
Less: Cash collateral received/paid | (7,781) | (86,233) | (8,449) | (91,634) | ||||||||||||||||||||||||||||||||||
Net derivative assets/liabilities | $ | 349,082 | $ | 157,448 | $ | 501,242 | $ | 240,131 | ||||||||||||||||||||||||||||||
(1)The Company held equity contracts in 18 private companies as of March 31, 2021. In comparison, the Company held equity contracts in two public companies and 17 private companies as of December 31, 2020.
(2)The notional amount of the Company’s commodity contracts entered with its customers totaled 8,258 thousand barrels of crude oil and 102,996 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of March 31, 2021. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 6,321 thousand barrels of crude oil and 109,635 thousand MMBTUs of natural gas as of December 31, 2020. The Company simultaneously entered into the offsetting commodity contracts with mirrored terms with third-party financial institutions.
Derivatives Designated as Hedging Instruments
Fair Value Hedges — The Company entered into interest rate swaps designated as fair value hedges to hedge changes in the fair value of certain certificates of deposit due to changes in the benchmark interest rate. The interest rate swaps involved the exchange of variable-rate payments over the life of the agreements without exchanging the underlying notional amounts. During the fourth quarter of 2020, both the hedging interest rate swaps and hedged certificates of deposit were called.
As of both March 31, 2021 and December 31, 2020, there were no fair value hedges or hedged certificates of deposit outstanding. There were no gains or losses recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the three months ended March 31, 2021. The net gains recognized on interest rate swaps were $2.0 million and the net losses recognized on certificates of deposit were $1.4 million, both recorded in interest expense on the Consolidated Statement of Income for the three months ended March 31, 2020.
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Cash Flow Hedges — The Company entered into interest rate swaps that were designated and qualified as cash flow hedges to limit the exposure to the variability in interest payments on certain floating rate borrowings. For cash flow hedges, the entire change in the fair value of the hedging instruments is recognized in AOCI and reclassified to earnings in the same period when the hedged cash flows impact earnings. Reclassified gains and losses on interest rate swaps are recorded in the same line item as the interest payments of the hedged long-term borrowings within Interest expense in the Consolidated Statements of Income. Considering the interest rates, yield curve and notional amounts as of March 31, 2021, the Company expected to reclassify an estimated $560 thousand of after-tax net losses on derivative instruments designated as cash flow hedges from AOCI into earnings during the next 12 months.
The following table presents the pre-tax changes in AOCI from cash flow hedges for the three months ended March 31, 2021 and 2020. The after-tax impact of cash flow hedges on AOCI is shown in Note 13 — Accumulated Other Comprehensive Income (Loss) to the Consolidated Financial Statements in this Form-10-Q.
($ in thousands) | Three Months Ended March 31, | |||||||||||||
2021 | 2020 | |||||||||||||
Gains recognized in AOCI | $ | 426 | $ | — | ||||||||||
(Losses) reclassified from AOCI to interest expense | $ | (177) | $ | — | ||||||||||
Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. The Company enters into foreign currency forward contracts to hedge a portion of the Bank’s investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Bank’s net investment in East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate of the Chinese Renminbi (“RMB”). The Company may de-designate the net investment hedges when the Company expects the hedge will cease to be highly effective.
The following table presents the after-tax (losses) gains recognized in AOCI on net investment hedges for the three months ended March 31, 2021 and 2020:
($ in thousands) | Three Months Ended March 31, | |||||||||||||
2021 | 2020 | |||||||||||||
Gains recognized in AOCI | $ | 101 | $ | 1,004 | ||||||||||
Derivatives Not Designated as Hedging Instruments
Interest Rate Contracts — The Company enters into interest rate contracts, which include interest rate swaps and options with its customers to allow customers to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions, including central clearing organizations.
The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of March 31, 2021 and December 31, 2020:
($ in thousands) | March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Written options | $ | 800,962 | $ | — | $ | 544 | Purchased options | $ | 800,962 | $ | 551 | $ | — | |||||||||||||||||||||||||||||||
Sold collars and corridors | 531,840 | 5,849 | 158 | Collars and corridors | 531,840 | 160 | 5,888 | |||||||||||||||||||||||||||||||||||||
Swaps | 7,597,856 | 279,361 | 53,975 | Swaps | 7,628,500 | 33,128 | 168,467 | |||||||||||||||||||||||||||||||||||||
Total | $ | 8,930,658 | $ | 285,210 | $ | 54,677 | Total | $ | 8,961,302 | $ | 33,839 | $ | 174,355 | |||||||||||||||||||||||||||||||
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($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Written options | $ | 957,393 | $ | — | $ | 115 | Purchased options | $ | 957,393 | $ | 101 | $ | 15 | |||||||||||||||||||||||||||||||
Sold collars and corridors | 518,477 | 7,673 | — | Collars and corridors | 518,477 | — | 7,717 | |||||||||||||||||||||||||||||||||||||
Swaps | 7,586,414 | 479,634 | 1,364 | Swaps | 7,617,524 | 1,724 | 306,623 | |||||||||||||||||||||||||||||||||||||
Total | $ | 9,062,284 | $ | 487,307 | $ | 1,479 | Total | $ | 9,093,394 | $ | 1,825 | $ | 314,355 | |||||||||||||||||||||||||||||||
In January 2018, the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments made to and received from LCH as settlements of derivatives, and not as collateral against derivatives. Included in the total notional amount of $8.96 billion of interest rate contracts entered into with financial counterparties as of March 31, 2021, was a notional amount of $2.93 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair value of $27.2 million and liability fair values of $116.2 million as of March 31, 2021. In comparison, included in the total notional amount of $9.09 billion of interest rate contracts entered into with financial counterparties as of December 31, 2020, was a notional amount of $2.98 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair values of $1.3 million and liability fair values of $187.4 million as of December 31, 2020.
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot, swap and option contracts to accommodate the business needs of its customers. The Company enters into offsetting foreign exchange contracts with third-party financial institutions to manage its foreign exchange exposure with its customers, or enters into bilateral collateral and master netting agreements with certain customer counterparties to manage its credit exposure. The Company also utilizes foreign exchange contracts, which are not designated as hedging instruments, to mitigate the economic effect of currency fluctuations on certain foreign currency-denominated on-balance sheet assets and liabilities, primarily foreign currency-denominated deposits offered to its customers. A majority of the foreign exchange contracts had original maturities of one year or less as of both March 31, 2021 and December 31, 2020.
The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of March 31, 2021 and December 31, 2020:
($ in thousands) | March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Forwards and spot | $ | 2,468,974 | $ | 27,803 | $ | 21,835 | Forwards and spot | $ | 168,942 | $ | 869 | $ | 494 | |||||||||||||||||||||||||||||||
Swaps | 184,584 | 1,902 | 247 | Swaps | 974,974 | 7,733 | 4,364 | |||||||||||||||||||||||||||||||||||||
Written options | 116,575 | — | 336 | Purchased options | 116,575 | 336 | — | |||||||||||||||||||||||||||||||||||||
Collars | 3,167 | — | 11 | Collars | 3,167 | 11 | — | |||||||||||||||||||||||||||||||||||||
Total | $ | 2,773,300 | $ | 29,705 | $ | 22,429 | Total | $ | 1,263,658 | $ | 8,949 | $ | 4,858 | |||||||||||||||||||||||||||||||
($ in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||
Forwards and spot | $ | 1,522,888 | $ | 17,575 | $ | 17,928 | Forwards and spot | $ | 145,197 | $ | 1,230 | $ | 273 | |||||||||||||||||||||||||||||||
Swaps | 13,590 | 872 | 91 | Swaps | 1,191,355 | 10,049 | 3,658 | |||||||||||||||||||||||||||||||||||||
Written options | 117,729 | — | 574 | Purchased options | 117,729 | 574 | — | |||||||||||||||||||||||||||||||||||||
Total | $ | 1,654,207 | $ | 18,447 | $ | 18,593 | Total | $ | 1,454,281 | $ | 11,853 | $ | 3,931 | |||||||||||||||||||||||||||||||
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Credit Contracts — The Company may periodically enter into RPA contracts with institutional counterparties to manage the credit exposure on interest rate contracts associated with syndicated loans. The Company may enter into protection sold or protection purchased RPAs. Under the RPAs, the Company will make or receive a payment if a borrower defaults on the related interest rate contract. Credit risk on RPAs is managed by monitoring the credit worthiness of the borrowers and institutional counterparties, which is based on the normal credit review process. The majority of the reference entities of the protection sold RPAs were investment grade as of March 31, 2021, while all were investment grade as of December 31, 2020. Assuming the underlying borrower referenced in the interest rate contracts defaulted as of March 31, 2021 and December 31, 2020, the maximum exposure of protection sold RPAs would be $4.9 million and $6.0 million, respectively. As of March 31, 2021 and December 31, 2020, the weighted-average remaining maturities of the outstanding protection sold RPAs were 3.3 years and 3.5 years, respectively.
The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of March 31, 2021 and December 31, 2020:
($ in thousands) | March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||
Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||
RPAs - protection sold | $ | 66,278 | $ | — | $ | 153 | $ | 66,278 | $ | — | $ | 206 | ||||||||||||||||||||||||||
RPAs - protection purchased | 10,714 | 5 | — | 10,714 | 13 | — | ||||||||||||||||||||||||||||||||
Total RPAs | $ | 76,992 | $ | 5 | $ | 153 | $ | 76,992 | $ | 13 | $ | 206 | ||||||||||||||||||||||||||
Equity Contracts — Periodically, as part of the Company’s loan origination process, the Company obtains warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans. Warrants grant the Company the right to buy a certain class of the underlying company’s equity at a certain price before expiration. The Company held warrants in 18 private companies as of March 31, 2021, and held warrants in two public companies and 17 private companies as of December 31, 2020. The total fair value of the warrants held in both public and private companies was $272 thousand and $858 thousand as of March 31, 2021 and December 31, 2020, respectively.
Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of energy commodity price fluctuation. To economically hedge against the risk of commodity price fluctuation in the products offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions to manage the exposure.
The following tables present the notional amounts and fair values of the commodity derivative positions outstanding as of March 31, 2021 and December 31, 2020:
($ and units in thousands) | March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ and units in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional Unit | Fair Value | Notional Unit | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Crude oil: | Crude oil: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Written options | 248 | Barrels | $ | 211 | $ | 25 | Purchased options | 248 | Barrels | $ | — | $ | 48 | |||||||||||||||||||||||||||||||||||||||||||
Collars | 2,361 | Barrels | 11,181 | 219 | Collars | 2,361 | Barrels | 219 | 10,989 | |||||||||||||||||||||||||||||||||||||||||||||||
Swaps | 5,649 | Barrels | 37,076 | 1,206 | Swaps | 5,649 | Barrels | 1,058 | 28,624 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | 8,258 | $ | 48,468 | $ | 1,450 | Total | 8,258 | $ | 1,277 | $ | 39,661 | |||||||||||||||||||||||||||||||||||||||||||||
Natural gas: | Natural gas: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Written options | 8,065 | MMBTUs | $ | 52 | $ | 319 | Purchased options | 8,065 | MMBTUs | $ | 319 | $ | 52 | |||||||||||||||||||||||||||||||||||||||||||
Collars | 10,823 | MMBTUs | 879 | — | Collars | 14,023 | MMBTUs | — | 555 | |||||||||||||||||||||||||||||||||||||||||||||||
Swaps | 84,108 | MMBTUs | 28,878 | 18,449 | Swaps | 91,790 | MMBTUs | 18,556 | 25,919 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | 102,996 | $ | 29,809 | $ | 18,768 | Total | 113,878 | $ | 18,875 | $ | 26,526 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 78,277 | $ | 20,218 | Total | $ | 20,152 | $ | 66,187 | |||||||||||||||||||||||||||||||||||||||||||||||
30
($ and units in thousands) | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customer Counterparty | ($ and units in thousands) | Financial Counterparty | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional Unit | Fair Value | Notional Unit | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Crude oil: | Crude oil: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collars | 2,022 | Barrels | $ | 2,344 | $ | 2,193 | Collars | 2,022 | Barrels | $ | 2,217 | $ | 2,402 | |||||||||||||||||||||||||||||||||||||||||||
Swaps | 4,299 | Barrels | 9,282 | 14,283 | Swaps | 4,299 | Barrels | 8,220 | 7,135 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | 6,321 | $ | 11,626 | $ | 16,476 | Total |