EAST WEST BANCORP INC - Quarter Report: 2022 September (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 September 30, 2022
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 $0.001 per share | EWBC | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 140,946,569 shares as of October 31, 2022.
TABLE OF CONTENTS
Page | |||||||||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
September 30, 2022 | December 31, 2021 | |||||||||||||
(Unaudited) | ||||||||||||||
ASSETS | ||||||||||||||
Cash and due from banks | $ | 554,260 | $ | 527,317 | ||||||||||
Interest-bearing cash with banks | 1,609,093 | 3,385,618 | ||||||||||||
Cash and cash equivalents | 2,163,353 | 3,912,935 | ||||||||||||
Interest-bearing deposits with banks | 630,543 | 736,492 | ||||||||||||
Assets purchased under resale agreements (“resale agreements”) | 892,986 | 2,353,503 | ||||||||||||
Securities: | ||||||||||||||
Available-for-sale (“AFS”) debt securities, at fair value (amortized cost of $6,771,354 and $10,087,179) | 5,906,090 | 9,965,353 | ||||||||||||
Held-to-maturity (“HTM”) debt securities, at amortized cost (fair value of $2,459,135) | 3,012,667 | — | ||||||||||||
Loans held-for-sale | 14,500 | 635 | ||||||||||||
Loans held-for-investment (net of allowance for loan losses of $582,517 and $541,579) | 46,859,738 | 41,152,202 | ||||||||||||
Investments in qualified affordable housing partnerships, tax credit and other investments, net | 725,254 | 628,263 | ||||||||||||
Premises and equipment (net of accumulated depreciation of $146,073 and $139,358) | 91,587 | 97,302 | ||||||||||||
Goodwill | 465,697 | 465,697 | ||||||||||||
Operating lease right-of-use assets | 105,411 | 98,632 | ||||||||||||
Other assets | 1,708,235 | 1,459,687 | ||||||||||||
TOTAL | $ | 62,576,061 | $ | 60,870,701 | ||||||||||
LIABILITIES | ||||||||||||||
Deposits: | ||||||||||||||
Noninterest-bearing | $ | 21,645,394 | $ | 22,845,464 | ||||||||||
Interest-bearing | 32,211,968 | 30,505,068 | ||||||||||||
Total deposits | 53,857,362 | 53,350,532 | ||||||||||||
Federal funds purchased | 200,000 | — | ||||||||||||
Federal Home Loan Bank (“FHLB”) advances | 324,920 | 249,331 | ||||||||||||
Assets sold under repurchase agreements (“repurchase agreements”) | 611,785 | 300,000 | ||||||||||||
Long-term debt and finance lease liabilities | 152,610 | 151,997 | ||||||||||||
Operating lease liabilities | 113,477 | 105,534 | ||||||||||||
Accrued expenses and other liabilities | 1,655,239 | 876,089 | ||||||||||||
Total liabilities | 56,915,393 | 55,033,483 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized; 168,427,227 and 167,790,645 shares issued | 168 | 168 | ||||||||||||
Additional paid-in capital | 1,926,393 | 1,893,557 | ||||||||||||
Retained earnings | 5,302,897 | 4,683,659 | ||||||||||||
Treasury stock, at cost 27,509,715 and 25,882,691 shares | (768,758) | (649,785) | ||||||||||||
Accumulated other comprehensive loss (“AOCI”), net of tax | (800,032) | (90,381) | ||||||||||||
Total stockholders’ equity | 5,660,668 | 5,837,218 | ||||||||||||
TOTAL | $ | 62,576,061 | $ | 60,870,701 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
3
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands, except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||||||||||||||||
Loans receivable, including fees | $ | 560,452 | $ | 363,503 | $ | 1,376,978 | $ | 1,057,964 | ||||||||||||||||||
Debt securities | 51,092 | 37,826 | 139,935 | 101,616 | ||||||||||||||||||||||
Resale agreements | 6,769 | 8,957 | 23,705 | 23,077 | ||||||||||||||||||||||
Restricted equity securities | 843 | 500 | 2,274 | 1,588 | ||||||||||||||||||||||
Interest-bearing cash and deposits with banks | 9,080 | 4,521 | 17,127 | 11,781 | ||||||||||||||||||||||
Total interest and dividend income | 628,236 | 415,307 | 1,560,019 | 1,196,026 | ||||||||||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||||
Deposits | 68,894 | 15,970 | 104,371 | 55,790 | ||||||||||||||||||||||
Federal funds purchased and other short-term borrowings | 1,177 | — | 1,427 | 42 | ||||||||||||||||||||||
FHLB advances | 392 | 857 | 1,529 | 6,025 | ||||||||||||||||||||||
Repurchase agreements | 4,421 | 2,012 | 8,855 | 5,981 | ||||||||||||||||||||||
Long-term debt and finance lease liabilities | 1,543 | 762 | 3,463 | 2,314 | ||||||||||||||||||||||
Total interest expense | 76,427 | 19,601 | 119,645 | 70,152 | ||||||||||||||||||||||
Net interest income before provision for (reversal of) credit losses | 551,809 | 395,706 | 1,440,374 | 1,125,874 | ||||||||||||||||||||||
Provision for (reversal of) credit losses | 27,000 | (10,000) | 48,500 | (25,000) | ||||||||||||||||||||||
Net interest income after provision for (reversal of) credit losses | 524,809 | 405,706 | 1,391,874 | 1,150,874 | ||||||||||||||||||||||
NONINTEREST INCOME | ||||||||||||||||||||||||||
Lending fees | 20,289 | 17,516 | 59,869 | 56,965 | ||||||||||||||||||||||
Deposit account fees | 23,636 | 18,508 | 66,323 | 51,233 | ||||||||||||||||||||||
Interest rate contracts and other derivative income | 8,761 | 7,156 | 29,695 | 20,981 | ||||||||||||||||||||||
Foreign exchange income | 10,083 | 13,101 | 34,143 | 35,634 | ||||||||||||||||||||||
Wealth management fees | 8,903 | 5,598 | 21,494 | 20,460 | ||||||||||||||||||||||
Net gains on sales of loans | 2,129 | 3,329 | 5,968 | 6,601 | ||||||||||||||||||||||
Gains on sales of AFS debt securities | — | 354 | 1,306 | 1,178 | ||||||||||||||||||||||
Other investment (loss) income | (580) | 5,349 | 5,910 | 13,870 | ||||||||||||||||||||||
Other income | 2,331 | 2,198 | 9,031 | 7,484 | ||||||||||||||||||||||
Total noninterest income | 75,552 | 73,109 | 233,739 | 214,406 | ||||||||||||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||||||||||||
Compensation and employee benefits | 127,580 | 105,751 | 357,213 | 318,985 | ||||||||||||||||||||||
Occupancy and equipment expense | 15,920 | 15,851 | 46,853 | 47,150 | ||||||||||||||||||||||
Deposit insurance premiums and regulatory assessments | 4,875 | 4,641 | 14,519 | 12,791 | ||||||||||||||||||||||
Deposit account expense | 6,707 | 4,136 | 17,071 | 11,845 | ||||||||||||||||||||||
Data processing | 3,725 | 3,575 | 10,876 | 12,088 | ||||||||||||||||||||||
Computer software expense | 6,889 | 8,426 | 20,755 | 23,106 | ||||||||||||||||||||||
Consulting expense | 1,620 | 1,635 | 5,474 | 4,978 | ||||||||||||||||||||||
Legal expense | 689 | 2,363 | 2,454 | 5,840 | ||||||||||||||||||||||
Other operating expense | 28,094 | 20,998 | 78,315 | 58,544 | ||||||||||||||||||||||
Amortization of tax credit and other investments | 19,874 | 38,008 | 48,753 | 90,657 | ||||||||||||||||||||||
Total noninterest expense | 215,973 | 205,384 | 602,283 | 585,984 | ||||||||||||||||||||||
INCOME BEFORE INCOME TAXES | 384,388 | 273,431 | 1,023,330 | 779,296 | ||||||||||||||||||||||
INCOME TAX EXPENSE | 89,049 | 47,982 | 232,010 | 124,111 | ||||||||||||||||||||||
NET INCOME | $ | 295,339 | $ | 225,449 | $ | 791,320 | $ | 655,185 | ||||||||||||||||||
EARNINGS PER SHARE (“EPS”) | ||||||||||||||||||||||||||
BASIC | $ | 2.10 | $ | 1.59 | $ | 5.59 | $ | 4.62 | ||||||||||||||||||
DILUTED | $ | 2.08 | $ | 1.57 | $ | 5.55 | $ | 4.58 | ||||||||||||||||||
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||||||||||||||||||||
BASIC | 140,917 | 141,880 | 141,453 | 141,799 | ||||||||||||||||||||||
DILUTED | 142,011 | 143,143 | 142,601 | 143,051 | ||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
4
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Net income | $ | 295,339 | $ | 225,449 | $ | 791,320 | $ | 655,185 | ||||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||||||||
Net changes in unrealized losses on AFS debt securities | (161,445) | (41,178) | (523,593) | (101,577) | ||||||||||||||||||||||
Net changes in unrealized gains (losses) on securities transferred from AFS to HTM | 3,256 | — | (103,674) | — | ||||||||||||||||||||||
Net changes in unrealized (losses) gains on cash flow hedges | (33,269) | 51 | (64,372) | 551 | ||||||||||||||||||||||
Foreign currency translation adjustments | (7,926) | (1,752) | (18,012) | (867) | ||||||||||||||||||||||
Other comprehensive loss | (199,384) | (42,879) | (709,651) | (101,893) | ||||||||||||||||||||||
COMPREHENSIVE INCOME | $ | 95,955 | $ | 182,570 | $ | 81,669 | $ | 553,292 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except shares)
(Unaudited)
Common Stock and Additional Paid-in Capital | Retained Earnings | Treasury Stock | AOCI, Net of Tax | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||
BALANCE, JULY 1, 2021 | 141,877,505 | $ | 1,876,247 | $ | 4,335,327 | $ | (649,337) | $ | (14,689) | $ | 5,547,548 | |||||||||||||||||||||||||||
Net income | — | — | 225,449 | — | — | 225,449 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (42,879) | (42,879) | ||||||||||||||||||||||||||||||||
Issuance of common stock pursuant to various stock compensation plans and agreements | 9,643 | 7,792 | — | — | — | 7,792 | ||||||||||||||||||||||||||||||||
Repurchase of common stock pursuant to various stock compensation plans and agreements | (3,417) | — | — | (254) | — | (254) | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.33 per share) | — | — | (47,455) | — | — | (47,455) | ||||||||||||||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2021 | 141,883,731 | $ | 1,884,039 | $ | 4,513,321 | $ | (649,591) | $ | (57,568) | $ | 5,690,201 | |||||||||||||||||||||||||||
BALANCE, JULY 1, 2022 | 140,917,389 | $ | 1,914,232 | $ | 5,064,650 | $ | (768,752) | $ | (600,648) | $ | 5,609,482 | |||||||||||||||||||||||||||
Net income | — | — | 295,339 | — | — | 295,339 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (199,384) | (199,384) | ||||||||||||||||||||||||||||||||
Issuance of common stock pursuant to various stock compensation plans and agreements | 206 | 12,329 | — | — | — | 12,329 | ||||||||||||||||||||||||||||||||
Repurchase of common stock pursuant to various stock compensation plans and agreements | (83) | — | — | (6) | — | (6) | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.40 per share) | — | — | (57,092) | — | — | (57,092) | ||||||||||||||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2022 | 140,917,512 | $ | 1,926,561 | $ | 5,302,897 | $ | (768,758) | $ | (800,032) | $ | 5,660,668 | |||||||||||||||||||||||||||
Common Stock and Additional Paid-in Capital | Retained Earnings | Treasury Stock | AOCI, Net of Tax | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2021 | 141,565,229 | $ | 1,858,519 | $ | 4,000,414 | $ | (634,083) | $ | 44,325 | $ | 5,269,175 | |||||||||||||||||||||||||||
Net income | — | — | 655,185 | — | — | 655,185 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (101,893) | (101,893) | ||||||||||||||||||||||||||||||||
Issuance of common stock pursuant to various stock compensation plans and agreements | 523,449 | 25,520 | — | — | — | 25,520 | ||||||||||||||||||||||||||||||||
Repurchase of common stock pursuant to various stock compensation plans and agreements | (204,947) | — | — | (15,508) | — | (15,508) | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($0.99 per share) | — | — | (142,278) | — | — | (142,278) | ||||||||||||||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2021 | 141,883,731 | $ | 1,884,039 | $ | 4,513,321 | $ | (649,591) | $ | (57,568) | $ | 5,690,201 | |||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2022 | 141,907,954 | $ | 1,893,725 | $ | 4,683,659 | $ | (649,785) | $ | (90,381) | $ | 5,837,218 | |||||||||||||||||||||||||||
Net income | — | — | 791,320 | — | — | 791,320 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (709,651) | (709,651) | ||||||||||||||||||||||||||||||||
Issuance of common stock pursuant to various stock compensation plans and agreements | 640,053 | 32,836 | — | — | — | 32,836 | ||||||||||||||||||||||||||||||||
Repurchase of common stock pursuant to various stock compensation plans and agreements | (244,978) | — | — | (18,983) | — | (18,983) | ||||||||||||||||||||||||||||||||
Repurchase of common stock pursuant to the Stock Repurchase Plan | (1,385,517) | — | — | (99,990) | — | (99,990) | ||||||||||||||||||||||||||||||||
Cash dividends on common stock ($1.20 per share) | — | — | (172,082) | — | — | (172,082) | ||||||||||||||||||||||||||||||||
BALANCE, SEPTEMBER 30, 2022 | 140,917,512 | $ | 1,926,561 | $ | 5,302,897 | $ | (768,758) | $ | (800,032) | $ | 5,660,668 | |||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
6
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
Net income | $ | 791,320 | $ | 655,185 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | 81,980 | 116,371 | ||||||||||||
Amortization of premiums and accretion of discount, net | 26,336 | 17,392 | ||||||||||||
Stock compensation costs | 29,338 | 24,047 | ||||||||||||
Deferred income tax (benefit) expense | (6,107) | 787 | ||||||||||||
Provision for (reversal of) credit losses | 48,500 | (25,000) | ||||||||||||
Net gains on sales of loans | (5,968) | (6,601) | ||||||||||||
Gains on sales of AFS debt securities | (1,306) | (1,178) | ||||||||||||
Loans held-for-sale: | ||||||||||||||
Originations and purchases | (447) | (9,323) | ||||||||||||
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale | 461 | 11,337 | ||||||||||||
Proceeds from distributions received from equity method investees | 5,642 | 7,624 | ||||||||||||
Net change in accrued interest receivable and other assets | 56,958 | (78,649) | ||||||||||||
Net change in accrued expenses and other liabilities | 584,655 | 30,179 | ||||||||||||
Other operating activities, net | 5,057 | 3,660 | ||||||||||||
Total adjustments | 825,099 | 90,646 | ||||||||||||
Net cash provided by operating activities | 1,616,419 | 745,831 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
Net change in: | ||||||||||||||
Investments in qualified affordable housing partnerships, tax credit and other investments | (91,710) | (141,882) | ||||||||||||
Interest-bearing deposits with banks | 105,479 | 4,576 | ||||||||||||
Resale agreements: | ||||||||||||||
Proceeds from paydowns and maturities | 1,719,076 | 698,274 | ||||||||||||
Purchases | (258,559) | (1,834,416) | ||||||||||||
AFS debt securities: | ||||||||||||||
Proceeds from sales | 129,181 | 236,967 | ||||||||||||
Proceeds from repayments, maturities and redemptions | 711,950 | 1,346,839 | ||||||||||||
Purchases | (769,007) | (5,884,389) | ||||||||||||
HTM debt securities: | ||||||||||||||
Proceeds from repayments, maturities and redemptions | 60,140 | — | ||||||||||||
Purchases | (50,000) | — | ||||||||||||
Loans held-for-investment: | ||||||||||||||
Proceeds from sales of loans originally classified as held-for-investment | 453,315 | 416,426 | ||||||||||||
Purchases | (599,660) | (746,395) | ||||||||||||
Other changes in loans held-for-investment, net | (5,675,012) | (1,798,011) | ||||||||||||
Proceeds from sales of OREO | — | 28,560 | ||||||||||||
Purchase of bank-owned life insurance | — | (150,000) | ||||||||||||
Proceeds from distributions received from equity method investees | 13,557 | 5,626 | ||||||||||||
Other investing activities, net | 920 | (61) | ||||||||||||
Net cash used in investing activities | (4,250,330) | (7,817,886) | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
7
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
(Continued)
Nine Months Ended September 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||
Net change in deposits | 623,025 | 8,486,734 | ||||||||||||
Net change in federal funds purchased and short-term borrowings | 200,006 | (21,143) | ||||||||||||
FHLB advances: | ||||||||||||||
Proceeds | 4,600,200 | — | ||||||||||||
Repayment | (4,525,200) | (405,000) | ||||||||||||
Repurchase agreements: | ||||||||||||||
Proceeds from repurchase agreements | 311,785 | — | ||||||||||||
Long-term debt and lease liabilities: | ||||||||||||||
Repayment of long-term debt and lease liabilities | (710) | (909) | ||||||||||||
Common stock: | ||||||||||||||
Repurchase of common stocks pursuant to the Stock Repurchase Program | (99,990) | — | ||||||||||||
Proceeds from issuance pursuant to various stock compensation plans and agreements | 1,444 | 1,180 | ||||||||||||
Stocks tendered for payment of withholding taxes | (18,983) | (15,508) | ||||||||||||
Cash dividends paid | (171,991) | (141,911) | ||||||||||||
Net cash provided by financing activities | 919,586 | 7,903,443 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (35,257) | 3,542 | ||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,749,582) | 834,930 | ||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 3,912,935 | 4,017,971 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 2,163,353 | $ | 4,852,901 | ||||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||||
Cash paid during the period for: | ||||||||||||||
Interest | $ | 107,146 | $ | 70,833 | ||||||||||
Income taxes, net | $ | 233,082 | $ | 137,452 | ||||||||||
Noncash investing and financing activities: | ||||||||||||||
Securities transferred from AFS to HTM debt securities | $ | 3,010,003 | $ | — | ||||||||||
Loans transferred from held-for-investment to held-for-sale | $ | 463,769 | $ | 411,416 | ||||||||||
Loans transferred to other real estate owned (“OREO”) and other foreclosed assets | $ | — | $ | 49,122 | ||||||||||
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 September 30, 2022, East West also has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Trusts are not included on the Consolidated Financial Statements.
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. While the unaudited interim Consolidated Financial Statements reflect all adjustments that, in the opinion of management, are necessary for fair presentation, they primarily serve to update the most recently filed annual report on Form 10-K, and may not include all the information and notes necessary to constitute a complete set of financial statements. Accordingly, they 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, 2021, filed with the U.S. Securities and Exchange Commission on February 28, 2022 (the “Company’s 2021 Form 10-K”). In addition, certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.
The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Financial Statements, income and expenses during the reporting periods, and the related disclosures. Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual results could be materially different from those estimates. Hence, 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.
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Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies
Recent Accounting Pronouncements
Standard | Required Date of Adoption | Description | Effect on Financial Statements | ||||||||
Standards Not Yet Adopted | |||||||||||
Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and the Vintage Disclosures | January 1, 2023 | ASU 2022-02 eliminates the troubled debt restructuring (“TDRs”) accounting model for creditors and instead requires companies to apply the loan refinancing and restructuring guidance to determine whether a modification made to a borrower results in a new loan or a continuation of an existing loan. In addition, companies are no longer required to use a discounted cash flow method to measure the allowance for credit losses for certain TDRs and instead allows for the use of an expected loss approach for all loans. The guidance also introduces new disclosure requirements related to restructuring of financing receivables made to borrowers experiencing financial difficulty, and amends vintage disclosures to require current-period gross write-off by year of origination. The guidance should be applied on a prospective basis except for amendments related to recognition and measurement of TDRs, where a modified retrospective transition method is optional. | The Company does not expect the adoption of this guidance to have a material impact on the Company’s Consolidated Financial Statements. The Company expects to adopt ASU 2022-02 on January 1, 2023. | ||||||||
ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions | January 1, 2024 | ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This ASU also requires the following disclosures for equity securities that are subject to contractual restrictions: the fair value of equity securities subject to contractual sale restrictions; nature and remaining duration of the restrictions; and circumstances that could cause a lapse in the restrictions. The guidance should be applied on a prospective basis with any adjustments from the adoption of the amendment recognized in earnings and disclosed on the date of adoption. | The Company does not expect the adoption of this guidance to have an impact on the Company’s Consolidated Financial Statements. The Company expects to adopt ASU 2022-03 on January 1, 2024. |
Significant Accounting Policies Update
During the first quarter of 2022, the Company transferred $3.01 billion in fair value of debt securities from AFS to HTM.
Transfer between Categories of Debt Securities — Upon transfer of a debt security from the AFS to HTM category, the security’s new amortized cost is reset to fair value, reduced by any previous write-offs but excluding any allowance for credit losses. Unrealized gains or losses at the date of transfer of these securities continue to be reported in AOCI and are amortized into interest income over the remaining life of the securities as effective yield adjustments, in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. For transfers of securities from the AFS to HTM category, any allowance for credit losses that was previously recorded under the AFS model is reversed and an allowance for credit losses is subsequently recorded under the HTM debt security model. The reversal and re-establishment of the allowance for credit losses are recorded in the provision for credit losses.
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Held-to-Maturity Debt Securities — Debt securities that the Company has the intent and ability to hold until maturity are classified as HTM and are carried at amortized cost, net of allowance for credit losses. The criteria used to place HTM debt securities on nonaccrual are largely similar to those described for loans. The amortized cost of the Company’s HTM debt securities excludes accrued interest, which is included in Other assets on the Consolidated Balance Sheet. The Company has made an accounting policy election not to recognize an allowance for credit losses for accrued interest receivables on HTM debt securities, as the Company reverses any accrued interest against interest income if a debt security is placed on nonaccrual status. Any cash collected on nonaccrual HTM securities is applied to reduce the security’s amortized cost basis and not as interest income. Generally, the Company returns an HTM security to accrual status when all delinquent interest and principal become current under the contractual terms of the security, and the collectability of remaining principal and interest is no longer doubtful.
Allowance for Credit Losses on Held-to-Maturity Debt Securities — For each major HTM debt security type, the allowance for credit losses is estimated collectively for groups of securities with similar risk characteristics. For securities that do not share similar risk characteristics, the losses are estimated individually. The Company applies a zero credit loss assumption to certain HTM debt securities, including debt securities that are either guaranteed or issued by the U.S. government or government-sponsored enterprises, are highly rated by nationally recognized statistical rating organizations (“NRSROs”), and have a long history of no credit losses. Any expected credit loss is recorded through the allowance for credit losses on HTM debt securities and deducted from the amortized cost basis of the security, reflecting the net amount the Company expects to collect.
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 described 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.
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Available-for-Sale Debt Securities — The fair value of 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 expectations 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 valuation inputs and methodology for each security category furnished by third-party pricing service providers.
When available, the Company uses quoted market prices to determine the fair value of AFS debt securities that are classified as Level 1. Level 1 AFS debt securities consist of U.S. Treasury 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. In addition, the Company obtains market quotes from other official published sources. As these valuations are based on observable inputs in the current marketplace, they 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 techniques are reviewed periodically.
Equity Securities — Equity securities consisted of mutual funds as of both September 30, 2022 and December 31, 2021. 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 or interest rate collar contracts with institutional counterparties to hedge against certain variable interest rate borrowings and variable interest rate loans. These interest rate contracts with institutional counterparties are 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 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. Considering the observable nature of all other significant inputs utilized, the Company classifies these derivative instruments as Level 2.
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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 of foreign exchange contracts 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 is classified as Level 2. As of September 30, 2022 and December 31, 2021, 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 non-deliverable forward 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. Since the majority of the inputs used to value the RPAs are observable, RPAs are classified as Level 2.
Equity Contracts — As part of the loan origination process, the Company may obtain warrants to purchase preferred and/or common stock of the borrowers, which are mainly in the technology and life sciences sectors. As of September 30, 2022 and December 31, 2021, 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 company 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. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a measurement of uncertainty analysis on the option volatility and liquidity discount assumptions is performed.
Commodity Contracts — The Company enters into energy commodity contracts consisting of swaps and options with its oil and gas loan customers, which 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 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. 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. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.
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The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:
($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2022 | |||||||||||||||||||||||||
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 | $ | 600,677 | $ | — | $ | — | $ | 600,677 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | — | 260,424 | — | 260,424 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 521,885 | — | 521,885 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 1,793,429 | — | 1,793,429 | ||||||||||||||||||||||
Municipal securities | — | 249,502 | — | 249,502 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 397,975 | — | 397,975 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 671,538 | — | 671,538 | ||||||||||||||||||||||
Corporate debt securities | — | 529,565 | — | 529,565 | ||||||||||||||||||||||
Foreign government bonds | — | 225,810 | — | 225,810 | ||||||||||||||||||||||
Asset-backed securities | — | 64,870 | — | 64,870 | ||||||||||||||||||||||
Collateralized loan obligations (“CLOs”) | — | 590,415 | — | 590,415 | ||||||||||||||||||||||
Total AFS debt securities | $ | 600,677 | $ | 5,305,413 | $ | — | $ | 5,906,090 | ||||||||||||||||||
Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities | $ | 19,637 | $ | 4,200 | $ | — | $ | 23,837 | ||||||||||||||||||
Total investments in tax credit and other investments | $ | 19,637 | $ | 4,200 | $ | — | $ | 23,837 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 430,038 | $ | — | $ | 430,038 | ||||||||||||||||||
Foreign exchange contracts | — | 81,874 | — | 81,874 | ||||||||||||||||||||||
Equity contracts | — | 1 | 345 | 346 | ||||||||||||||||||||||
Commodity contracts | — | 369,146 | — | 369,146 | ||||||||||||||||||||||
Gross derivative assets | $ | — | $ | 881,059 | $ | 345 | $ | 881,404 | ||||||||||||||||||
Netting adjustments (1) | $ | — | $ | (605,957) | $ | — | $ | (605,957) | ||||||||||||||||||
Net derivative assets | $ | — | $ | 275,102 | $ | 345 | $ | 275,447 | ||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 615,327 | $ | — | $ | 615,327 | ||||||||||||||||||
Foreign exchange contracts | — | 64,049 | — | 64,049 | ||||||||||||||||||||||
Credit contracts | — | 27 | — | 27 | ||||||||||||||||||||||
Commodity contracts | — | 350,198 | — | 350,198 | ||||||||||||||||||||||
Gross derivative liabilities | $ | — | $ | 1,029,601 | $ | — | $ | 1,029,601 | ||||||||||||||||||
Netting adjustments (1) | $ | — | $ | (239,206) | $ | — | $ | (239,206) | ||||||||||||||||||
Net derivative liabilities | $ | — | $ | 790,395 | $ | — | $ | 790,395 | ||||||||||||||||||
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($ in thousands) | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 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 | $ | 1,032,681 | $ | — | $ | — | $ | 1,032,681 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | — | 1,301,971 | — | 1,301,971 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 1,228,980 | — | 1,228,980 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 2,928,283 | — | 2,928,283 | ||||||||||||||||||||||
Municipal securities | — | 523,158 | — | 523,158 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | 496,443 | — | 496,443 | ||||||||||||||||||||||
Residential mortgage-backed securities | — | 881,931 | — | 881,931 | ||||||||||||||||||||||
Corporate debt securities | — | 649,665 | — | 649,665 | ||||||||||||||||||||||
Foreign government bonds | — | 257,733 | — | 257,733 | ||||||||||||||||||||||
Asset-backed securities | — | 74,558 | — | 74,558 | ||||||||||||||||||||||
CLOs | — | 589,950 | — | 589,950 | ||||||||||||||||||||||
Total AFS debt securities | $ | 1,032,681 | $ | 8,932,672 | $ | — | $ | 9,965,353 | ||||||||||||||||||
Investments in tax credit and other investments: | ||||||||||||||||||||||||||
Equity securities | $ | 22,130 | $ | 4,474 | $ | — | $ | 26,604 | ||||||||||||||||||
Total investments in tax credit and other investments | $ | 22,130 | $ | 4,474 | $ | — | $ | 26,604 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 240,222 | $ | — | $ | 240,222 | ||||||||||||||||||
Foreign exchange contracts | — | 21,033 | — | 21,033 | ||||||||||||||||||||||
Equity contracts | — | 5 | 215 | 220 | ||||||||||||||||||||||
Commodity contracts | — | 222,709 | — | 222,709 | ||||||||||||||||||||||
Gross derivative assets | $ | — | $ | 483,969 | $ | 215 | $ | 484,184 | ||||||||||||||||||
Netting adjustments (1) | $ | — | $ | (100,953) | $ | — | $ | (100,953) | ||||||||||||||||||
Net derivative assets | $ | — | $ | 383,016 | $ | 215 | $ | 383,231 | ||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||
Interest rate contracts | $ | — | $ | 179,962 | $ | — | $ | 179,962 | ||||||||||||||||||
Foreign exchange contracts | — | 15,501 | — | 15,501 | ||||||||||||||||||||||
Credit contracts | — | 141 | — | 141 | ||||||||||||||||||||||
Commodity contracts | — | 194,567 | — | 194,567 | ||||||||||||||||||||||
Gross derivative liabilities | $ | — | $ | 390,171 | $ | — | $ | 390,171 | ||||||||||||||||||
Netting adjustments (1) | $ | — | $ | (232,727) | $ | — | $ | (232,727) | ||||||||||||||||||
Net derivative liabilities | $ | — | $ | 157,444 | $ | — | $ | 157,444 | ||||||||||||||||||
(1)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
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For the three and nine months ended September 30, 2022 and 2021, Level 3 fair value measurements that were measured on a recurring basis consisted of equity contracts issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity contracts for the three and nine months ended September 30, 2022 and 2021:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Equity contracts | ||||||||||||||||||||||||||
Beginning balance | $ | 357 | $ | 223 | $ | 215 | $ | 273 | ||||||||||||||||||
Total (losses) gains included in earnings (1) | (12) | (9) | 39 | 37 | ||||||||||||||||||||||
Issuances | — | 12 | 91 | 12 | ||||||||||||||||||||||
Settlements | — | — | — | (96) | ||||||||||||||||||||||
Transfers out of Level 3 (2) | — | (6) | — | (6) | ||||||||||||||||||||||
Ending balance | $ | 345 | $ | 220 | $ | 345 | $ | 220 | ||||||||||||||||||
(1)Includes unrealized (losses) gains of $(12) thousand and $(9) thousand for the three months ended September 30, 2022 and 2021, respectively, and $39 thousand and $(38) thousand for the nine months ended September 30, 2022 and 2021, respectively. The realized/unrealized gains (losses) of equity contracts are recorded in on the Consolidated Statement of Income.
(2)During the three and nine months ended September 30, 2021, the Company transferred $6 thousand of equity contracts measured on a recurring basis out of Level 3 into Level 2 after the corresponding issuer of the equity contracts, which was previously a private company completed its initial public offering and became a public company.
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of September 30, 2022 and December 31, 2021. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted- Average of Inputs (1) | |||||||||||||||||||||||||||
September 30, 2022 | ||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Equity contracts | $ | 345 | Black-Scholes option pricing model | Equity volatility | 49% — 70% | 59% | ||||||||||||||||||||||||||
Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Equity contracts | $ | 215 | Black-Scholes option pricing model | Equity volatility | 44% — 54% | 49% | ||||||||||||||||||||||||||
Liquidity discount | 47% | 47% | ||||||||||||||||||||||||||||||
(1)Weighted-average of inputs is calculated based on the fair value of equity contracts as of September 30, 2022 and December 31, 2021.
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 the impairment on certain individually evaluated loans held-for-investment and investments in qualified affordable housing partnerships, tax credit and other investments, from 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.
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•When the repayment of an individually evaluated loan is dependent on the sale of the collateral, 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.
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 to ensure book values are realizable and that there is no significant tax credit recapture risk. This monitoring process 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 information 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, Investments — Equity Method and Joint Ventures, 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.
Loans Held-for-Sale — Loans held-for-investment subsequently transferred to held-for-sale are recorded at the lower of cost or fair value upon transfer. Loans held-for-sale may be measured at fair value on a nonrecurring basis when fair value is less than cost. Fair value is generally determined based on available market data for similar loans and therefore, are classified as Level 2.
Other Nonperforming Assets — Other nonperforming assets are recorded at fair value upon transfer 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 estimated recovery of the foreclosed asset. The Company records an impairment when the foreclosed asset’s fair value declines below its carrying value. The fair value measurement of other nonperforming assets is classified within one of the three levels in a valuation hierarchy based upon the observability of inputs to the valuation as of the measurement date.
17
The following tables present the carrying amounts of assets that were still held and had fair value adjustments measured on a nonrecurring basis as of September 30, 2022 and December 31, 2021:
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of September 30, 2022 | |||||||||||||||||||||||||
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”) | $ | — | $ | — | $ | 57,696 | $ | 57,696 | ||||||||||||||||||
Commercial real estate (“CRE”): | ||||||||||||||||||||||||||
CRE | — | — | 30,359 | 30,359 | ||||||||||||||||||||||
Multifamily residential | — | — | 1,008 | 1,008 | ||||||||||||||||||||||
Total commercial | — | — | 89,063 | 89,063 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
Home equity lines of credit (“HELOCs”) | — | — | 1,235 | 1,235 | ||||||||||||||||||||||
Total consumer | — | — | 1,235 | 1,235 | ||||||||||||||||||||||
Total loans held-for-investment | $ | — | $ | — | $ | 90,298 | $ | 90,298 | ||||||||||||||||||
($ in thousands) | Assets Measured at Fair Value on a Nonrecurring Basis as of December 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: | ||||||||||||||||||||||||||
C&I | $ | — | $ | — | $ | 102,349 | $ | 102,349 | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | — | — | 21,891 | 21,891 | ||||||||||||||||||||||
Total commercial | — | — | 124,240 | 124,240 | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
HELOCs | — | — | 2,744 | 2,744 | ||||||||||||||||||||||
Total consumer | — | — | 2,744 | 2,744 | ||||||||||||||||||||||
Total loans held-for-investment | $ | — | $ | — | $ | 126,984 | $ | 126,984 | ||||||||||||||||||
Other nonperforming assets | $ | 391 | $ | — | $ | — | $ | 391 | ||||||||||||||||||
18
The following table presents the increase (decrease) in fair value of certain assets held at the end of the respective reporting periods, for which a nonrecurring fair value adjustment was recognized for the three and nine months ended September 30, 2022 and 2021:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Loans held-for-investment: | ||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
C&I | $ | (15,265) | $ | (4,977) | $ | (30,011) | $ | (13,590) | ||||||||||||||||||
CRE: | ||||||||||||||||||||||||||
CRE | (118) | (106) | 2,212 | (7,186) | ||||||||||||||||||||||
Multifamily residential | (5,931) | 16 | (5,939) | — | ||||||||||||||||||||||
Total commercial | (21,314) | (5,067) | (33,738) | (20,776) | ||||||||||||||||||||||
Consumer: | ||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||
HELOCs | 81 | 3 | 166 | (6) | ||||||||||||||||||||||
Other consumer | — | — | — | (2,491) | ||||||||||||||||||||||
Total consumer | 81 | 3 | 166 | (2,497) | ||||||||||||||||||||||
Total loans held-for-investment | $ | (21,233) | $ | (5,064) | $ | (33,572) | $ | (23,273) | ||||||||||||||||||
Investments in tax credit and other investments, net | $ | — | $ | — | $ | — | $ | 877 | ||||||||||||||||||
Other nonperforming assets | $ | — | $ | (43) | $ | (6,861) | $ | (3,933) | ||||||||||||||||||
The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of September 30, 2022 and December 31, 2021:
($ in thousands) | Fair Value Measurements (Level 3) | Valuation Techniques | Unobservable Inputs | Range of Inputs | Weighted- Average of Inputs (1) | |||||||||||||||||||||||||||
September 30, 2022 | ||||||||||||||||||||||||||||||||
Loans held-for-investment | $ | 40,559 | Discounted cash flows | Discount | 4% — 6% | 4% | ||||||||||||||||||||||||||
$ | 18,372 | Fair value of collateral | Discount | 40% — 94% | 52% | |||||||||||||||||||||||||||
$ | 31,367 | Fair value of property | Selling cost | 8% | 8% | |||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||
Loans held-for-investment | $ | 64,919 | Discounted cash flows | Discount | 4% — 15% | 7% | ||||||||||||||||||||||||||
$ | 38,537 | Fair value of collateral | Discount | 15% — 75% | 41% | |||||||||||||||||||||||||||
$ | 23,528 | Fair value of property | Selling cost | 8% | 8% | |||||||||||||||||||||||||||
(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of September 30, 2022 and December 31, 2021.
19
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of September 30, 2022 and December 31, 2021, 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, restricted equity securities, at cost, and mortgage servicing rights that are included in Other assets, and accrued interest payable which is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured on an amortized cost basis on the Company’s Consolidated Balance Sheet.
($ in thousands) | September 30, 2022 | |||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,163,353 | $ | 2,163,353 | $ | — | $ | — | $ | 2,163,353 | ||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 630,543 | $ | — | $ | 630,543 | $ | — | $ | 630,543 | ||||||||||||||||||||||
Resale agreements | $ | 892,986 | $ | — | $ | 790,239 | $ | — | $ | 790,239 | ||||||||||||||||||||||
HTM debt securities | $ | 3,012,667 | $ | 466,085 | $ | 1,993,050 | $ | — | $ | 2,459,135 | ||||||||||||||||||||||
Restricted equity securities, at cost | $ | 78,254 | $ | — | $ | 78,254 | $ | — | $ | 78,254 | ||||||||||||||||||||||
Loans held-for-sale | $ | 14,500 | $ | — | $ | 14,500 | $ | — | $ | 14,500 | ||||||||||||||||||||||
Loans held-for-investment, net | $ | 46,859,738 | $ | — | $ | — | $ | 46,147,082 | $ | 46,147,082 | ||||||||||||||||||||||
Mortgage servicing rights | $ | 6,523 | $ | — | $ | — | $ | 10,532 | $ | 10,532 | ||||||||||||||||||||||
Accrued interest receivable | $ | 208,520 | $ | — | $ | 208,520 | $ | — | $ | 208,520 | ||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 43,498,799 | $ | — | $ | 43,498,799 | $ | — | $ | 43,498,799 | ||||||||||||||||||||||
Time deposits | $ | 10,358,563 | $ | — | $ | 10,256,100 | $ | — | $ | 10,256,100 | ||||||||||||||||||||||
Federal funds purchased | $ | 200,000 | $ | — | $ | 200,000 | $ | — | $ | 200,000 | ||||||||||||||||||||||
FHLB advances | $ | 324,920 | $ | — | $ | 325,000 | $ | — | $ | 325,000 | ||||||||||||||||||||||
Repurchase agreements | $ | 611,785 | $ | — | $ | 617,513 | $ | — | $ | 617,513 | ||||||||||||||||||||||
Long-term debt | $ | 147,875 | $ | — | $ | 140,902 | $ | — | $ | 140,902 | ||||||||||||||||||||||
Accrued interest payable | $ | 23,934 | $ | — | $ | 23,934 | $ | — | $ | 23,934 | ||||||||||||||||||||||
($ in thousands) | December 31, 2021 | |||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | ||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 3,912,935 | $ | 3,912,935 | $ | — | $ | — | $ | 3,912,935 | ||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 736,492 | $ | — | $ | 736,492 | $ | — | $ | 736,492 | ||||||||||||||||||||||
Resale agreements | $ | 2,353,503 | $ | — | $ | 2,335,901 | $ | — | $ | 2,335,901 | ||||||||||||||||||||||
Restricted equity securities, at cost | $ | 77,434 | $ | — | $ | 77,434 | $ | — | $ | 77,434 | ||||||||||||||||||||||
Loans held-for-sale | $ | 635 | $ | — | $ | 635 | $ | — | $ | 635 | ||||||||||||||||||||||
Loans held-for-investment, net | $ | 41,152,202 | $ | — | $ | — | $ | 41,199,599 | $ | 41,199,599 | ||||||||||||||||||||||
Mortgage servicing rights | $ | 5,706 | $ | — | $ | — | $ | 9,104 | $ | 9,104 | ||||||||||||||||||||||
Accrued interest receivable | $ | 159,833 | $ | — | $ | 159,833 | $ | — | $ | 159,833 | ||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Demand, checking, savings and money market deposits | $ | 45,388,550 | $ | — | $ | 45,388,550 | $ | — | $ | 45,388,550 | ||||||||||||||||||||||
Time deposits | $ | 7,961,982 | $ | — | $ | 7,966,116 | $ | — | $ | 7,966,116 | ||||||||||||||||||||||
FHLB advances | $ | 249,331 | $ | — | $ | 250,372 | $ | — | $ | 250,372 | ||||||||||||||||||||||
Repurchase agreements | $ | 300,000 | $ | — | $ | 310,525 | $ | — | $ | 310,525 | ||||||||||||||||||||||
Long-term debt | $ | 147,658 | $ | — | $ | 151,020 | $ | — | $ | 151,020 | ||||||||||||||||||||||
Accrued interest payable | $ | 11,435 | $ | — | $ | 11,435 | $ | — | $ | 11,435 | ||||||||||||||||||||||
20
Note 4 — Assets Purchased under Resale Agreements and Sold under Repurchase Agreements
Assets Purchased under Resale Agreements
With resale agreements, the Company is exposed to credit risk for both the counterparties and the underlying collateral. The Company manages credit exposure from certain transactions by entering into master netting agreements and collateral arrangements with the 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 both September 30, 2022 and December 31, 2021.
Securities Purchased under Resale Agreements — Total securities purchased under resale agreements were $885.0 million as of September 30, 2022, and $1.33 billion as of December 31, 2021. The weighted-average yields were 2.41% and 1.50% for the three months ended September 30, 2022 and 2021, respectively; and 1.96% and 1.53% for the nine months ended September 30, 2022 and 2021, respectively.
Loans Purchased under Resale Agreements — Total loans purchased under resale agreements were $8.0 million as of September 30, 2022, and $1.02 billion as of December 31, 2021. The weighted-average yields were 3.87% and 1.48% for the three months ended September 30, 2022 and 2021, respectively; and 2.10% and 1.57% for the nine months ended September 30, 2022 and 2021, respectively.
Assets Sold under Repurchase Agreements — As of September 30, 2022, securities sold under repurchase agreements consisted of U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and U.S. Treasury securities. Gross repurchase agreements were $611.8 million as of September 30, 2022, and $300.0 million as of December 31, 2021. The weighted-average interest rates were 2.81% and 2.57% for the three months ended September 30, 2022 and 2021, respectively; and 2.73% and 2.62% for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, $311.8 million and $300.0 million of the securities sold under repurchase agreements will mature in 2022 and 2023, respectively.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that, in the event of default by the counterparty, provide the Company the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting Repurchase and Reverse Repurchase Agreements. Collateral received includes securities and loans that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Securities received or pledged as collateral in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, and are usually delivered to and held by the third-party trustees.
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of September 30, 2022 and December 31, 2021:
($ in thousands) | September 30, 2022 | |||||||||||||||||||||||||||||||
Assets | Gross Amounts of Recognized Assets | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Assets Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||
Collateral Received | ||||||||||||||||||||||||||||||||
Resale agreements | $ | 892,986 | $ | — | $ | 892,986 | $ | (810,574) | (1) | $ | 82,412 | |||||||||||||||||||||
Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | Net Amount | |||||||||||||||||||||||||||
Collateral Pledged | ||||||||||||||||||||||||||||||||
Repurchase agreements | $ | 611,785 | $ | — | $ | 611,785 | $ | (606,766) | (2) | $ | 5,019 | |||||||||||||||||||||
21
($ in thousands) | December 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 | $ | 2,353,503 | $ | — | $ | 2,353,503 | $ | (2,327,687) | (1) | $ | 25,816 | |||||||||||||||||||||
Liabilities | Gross Amounts of Recognized Liabilities | Gross Amounts Offset on the Consolidated Balance Sheet | Net Amounts of Liabilities Presented on the Consolidated Balance Sheet | Gross Amounts Not Offset on the Consolidated Balance Sheet | ||||||||||||||||||||||||||||
Net Amount | ||||||||||||||||||||||||||||||||
Collateral Pledged | ||||||||||||||||||||||||||||||||
Repurchase agreements | $ | 300,000 | $ | — | $ | 300,000 | $ | (300,000) | (2) | $ | — | |||||||||||||||||||||
(1)Represents the fair value of assets the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
(2)Represents the fair value of assets the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability due to each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to derivatives. Refer to Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.
22
Note 5 — Securities
The following tables present the amortized cost, gross unrealized gains and losses and fair value by major categories of AFS and HTM debt securities as of September 30, 2022 and December 31, 2021:
($ in thousands) | September 30, 2022 | |||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 676,312 | $ | — | $ | (75,635) | $ | 600,677 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 319,070 | — | (58,646) | 260,424 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 595,342 | — | (73,457) | 521,885 | ||||||||||||||||||||||
Residential mortgage-backed securities | 2,043,791 | 58 | (250,420) | 1,793,429 | ||||||||||||||||||||||
Municipal securities | 307,084 | — | (57,582) | 249,502 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 448,790 | 173 | (50,988) | 397,975 | ||||||||||||||||||||||
Residential mortgage-backed securities | 784,700 | — | (113,162) | 671,538 | ||||||||||||||||||||||
Corporate debt securities | 673,502 | — | (143,937) | 529,565 | ||||||||||||||||||||||
Foreign government bonds | 238,720 | 528 | (13,438) | 225,810 | ||||||||||||||||||||||
Asset-backed securities | 66,793 | — | (1,923) | 64,870 | ||||||||||||||||||||||
CLOs | 617,250 | — | (26,835) | 590,415 | ||||||||||||||||||||||
Total AFS debt securities | 6,771,354 | 759 | (866,023) | 5,906,090 | ||||||||||||||||||||||
HTM debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | 522,713 | — | (56,628) | 466,085 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 998,233 | — | (215,616) | 782,617 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 509,139 | — | (92,507) | 416,632 | ||||||||||||||||||||||
Residential mortgage-backed securities | 792,685 | — | (142,978) | 649,707 | ||||||||||||||||||||||
Municipal securities | 189,897 | — | (45,803) | 144,094 | ||||||||||||||||||||||
Total HTM debt securities | 3,012,667 | — | (553,532) | 2,459,135 | ||||||||||||||||||||||
Total debt securities | $ | 9,784,021 | $ | 759 | $ | (1,419,555) | $ | 8,365,225 | ||||||||||||||||||
23
($ in thousands) | December 31, 2021 | |||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | 1,049,238 | $ | 130 | $ | (16,687) | $ | 1,032,681 | ||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 1,333,984 | 2,697 | (34,710) | 1,301,971 | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 1,242,043 | 15,791 | (28,854) | 1,228,980 | ||||||||||||||||||||||
Residential mortgage-backed securities | 2,968,789 | 8,629 | (49,135) | 2,928,283 | ||||||||||||||||||||||
Municipal securities | 519,381 | 10,065 | (6,288) | 523,158 | ||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||
Commercial mortgage-backed securities | 498,920 | 3,000 | (5,477) | 496,443 | ||||||||||||||||||||||
Residential mortgage-backed securities | 889,937 | 971 | (8,977) | 881,931 | ||||||||||||||||||||||
Corporate debt securities | 657,516 | 8,738 | (16,589) | 649,665 | ||||||||||||||||||||||
Foreign government bonds | 260,447 | 767 | (3,481) | 257,733 | ||||||||||||||||||||||
Asset-backed securities | 74,674 | 185 | (301) | 74,558 | ||||||||||||||||||||||
CLOs | 592,250 | 52 | (2,352) | 589,950 | ||||||||||||||||||||||
Total AFS debt securities | $ | 10,087,179 | $ | 51,025 | $ | (172,851) | $ | 9,965,353 | ||||||||||||||||||
During the first quarter of 2022, the Company transferred $3.01 billion in fair value of debt securities from AFS to HTM. At the time of the transfer, $113.0 million of unrealized losses, net of tax, was retained in AOCI.
As of September 30, 2022 and December 31, 2021, the amortized cost of debt securities excluded accrued interest receivables of $33.8 million and $33.1 million, respectively, which are included in Other assets on the Consolidated Balance Sheet. For the Company’s accounting policy related to debt securities’ accrued interest receivable, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in the Company’s 2021 Form 10-K and Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
24
Unrealized Losses of Available-for-Sale Debt Securities
The following tables present the fair value and the associated gross unrealized losses of the Company’s AFS debt securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position as of September 30, 2022 and December 31, 2021.
($ in thousands) | September 30, 2022 | |||||||||||||||||||||||||||||||||||||
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 | $ | 263,772 | $ | (25,232) | $ | 336,905 | $ | (50,403) | $ | 600,677 | $ | (75,635) | ||||||||||||||||||||||||||
U.S. government agency and U.S. government sponsored enterprise debt securities | 88,168 | (16,401) | 172,256 | (42,245) | 260,424 | (58,646) | ||||||||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 334,460 | (39,330) | 187,425 | (34,127) | 521,885 | (73,457) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 700,318 | (72,088) | 1,085,253 | (178,332) | 1,785,571 | (250,420) | ||||||||||||||||||||||||||||||||
Municipal securities | 203,157 | (46,271) | 46,345 | (11,311) | 249,502 | (57,582) | ||||||||||||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 170,101 | (8,351) | 218,124 | (42,637) | 388,225 | (50,988) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 188,584 | (23,168) | 482,954 | (89,994) | 671,538 | (113,162) | ||||||||||||||||||||||||||||||||
Corporate debt securities | 247,533 | (24,969) | 282,032 | (118,968) | 529,565 | (143,937) | ||||||||||||||||||||||||||||||||
Foreign government bonds | 68,733 | (336) | 36,899 | (13,102) | 105,632 | (13,438) | ||||||||||||||||||||||||||||||||
Asset-backed securities | 54,811 | (1,579) | 10,059 | (344) | 64,870 | (1,923) | ||||||||||||||||||||||||||||||||
CLOs | 190,370 | (8,730) | 400,045 | (18,105) | 590,415 | (26,835) | ||||||||||||||||||||||||||||||||
Total AFS debt securities | $ | 2,510,007 | $ | (266,455) | $ | 3,258,297 | $ | (599,568) | $ | 5,768,304 | $ | (866,023) | ||||||||||||||||||||||||||
($ in thousands) | December 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 | $ | 935,776 | $ | (14,689) | $ | 47,881 | $ | (1,998) | $ | 983,657 | $ | (16,687) | ||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | 773,647 | (18,000) | 402,907 | (16,710) | 1,176,554 | (34,710) | ||||||||||||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 440,734 | (13,589) | 257,745 | (15,265) | 698,479 | (28,854) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 2,138,542 | (37,691) | 330,522 | (11,444) | 2,469,064 | (49,135) | ||||||||||||||||||||||||||||||||
Municipal securities | 177,065 | (5,682) | 17,003 | (606) | 194,068 | (6,288) | ||||||||||||||||||||||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 301,925 | (4,158) | 40,013 | (1,319) | 341,938 | (5,477) | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 707,792 | (8,966) | 6,431 | (11) | 714,223 | (8,977) | ||||||||||||||||||||||||||||||||
Corporate debt securities | 183,916 | (3,084) | 251,494 | (13,505) | 435,410 | (16,589) | ||||||||||||||||||||||||||||||||
Foreign government bonds | 27,097 | (5) | 133,279 | (3,476) | 160,376 | (3,481) | ||||||||||||||||||||||||||||||||
Asset-backed securities | 24,885 | (301) | — | — | 24,885 | (301) | ||||||||||||||||||||||||||||||||
CLOs | 221,586 | (64) | 291,712 | (2,288) | 513,298 | (2,352) | ||||||||||||||||||||||||||||||||
Total AFS debt securities | $ | 5,932,965 | $ | (106,229) | $ | 1,778,987 | $ | (66,622) | $ | 7,711,952 | $ | (172,851) | ||||||||||||||||||||||||||
25
As of September 30, 2022, the Company had a total of 557 AFS debt securities in a gross unrealized loss position with no credit impairment, consisting primarily of 262 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, 100 non-agency mortgage-backed securities, and 68 corporate debt securities. In comparison, as of December 31, 2021, the Company had a total of 431 AFS debt securities in a gross unrealized loss position with no credit impairment, consisting primarily of 180 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, 50 U.S. government agency and U.S. government-sponsored agency debt securities, 21 U.S. Treasury securities, and 30 corporate debt securities.
Allowance for Credit Losses on Available-for-Sale Debt Securities
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 — Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in the Company’s 2021 Form 10-K.
The gross unrealized losses presented in the preceding tables were primarily attributable to interest rate movement and the widening of liquidity and/or credit spreads. U.S. Treasury, U.S. government agency, U.S. government-sponsored agency, and U.S. government-sponsored enterprise mortgage-backed securities are issued, guaranteed, or otherwise supported by the U.S. government and have a zero credit loss assumption. The other securities that were in an unrealized loss position as of September 30, 2022 were mainly comprised of the following:
•Non-agency mortgage-backed securities — The market value decline as of September 30, 2022, was primarily due to interest rate movement and spread widening. Since these securities are rated investment grade by NRSROs, or have high priority in the cash flow waterfall within the securitization structure, and the contractual payments have historically been on time, the Company believes the risk of credit losses on these securities is low.
•Corporate debt securities — The market value decline as of September 30, 2022 was primarily due to interest rate movement and spread widening. Since these securities are nearly all rated investment grade by NRSROs or, if not, the issuer is a well-capitalized financial institution with strong profitability, 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 low.
As of September 30, 2022 and December 31, 2021, 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 the 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 September 30, 2022 and December 31, 2021 provided against these securities. In addition, there was no provision for credit losses recognized for the three and nine months ended September 30, 2022 and 2021. If a credit loss had been identified, the Company would record an impairment through the allowance for credit losses with a corresponding Provision for credit losses on the Consolidated Statement of Income.
Allowance for Credit Losses on Held-to-Maturity Debt Securities
The Company separately evaluates its HTM debt securities for any credit losses using an expected loss model, similar to the methodology used for loans. Any expected credit loss is recorded through the allowance for credit losses and is deducted from the amortized cost basis. The net amount the Company expects to collect is reflected on the Consolidated Balance Sheet.
The Company monitors the credit quality of the HTM debt securities using external credit ratings. As of September 30, 2022, all HTM securities were rated investment grade by NRSROs and issued, guaranteed, or supported by U.S. government entities and agencies. Accordingly, the Company applied a zero credit loss assumption and no allowance for credit losses was recorded as of September 30, 2022. Overall, the Company believes that the credit support levels of the debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received. For more information on the Company’s credit loss methodology, refer to Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
26
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 and nine months ended September 30, 2022 and 2021:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Gross realized gains | $ | — | $ | 354 | $ | 1,306 | $ | 1,178 | ||||||||||||||||||
Related tax expense | $ | — | $ | 104 | $ | 386 | $ | 348 | ||||||||||||||||||
Interest Income
The following table presents the composition of interest income on debt securities for the three and nine months ended September 30, 2022 and 2021:
($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Taxable interest | $ | 46,172 | $ | 34,755 | $ | 125,626 | $ | 92,909 | ||||||||||||||||||
Nontaxable interest | 4,920 | 3,071 | 14,309 | 8,707 | ||||||||||||||||||||||
Total interest income on debt securities | $ | 51,092 | $ | 37,826 | $ | 139,935 | $ | 101,616 | ||||||||||||||||||
27
Contractual Maturities of Available-for-Sale and Held-to-Maturity Debt Securities
The following tables present the contractual maturities, amortized cost, fair value and weighted average yields of AFS and HTM debt securities as of September 30, 2022. 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) | Within One Year | After One Year through Five Years | After Five Years through Ten Years | After Ten Years | Total | |||||||||||||||||||||||||||
AFS debt securities: | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | ||||||||||||||||||||||||||||||||
Amortized cost | $ | — | $ | 576,605 | $ | 99,707 | $ | — | $ | 676,312 | ||||||||||||||||||||||
Fair value | — | 516,595 | 84,082 | — | 600,677 | |||||||||||||||||||||||||||
Weighted-average yield (1) | — | % | 1.28 | % | 0.74 | % | — | % | 1.20 | % | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | ||||||||||||||||||||||||||||||||
Amortized cost | — | 24,775 | 125,000 | 169,295 | 319,070 | |||||||||||||||||||||||||||
Fair value | — | 22,787 | 102,540 | 135,097 | 260,424 | |||||||||||||||||||||||||||
Weighted-average yield (1) | — | % | 1.47 | % | 1.16 | % | 2.10 | % | 1.69 | % | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities | ||||||||||||||||||||||||||||||||
Amortized cost | — | 24,417 | 173,899 | 2,440,817 | 2,639,133 | |||||||||||||||||||||||||||
Fair value | — | 23,529 | 157,827 | 2,133,958 | 2,315,314 | |||||||||||||||||||||||||||
Weighted-average yield (1) | — | % | 3.26 | % | 2.71 | % | 2.70 | % | 2.71 | % | ||||||||||||||||||||||
Municipal securities | ||||||||||||||||||||||||||||||||
Amortized cost | 1,511 | 38,079 | 6,855 | 260,639 | 307,084 | |||||||||||||||||||||||||||
Fair value | 1,510 | 35,025 | 5,753 | 207,214 | 249,502 | |||||||||||||||||||||||||||
Weighted-average yield (1) (2) | 3.13 | % | 2.44 | % | 1.85 | % | 2.24 | % | 2.26 | % | ||||||||||||||||||||||
Non-agency mortgage-backed securities | ||||||||||||||||||||||||||||||||
Amortized cost | 28,574 | 187,564 | 25,832 | 991,520 | 1,233,490 | |||||||||||||||||||||||||||
Fair value | 28,195 | 179,900 | 24,897 | 836,521 | 1,069,513 | |||||||||||||||||||||||||||
Weighted-average yield (1) | 4.84 | % | 3.87 | % | 0.84 | % | 2.37 | % | 2.62 | % | ||||||||||||||||||||||
Corporate debt securities | ||||||||||||||||||||||||||||||||
Amortized cost | 10,000 | — | 334,502 | 329,000 | 673,502 | |||||||||||||||||||||||||||
Fair value | 9,857 | — | 296,184 | 223,524 | 529,565 | |||||||||||||||||||||||||||
Weighted average yield (1) | 3.95 | % | — | % | 3.59 | % | 1.98 | % | 2.81 | % | ||||||||||||||||||||||
Foreign government bonds | ||||||||||||||||||||||||||||||||
Amortized cost | 138,720 | — | 50,000 | 50,000 | 238,720 | |||||||||||||||||||||||||||
Fair value | 139,060 | — | 49,851 | 36,899 | 225,810 | |||||||||||||||||||||||||||
Weighted-average yield (1) | 2.15 | % | — | % | 2.66 | % | 1.50 | % | 2.12 | % | ||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||||||||||
Amortized cost | — | — | — | 66,793 | 66,793 | |||||||||||||||||||||||||||
Fair value | — | — | — | 64,870 | 64,870 | |||||||||||||||||||||||||||
Weighted-average yield (1) | — | % | — | % | — | % | 4.15 | % | 4.15 | % | ||||||||||||||||||||||
CLOs | ||||||||||||||||||||||||||||||||
Amortized cost | — | — | 25,000 | 592,250 | 617,250 | |||||||||||||||||||||||||||
Fair value | — | — | 24,168 | 566,247 | 590,415 | |||||||||||||||||||||||||||
Weighted average yield (1) | — | % | — | % | 3.66 | % | 3.86 | % | 3.85 | % | ||||||||||||||||||||||
Total AFS debt securities | ||||||||||||||||||||||||||||||||
Amortized cost | $ | 178,805 | $ | 851,440 | $ | 840,795 | $ | 4,900,314 | $ | 6,771,354 | ||||||||||||||||||||||
Fair value | $ | 178,622 | $ | 777,836 | $ | 745,302 | $ | 4,204,330 | $ | 5,906,090 | ||||||||||||||||||||||
Weighted-average yield (1) | 2.69 | % | 1.96 | % | 2.56 | % | 2.69 | % | 2.58 | % | ||||||||||||||||||||||
28
($ in thousands) | Within One Year | After One Year through Five Years | After Five Years through Ten Years | After Ten Years | Total | |||||||||||||||||||||||||||
HTM debt securities: | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | ||||||||||||||||||||||||||||||||
Amortized cost | $ | — | $ | 285,325 | $ | 237,388 | $ | — | $ | 522,713 | ||||||||||||||||||||||
Fair value | — | 255,365 | 210,720 | — | 466,085 | |||||||||||||||||||||||||||
Weighted-average yield (1) | — | % | 0.96 | % | 1.14 | % | — | % | 1.05 | % | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise debt securities | ||||||||||||||||||||||||||||||||
Amortized cost | — | — | 255,708 | 742,525 | 998,233 | |||||||||||||||||||||||||||
Fair value | — | — | 215,684 | 566,933 | 782,617 | |||||||||||||||||||||||||||
Weighted-average yield (1) | — | % | — | % | 1.94 | % | 1.88 | % | 1.90 | % | ||||||||||||||||||||||
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities | ||||||||||||||||||||||||||||||||
Amortized cost | — | — | 96,433 | 1,205,391 | 1,301,824 | |||||||||||||||||||||||||||
Fair value | — | — | 81,526 | 984,813 | 1,066,339 | |||||||||||||||||||||||||||
Weighted-average yield (1) | — | % | — | % | 1.56 | % | 1.63 | % | 1.63 | % | ||||||||||||||||||||||
Municipal securities | ||||||||||||||||||||||||||||||||
Amortized cost | — | — | — | 189,897 | 189,897 | |||||||||||||||||||||||||||
Fair value | — | — | — | 144,094 |