NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) is a registered bank holding company that offers a full range of banking services to individuals and businesses through its subsidiary bank, East West Bank and its subsidiaries (“East West Bank” or the “Bank”). The unaudited interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q (“this Form 10-Q”) include the accounts of East West, East West Bank and East West’s subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of March 31, 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 period, 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.
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): Trouble Debt Restructurings and the Vintage Disclosures
| January 1, 2023 | ASU 2022-02 eliminates the troubled debt restructuring (“TDRs”) accounting model for creditors and requires companies to apply the general loan modification guidance under ASC 310-20-35-9 through 35-11 to determine whether a modification made to a borrower results in a new loan or a continuation of the existing loan. In addition, companies are no longer required to use a discounted cash flow method to measure the allowance for credit losses as a result of a modification or restructuring with a borrower experiencing financial difficulty. The guidance also introduces new disclosure requirements related to restructuring of financing receivables made to debtors experiencing financial difficulty, and requires public companies to prospectively begin disclosing current-period gross write-off information by year of origination in the vintage disclosures. | 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.
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Significant Accounting Policies Update
During the three months ended March 31, 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 provision for credit losses.
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. HTM debt securities are generally placed on nonaccrual status using factors 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. Debt securities that are either guaranteed or issued by the U.S. government or government-sponsored enterprises, are highly rated by major rating agencies, and have a long history of no credit losses are an example of such securities to which the Company applies a zero credit loss assumption. Any expected credit loss is provided through the allowance for credit losses on HTM debt securities and deducted from the amortized cost basis of the security, so that the balance sheet reflects 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.
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 expectation and reference data obtained from market research publications. Inputs used by the third-party pricing service providers in valuing collateralized mortgage obligations and other securitization structures also include new issue data, monthly payment information, whole loan collateral performance, tranche evaluation and “To Be Announced” prices. In valuing securities issued by state and political subdivisions, inputs used by third-party pricing service providers also include material event notices.
On a monthly basis, the Company validates the valuations provided by third-party pricing service providers to ensure that the fair value determination is consistent with the applicable accounting guidance and the financial instruments are properly classified in the fair value hierarchy. To perform this validation, the Company evaluates the fair values of securities by comparing the fair values provided by the third-party pricing service providers to prices from other available independent sources for the same securities. When significant variances in prices are identified, the Company further compares inputs used by different sources to ascertain the reliability of these sources. On a quarterly basis, the Company reviews the documentation received from the third-party pricing service providers regarding the valuation inputs and methodology used for each category of securities.
When 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 March 31, 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 contracts with institutional counterparties to hedge against certain variable interest rate borrowings and variable interest rate loans. These interest rate swap contracts with institutional counterparties were designated as cash flow hedges. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The fair value of the interest rate options, which consist of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (rise above) the strike rate of the floors (caps). In addition, to comply with the provisions of ASC 820, Fair Value Measurement, the Company incorporates credit valuation adjustments to appropriately reflect both its own 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.
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 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 March 31, 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 periodically obtains warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans. As of March 31, 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 in the form of swaps and options with its oil and gas loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. The fair value of the commodity option contracts is determined using the Black-Scholes model and assumptions that include expectations of future commodity price and volatility. The future commodity contract price is derived from observable inputs such as the market price of the commodity. Commodity swaps are structured as an exchange of fixed cash flows for floating cash flows. The 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.
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:
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($ in thousands) | | Assets and Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 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 | | $ | 637,974 | | | $ | — | | | $ | — | | | $ | 637,974 | |
U.S. government agency and U.S. government-sponsored enterprise debt securities | | — | | | 304,395 | | | — | | | 304,395 | |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | | | | | | | | |
Commercial mortgage-backed securities | | — | | | 600,323 | | | — | | | 600,323 | |
Residential mortgage-backed securities | | — | | | 2,068,485 | | | — | | | 2,068,485 | |
Municipal securities | | — | | | 298,659 | | | — | | | 298,659 | |
Non-agency mortgage-backed securities: | | | | | | | | |
Commercial mortgage-backed securities | | — | | | 445,325 | | | — | | | 445,325 | |
Residential mortgage-backed securities | | — | | | 806,782 | | | — | | | 806,782 | |
Corporate debt securities | | — | | | 630,512 | | | — | | | 630,512 | |
Foreign government bonds | | — | | | 253,811 | | | — | | | 253,811 | |
Asset-backed securities | | — | | | 71,362 | | | — | | | 71,362 | |
Collateralized loan obligations (“CLOs”) | | — | | | 611,803 | | | — | | | 611,803 | |
Total AFS debt securities | | $ | 637,974 | | | $ | 6,091,457 | | | $ | — | | | $ | 6,729,431 | |
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Investments in tax credit and other investments: | | | | | | | | |
Equity securities | | $ | 21,137 | | | $ | 4,357 | | | $ | — | | | $ | 25,494 | |
Total investments in tax credit and other investments | | $ | 21,137 | | | $ | 4,357 | | | $ | — | | | $ | 25,494 | |
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Derivative assets: | | | | | | | | |
Interest rate contracts | | $ | — | | | $ | 188,101 | | | $ | — | | | $ | 188,101 | |
Foreign exchange contracts | | — | | | 16,122 | | | — | | | 16,122 | |
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Equity contracts | | — | | | 5 | | | 309 | | | 314 | |
Commodity contracts | | — | | | 484,563 | | | — | | | 484,563 | |
Gross derivative assets | | $ | — | | | $ | 688,791 | | | $ | 309 | | | $ | 689,100 | |
Netting adjustments (1) | | $ | — | | | $ | (190,316) | | | $ | — | | | $ | (190,316) | |
Net derivative assets | | $ | — | | | $ | 498,475 | | | $ | 309 | | | $ | 498,784 | |
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Derivative liabilities: | | | | | | | | |
Interest rate contracts | | $ | — | | | $ | 236,569 | | | $ | — | | | $ | 236,569 | |
Foreign exchange contracts | | — | | | 12,035 | | | — | | | 12,035 | |
Credit contracts | | — | | | 67 | | | — | | | 67 | |
Commodity contracts | | — | | | 443,358 | | | — | | | 443,358 | |
Gross derivative liabilities | | $ | — | | | $ | 692,029 | | | $ | — | | | $ | 692,029 | |
Netting adjustments (1) | | $ | — | | | $ | (435,081) | | | $ | — | | | $ | (435,081) | |
Net derivative liabilities | | $ | — | | | $ | 256,948 | | | $ | — | | | $ | 256,948 | |
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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 | |
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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 | |
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Derivative assets: | | | | | | | | |
Interest rate contracts | | $ | — | | | $ | 240,222 | | | $ | — | | | $ | 240,222 | |
Foreign exchange contracts | | — | | | 21,033 | | | — | | | 21,033 | |
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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 | |
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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 | |
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(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.
For the three months ended March 31, 2022 and 2021, Level 3 fair value measurements that were measured on a recurring basis consisted of warrants issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity contracts for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Equity contracts | | | | | | | | |
Beginning balance | | $ | 215 | | | $ | 273 | | | | | |
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Total gains (losses) included in earnings (1) | | 3 | | | (1) | | | | | |
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Issuances | | 91 | | | — | | | | | |
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Ending balance | | $ | 309 | | | $ | 272 | | | | | |
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(1)Includes unrealized gains (losses) recorded in Lending fees on the Consolidated Statement of Income.
The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of March 31, 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.
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($ in thousands) | | Fair Value Measurements (Level 3) | | Valuation Technique | | Unobservable Inputs | | Range of Inputs | | Weighted- Average of Inputs (1) |
March 31, 2022 | | | | | | | | | | |
Derivative assets: | | | | | | | | | | |
Equity contracts | | $ | 309 | | | Black-Scholes option pricing model | | Equity volatility | | 41% — 57% | | 48% |
| | | | | | 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% |
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(1)Weighted-average of inputs is calculated based on the fair value of equity contracts as of March 31, 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 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.
•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, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary.
Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure and at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.
Other Nonperforming Assets — Other nonperforming assets are recorded at fair value upon transfers from loans to foreclosed assets. Subsequently, foreclosed assets are recorded at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised values of the collateral or management’s estimates of the foreclosed asset. The Company records an impairment when the foreclosed asset’s fair value declines below its carrying value. 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.
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 March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | Assets Measured at Fair Value on a Nonrecurring Basis as of March 31, 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”) | | $ | — | | | $ | — | | | $ | 78,354 | | | $ | 78,354 | |
Commercial real estate (“CRE”): | | | | | | | | |
CRE | | — | | | — | | | 24,186 | | | 24,186 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total commercial | | — | | | — | | | 102,540 | | | 102,540 | |
Consumer: | | | | | | | | |
Residential mortgage: | | | | | | | | |
| | | | | | | | |
Home equity lines of credit (“HELOCs”) | | — | | | — | | | 1,097 | | | 1,097 | |
| | | | | | | | |
| | | | | | | | |
Total consumer | | — | | | — | | | 1,097 | | | 1,097 | |
Total loans held-for-investment | | $ | — | | | $ | — | | | $ | 103,637 | | | $ | 103,637 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ 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 | |
| | | | | | | | |
| | | | | | | | |
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 months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Loans held-for-investment: | | | | | | | | |
Commercial: | | | | | | | | |
C&I | | $ | (10,424) | | | $ | (5,309) | | | | | |
CRE: | | | | | | | | |
CRE | | 2,864 | | | (7,062) | | | | | |
Multifamily residential | | — | | | (16) | | | | | |
Construction and land | | — | | | (71) | | | | | |
| | | | | | | | |
Total commercial | | (7,560) | | | (12,458) | | | | | |
Consumer: | | | | | | | | |
Residential mortgage: | | | | | | | | |
| | | | | | | | |
HELOCs | | 3 | | | (37) | | | | | |
| | | | | | | | |
| | | | | | | | |
Total consumer | | 3 | | | (37) | | | | | |
Total loans held-for-investment | | $ | (7,557) | | | $ | (12,495) | | | | | |
| | | | | | | | |
| | | | | | | | |
Other nonperforming assets | | $ | — | | | $ | (3,890) | | | | | |
|
The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | Fair Value Measurements (Level 3) | | Valuation Techniques | | Unobservable Inputs | | Range of Inputs | | Weighted- Average of Inputs (1) |
March 31, 2022 | | | | | | | | | | |
Loans held-for-investment | | $ | 44,881 | | | Discounted cash flows | | Discount | | 4% — 6% | | 4% |
| | $ | 34,570 | | | Fair value of collateral | | Discount | | 15% — 77% | | 30% |
| | | | | | | | | | |
| | $ | 24,186 | | | 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 March 31, 2022 and December 31, 2021.
Disclosures about Fair Value of Financial Instruments
The following tables present the fair value estimates for financial instruments as of March 31, 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) | | March 31, 2022 |
| Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Estimated Fair Value |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,848,700 | | | $ | 3,848,700 | | | $ | — | | | $ | — | | | $ | 3,848,700 | |
Interest-bearing deposits with banks | | $ | 816,125 | | | $ | — | | | $ | 816,125 | | | $ | — | | | $ | 816,125 | |
Resale agreements | | $ | 1,956,822 | | | $ | — | | | $ | 1,906,530 | | | $ | — | | | $ | 1,906,530 | |
HTM debt securities | | $ | 2,997,702 | | | $ | 499,275 | | | $ | 2,316,693 | | | $ | — | | | $ | 2,815,968 | |
Restricted equity securities, at cost | | $ | 77,682 | | | $ | — | | | $ | 77,682 | | | $ | — | | | $ | 77,682 | |
Loans held-for-sale | | $ | 631 | | | $ | — | | | $ | 631 | | | $ | — | | | $ | 631 | |
Loans held-for-investment, net | | $ | 42,944,997 | | | $ | — | | | $ | — | | | $ | 42,698,185 | | | $ | 42,698,185 | |
Mortgage servicing rights | | $ | 5,927 | | | $ | — | | | $ | — | | | $ | 9,853 | | | $ | 9,853 | |
Accrued interest receivable | | $ | 155,730 | | | $ | — | | | $ | 155,730 | | | $ | — | | | $ | 155,730 | |
Financial liabilities: | | | | | | | | | | |
Demand, checking, savings and money market deposits | | $ | 46,708,274 | | | $ | — | | | $ | 46,708,274 | | | $ | — | | | $ | 46,708,274 | |
Time deposits | | $ | 8,230,087 | | | $ | — | | | $ | 8,202,829 | | | $ | — | | | $ | 8,202,829 | |
| | | | | | | | | | |
| | | | | | | | | | |
FHLB advances | | $ | 74,619 | | | $ | — | | | $ | 75,265 | | | $ | — | | | $ | 75,265 | |
Repurchase agreements | | $ | 300,000 | | | $ | — | | | $ | 309,225 | | | $ | — | | | $ | 309,225 | |
Long-term debt | | $ | 147,729 | | | $ | — | | | $ | 148,298 | | | $ | — | | | $ | 148,298 | |
Accrued interest payable | | $ | 6,970 | | | $ | — | | | $ | 6,970 | | | $ | — | | | $ | 6,970 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ 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 | |
|
Note 4 — Assets Purchased under Resale Agreements and Sold under Repurchase Agreements
Assets Purchased under Resale Agreements
In resale agreements, the Company is exposed to credit risk for both 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 March 31, 2022 and December 31, 2021.
Securities Purchased under Resale Agreements — Total securities purchased under resale agreements were $1.33 billion as of both March 31, 2022 and December 31, 2021. The weighted-average yields were 1.63% and 1.57% for the three months ended March 31, 2022 and 2021, respectively.
Loans Purchased under Resale Agreements — Total loans purchased under resale agreements were $621.8 million and $1.02 billion as of March 31, 2022 and December 31, 2021, respectively. The weighted-average yields were 1.60% and 2.02% for the three months ended March 31, 2022 and 2021, respectively.
Assets Sold under Repurchase Agreements — As of March 31, 2022, securities sold under the repurchase agreements consisted of U.S. Treasury securities and U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities. Gross repurchase agreements were $300.0 million as of both March 31, 2022 and December 31, 2021. The weighted-average interest rates were 2.62% and 2.67% for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, all repurchase agreements will mature in 2023.
Balance Sheet Offsetting
The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that, in the event of default by the counterparty, provide the Company the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting Repurchase and Reverse Repurchase Agreements. Collateral received includes securities and loans that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Securities received or pledged as collateral in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, and are usually delivered to and held by the third-party trustees.
The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 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 | | $ | 1,956,822 | | | $ | — | | | $ | 1,956,822 | | | $ | (1,918,204) | | (1) | $ | 38,618 | |
| | | | | | | | | | |
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 | | | $ | (290,172) | | (2) | $ | 9,828 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ 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.
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 March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 |
| Amortized Cost | | | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
AFS debt securities: | | | | | | | | | | |
U.S. Treasury securities | | $ | 676,330 | | | | | $ | 64 | | | $ | (38,420) | | | $ | 637,974 | |
U.S. government agency and U.S. government-sponsored enterprise debt securities | | 326,555 | | | | | 119 | | | (22,279) | | | 304,395 | |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | | | | | | | | | | |
Commercial mortgage-backed securities | | 632,660 | | | | | 1,185 | | | (33,522) | | | 600,323 | |
Residential mortgage-backed securities | | 2,180,621 | | | | | 733 | | | (112,869) | | | 2,068,485 | |
Municipal securities | | 317,952 | | | | | 749 | | | (20,042) | | | 298,659 | |
Non-agency mortgage-backed securities: | | | | | | | | | | |
Commercial mortgage-backed securities | | 468,203 | | | | | 647 | | | (23,525) | | | 445,325 | |
Residential mortgage-backed securities | | 855,502 | | | | | 7 | | | (48,727) | | | 806,782 | |
Corporate debt securities | | 683,502 | | | | | 2,107 | | | (55,097) | | | 630,512 | |
Foreign government bonds | | 260,846 | | | | | 635 | | | (7,670) | | | 253,811 | |
Asset-backed securities | | 72,160 | | | | | — | | | (798) | | | 71,362 | |
CLOs | | 617,250 | | | | | — | | | (5,447) | | | 611,803 | |
Total AFS debt securities | | 7,091,581 | | | | | 6,246 | | | (368,396) | | | 6,729,431 | |
HTM debt securities: | | | | | | | | | | |
U.S. Treasury securities | | $ | 519,989 | | | | | $ | — | | | $ | (20,714) | | | $ | 499,275 | |
U.S. government agency and U.S. government-sponsored enterprise debt securities | | 946,763 | | | | | — | | | (67,477) | | | 879,286 | |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | | | | | | | | | | |
Commercial mortgage-backed securities | | 515,966 | | | | | — | | | (31,678) | | | 484,288 | |
Residential mortgage-backed securities | | 824,713 | | | | | — | | | (44,690) | | | 780,023 | |
Municipal securities | | 190,271 | | | | | — | | | (17,175) | | | 173,096 | |
Total HTM debt securities | | 2,997,702 | | | | | — | | | (181,734) | | | 2,815,968 | |
Total debt securities | | $ | 10,089,283 | | | | | $ | 6,246 | | | $ | (550,130) | | | $ | 9,545,399 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ 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 March 31, 2022 and December 31, 2021, the amortized cost of debt securities excluded accrued interest receivables of $28.5 million and $33.1 million, respectively, which are included in Other assets on the Consolidated Balance Sheet. For the Company’s accounting policy related to debt securities’ accrued interest receivable, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Allowance for Credit Losses on Available-for-Sale Debt Securities to the Consolidated Financial Statements in the Company’s 2021 Form 10-K and Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.
Unrealized Losses of Available-for-Sale Debt Securities
The following tables present the fair value and the associated gross unrealized losses of the Company’s AFS debt securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 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 | | $ | 452,031 | | | $ | (23,354) | | | $ | 162,785 | | | $ | (15,066) | | | $ | 614,816 | | | $ | (38,420) | |
U.S. government agency and U.S. government sponsored enterprise debt securities | | 283,790 | | | (21,418) | | | 13,639 | | | (861) | | | 297,429 | | | (22,279) | |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | | | | | | | | | | | | |
Commercial mortgage-backed securities | | 428,714 | | | (22,960) | | | 94,653 | | | (10,562) | | | 523,367 | | | (33,522) | |
Residential mortgage-backed securities | | 1,651,592 | | | (77,331) | | | 363,817 | | | (35,538) | | | 2,015,409 | | | (112,869) | |
Municipal securities | | 243,211 | | | (20,042) | | | — | | | — | | | 243,211 | | | (20,042) | |
Non-agency mortgage-backed securities: | | | | | | | | | | | | |
Commercial mortgage-backed securities | | 360,543 | | | (17,424) | | | 67,676 | | | (6,101) | | | 428,219 | | | (23,525) | |
Residential mortgage-backed securities | | 724,439 | | | (42,033) | | | 81,681 | | | (6,694) | | | 806,120 | | | (48,727) | |
Corporate debt securities | | 279,491 | | | (16,008) | | | 275,912 | | | (39,089) | | | 555,403 | | | (55,097) | |
Foreign government bonds | | 19,022 | | | (43) | | | 77,195 | | | (7,627) | | | 96,217 | | | (7,670) | |
Asset-backed securities | | 71,362 | | | (798) | | | — | | | — | | | 71,362 | | | (798) | |
CLOs | | 320,603 | | | (2,647) | | | 291,200 | | | (2,800) | | | 611,803 | | | (5,447) | |
Total AFS debt securities | | $ | 4,834,798 | | | $ | (244,058) | | | $ | 1,428,558 | | | $ | (124,338) | | | $ | 6,263,356 | | | $ | (368,396) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ 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) | |
|
As of March 31, 2022, the Company had a total of 497 AFS debt securities in a gross unrealized loss position with no credit impairment, consisting primarily of 223 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, 102 non-agency mortgage-backed securities, and 56 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 spread widening. Securities that were in unrealized loss positions as of March 31, 2022 were mainly comprised of the following:
•U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities — The market value decline as of March 31, 2022, was primarily due to interest rate movement. These securities (issued by Fannie Mae, Ginnie Mae and Freddie Mac) are guaranteed or sponsored by agencies of the U.S. government, and their credit profiles are strong (rated Aaa, AA+ and AAA by Moody’s Investors Service (“Moody’s”), S&P Global Ratings (“S&P”) and Fitch Ratings (“Fitch”), respectively). The Company expects to receive all contractual cash flows on time.
•Non-agency mortgage-backed securities — The market value decline as of March 31, 2022, was primarily due to interest rate movement and spread widening. Since these securities are rated AA or AAA by rating agencies (Moody’s, S&P, Kroll Bond Rating Agency, Fitch and Dominion Bond Rating Service Morningstar), 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 March 31, 2022, was primarily due to interest rate movement and spread widening. Since credit profiles of these securities are strong (rated BBB- or higher by Moody’s, S&P, Kroll Bond Rating Agency and Fitch), and the contractual payments from these bonds have been and are expected to be received on time, the Company believes that the risk of credit losses on these securities is low.
As of March 31, 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 March 31, 2022 and December 31, 2021 provided against these securities. In addition, there was no provision for credit losses recognized for the three months ended March 31, 2022 and 2021.
Allowance for Credit Losses on Held-to-Maturity Debt Securities
The Company separately evaluates its HTM debt securities for any credit losses, of which all qualify for the zero loss assumption as of March 31, 2022. 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. The Company monitors the credit quality of the HTM debt securities using external credit ratings. As of March 31, 2022, all HTM securities were highly rated (rated Aaa, AA+ and AAA by Moody’s, S&P and Fitch) and issued, guaranteed, or supported by U.S. government entities and agencies. The Company believes the history of no credit losses, current conditions as well as reasonable and supportable forecasts, indicate that all contractual payments will be received. Accordingly, the Company applied a zero credit loss assumption and no allowance for credit losses was recorded as of March 31, 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.
Realized Gains and Losses
The following table presents the gross realized gains and tax expense related to the sales of AFS debt securities for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| | | | | | | | |
Gross realized gains | | $ | 1,278 | | | $ | 192 | | | | | |
Related tax expense | | $ | 378 | | | $ | 57 | | | | | |
|
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 March 31, 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 | | $ | — | | | $ | 576,650 | | | $ | 99,680 | | | $ | — | | | $ | 676,330 | |
Fair value | | — | | | 547,431 | | | 90,543 | | | — | | | 637,974 | |
Weighted-average yield (1) | | — | % | | 1.28 | % | | 0.74 | % | | — | % | | 1.20 | % |
U.S. government agency and U.S. government-sponsored enterprise debt securities | | | | | | | | | | |
Amortized cost | | — | | | 29,199 | | | 125,000 | | | 172,356 | | | 326,555 | |
Fair value | | — | | | 27,969 | | | 115,734 | | | 160,692 | | | 304,395 | |
Weighted-average yield (1) | | — | % | | 1.64 | % | | 1.16 | % | | 2.09 | % | | 1.70 | % |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities: | | | | | | | | | | |
Amortized cost | | — | | | 12,508 | | | 190,547 | | | 2,610,226 | | | 2,813,281 | |
Fair value | | — | | | 12,538 | | | 185,605 | | | 2,470,665 | | | 2,668,808 | |
Weighted-average yield (1) | | — | % | | 3.08 | % | | 2.62 | % | | 1.78 | % | | 1.85 | % |
Municipal securities | | | | | | | | | | |
Amortized cost | | 1,841 | | | 36,444 | | | 18,691 | | | 260,976 | | | 317,952 | |
Fair value | | 1,844 | | | 35,640 | | | 18,174 | | | 243,001 | | | 298,659 | |
Weighted-average yield (1) (2) | | 2.72 | % | | 2.41 | % | | 2.60 | % | | 2.23 | % | | 2.28 | % |
Non-agency mortgage-backed securities | | | | | | | | | | |
Amortized cost | | 10,807 | | | 202,260 | | | 45,103 | | | 1,065,535 | | | 1,323,705 | |
Fair value | | 10,798 | | | 198,659 | | | 44,661 | | | 997,989 | | | 1,252,107 | |
Weighted-average yield (1) | | 3.07 | % | | 3.25 | % | | 1.16 | % | | 2.00 | % | | 2.17 | % |
Corporate debt securities | | | | | | | | | | |
Amortized cost | | — | | | 10,000 | | | 331,502 | | | 342,000 | | | 683,502 | |
Fair value | | — | | | 9,848 | | | 322,115 | | | 298,549 | | | 630,512 | |
Weighted average yield (1) | | — | % | | 1.55 | % | | 3.67 | % | | 2.05 | % | | 2.83 | % |
Foreign government bonds | | | | | | | | | | |
Amortized cost | | 113,979 | | | 46,867 | | | 50,000 | | | 50,000 | | | 260,846 | |
Fair value | | 113,864 | | | 47,315 | | | 50,131 | | | 42,501 | | | 253,811 | |
Weighted-average yield (1) | | 1.88 | % | | 3.01 | % | | 0.42 | % | | 1.50 | % | | 1.73 | % |
Asset-backed securities: | | | | | | | | | | |
Amortized cost | | — | | | — | | | — | | | 72,160 | | | 72,160 | |
Fair value | | — | | | — | | | — | | | 71,362 | | | 71,362 | |
Weighted-average yield (1) | | — | % | | — | % | | — | % | | 1.50 | % | | 1.50 | % |
CLOs | | | | | | | | | | |
Amortized cost | | — | | | — | | | — | | | 617,250 | | | 617,250 | |
Fair value | | — | | | — | | | — | | | 611,803 | | | 611,803 | |
Weighted average yield (1) | | — | % | | — | % | | — | % | | 1.41 | % | | 1.41 | % |
Total AFS debt securities | | | | | | | | | | |
Amortized cost | | $ | 126,627 | | | $ | 913,928 | | | $ | 860,523 | | | $ | 5,190,503 | | | $ | 7,091,581 | |
Fair value | | $ | 126,506 | | | $ | 879,400 | | | $ | 826,963 | | | $ | 4,896,562 | | | $ | 6,729,431 | |
Weighted-average yield (1) | | 1.99 | % | | 1.89 | % | | 2.39 | % | | 1.83 | % | | 1.91 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ 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 | | $ | — | | $ | 24,415 | | $ | 495,574 | | $ | — | | $ | 519,989 |
Fair value | | — | | 23,492 | | 475,783 | | — | | 499,275 |
Weighted-average yield (1) | | — | % | | 0.76 | % | | 1.06 | % | | — | % | | 1.05 | % |
U.S. government agency and U.S. government-sponsored enterprise debt securities | | | | | | | | | | |
Amortized cost | | — | | — | | 162,903 | | 783,860 | | 946,763 |
Fair value | | — | | — | | 153,074 | | 726,212 | | 879,286 |
Weighted-average yield (1) | | — | % | | — | % | | 1.43 | % | | 1.86 | % | | 1.79 | % |
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities | | | | | | | | | | |
Amortized cost | | — | | — | | 88,114 | | 1,252,565 | | 1,340,679 |
Fair value | | — | | — | | 83,816 | | 1,180,495 | | 1,264,311 |
Weighted-average yield (1) | | — | % | | — | % | | 1.61 | % | | 1.62 | % | | 1.62 | % |
Municipal securities | | | | | | | | | | |
Amortized cost | | — | | — | | — | | 190,271 | | 190,271 |
Fair value | | — | | — | | — | | 173,096 | | 173,096 |
Weighted-average yield (1) (2) | | — | % | | — | % | | — | % | | 1.97 | % | | 1.97 | % |
Total HTM debt securities | | | | | | | | | | |
Amortized cost | | $ | — | | $ | 24,415 | | $ | 746,591 | | $ | 2,226,696 | | $ | 2,997,702 |
Fair value | | $ | — | | $ | 23,492 | | $ | 712,673 | | $ | 2,079,803 | | $ | 2,815,968 |
Weighted-average yield (1) | | — | % | | 0.76 | % | | 1.21 | % | | 1.73 | % | | 1.59 | % |
|
(1)Weighted-average yields are computed based on amortized cost balances.
(2)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
As of March 31, 2022 and December 31, 2021, AFS and HTM debt securities with carrying values of $625.9 million and $803.9 million, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
Restricted Equity Securities
The following table presents the restricted equity securities included in Other assets on the Consolidated Balance Sheet as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 | | December 31, 2021 |
Federal Reserve Bank of San Francisco (“FRBSF”) stock | | $ | 60,432 | | | $ | 60,184 | |
FHLB stock | | 17,250 | | | 17,250 | |
Total restricted equity securities | | $ | 77,682 | | | $ | 77,434 | |
|
Note 6 — Derivatives
The Company uses derivatives to manage exposure to market risk, primarily interest rate or foreign currency risk, as well as to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates do not significantly affect earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities, as well as the Bank’s investment in East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives serve as economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Derivatives to the Consolidated Financial Statements of the Company’s 2021 Form 10-K.
The following table presents the notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis as of March 31, 2022 and December 31, 2021. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of March 31, 2022 and December 31, 2021. The resulting net derivative asset and liability fair values are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 | | December 31, 2021 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | Derivative Assets | | Derivative Liabilities | | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash flow hedges: | | | | | | | | | | | | |
Interest rate contracts | | $ | 1,275,000 | | | $ | 385 | | | $ | — | | | $ | 275,000 | | | $ | — | | | $ | 57 | |
Net investment hedges: | | | | | | | | | | | | |
Foreign exchange contracts | | 86,751 | | | — | | | 490 | | | 86,531 | | | — | | | 225 | |
Total derivatives designated as hedging instruments | | $ | 1,361,751 | | | $ | 385 | | | $ | 490 | | | $ | 361,531 | | | $ | — | | | $ | 282 | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Interest rate contracts | | $ | 17,771,724 | | | $ | 187,716 | | | $ | 236,569 | | | $ | 17,575,420 | | | $ | 240,222 | | | $ | 179,905 | |
Foreign exchange contracts | | 2,365,524 | | | 16,122 | | | 11,545 | | | 1,874,681 | | | 21,033 | | | 15,276 | |
Credit contracts | | 122,560 | | | — | | | 67 | | | 72,560 | | | — | | | 141 | |
Equity contracts | | — | | (1) | 314 | | | — | | | — | | (1) | 220 | | | — | |
Commodity contracts | | — | | (2) | 484,563 | | | 443,358 | | | — | | (2) | 222,709 | | | 194,567 | |
Total derivatives not designated as hedging instruments | | $ | 20,259,808 | | | $ | 688,715 | | | $ | 691,539 | | | $ | 19,522,661 | | | $ | 484,184 | | | $ | 389,889 | |
Gross derivative assets/liabilities | | | | $ | 689,100 | | | $ | 692,029 | | | | | $ | 484,184 | | | $ | 390,171 | |
Less: Master netting agreements | | | | (108,782) | | | (108,782) | | | | | (58,679) | | | (58,679) | |
Less: Cash collateral received/paid | | | | (81,534) | | | (326,299) | | | | | (42,274) | | | (174,048) | |
Net derivative assets/liabilities | | | | $ | 498,784 | | | $ | 256,948 | | | | | $ | 383,231 | | | $ | 157,444 | |
|
(1)The Company held equity contracts in one public company and 13 private companies as of March 31, 2022. In comparison, the Company held equity contracts in one public company and 12 private companies as of December 31, 2021.
(2)The notional amount of the Company’s commodity contracts entered with its customers totaled 7,217 thousand barrels of crude oil and 83,460 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of March 31, 2022. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 7,519 thousand barrels of crude oil and 83,274 thousand MMBTUs of natural gas as of December 31, 2021. The Company simultaneously entered into the offsetting commodity contracts with mirrored terms with third-party financial institutions.
Derivatives Designated as Hedging Instruments
Cash Flow Hedges — In 2020, the Company entered into $275.0 million in total notional amounts of interest rate swaps that were designated as cash flow hedges to limit the exposure to the variability in interest payments on certain floating rate borrowings. During the three months ended March 31, 2022, the Company entered into two new interest rate swaps in total notional amounts of $1.00 billion, which were designated as cash flow hedges to limit the exposure to the variability in interest receipts on certain variable rate CRE loans. Changes in the fair values of cash flow hedges are recognized in AOCI and reclassified to earnings in the same period when the hedged cash flows impact earnings. Reclassified gains and losses on these interest rate swaps are recorded either in the same line item as the interest payments of the hedged long-term borrowings within Interest expense, or in the same line items as the interest receipts of the hedged variable rate CRE loan pool within Interest and dividend income in the Consolidated Statements of Income. Considering the interest rates, yield curve and notional amounts as of March 31, 2022, the Company expected to reclassify an estimated $2.7 million of after-tax net losses on derivative instruments designated as cash flow hedges from AOCI into earnings during the next 12 months.
The following table presents the pre-tax changes in AOCI from cash flow hedges for the three months ended March 31, 2022 and 2021. The after-tax impact of cash flow hedges on AOCI is discussed in Note 13 — Accumulated Other Comprehensive Income (Loss) to the Consolidated Financial Statements in this Form-10-Q.
| | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
(Losses) gains recognized in AOCI: | | | | | | | | |
Interest rate swaps | | $ | (32,609) | | | $ | 426 | | | | | |
Gains (losses) reclassified from AOCI into earnings: | | | | | | | | |
Interest expense | | $ | (173) | | | $ | (177) | | | | | |
Interest income | | 2,273 | | | — | | | | | |
Total | | $ | 2,100 | | | $ | (177) | | | | | |
|
Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. The Company enters into foreign currency forward contracts to hedge a portion of the Bank’s investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Bank’s net investment in East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate of the Chinese Renminbi (“RMB”). The Company may de-designate the net investment hedges when the Company expects the hedge will cease to be highly effective.
The following table presents the after-tax gains (losses) recognized in AOCI on net investment hedges for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | Three Months Ended March 31, | | | | | | |
| 2022 | | 2021 | | | | | | | | | | |
(Losses) gains recognized in AOCI | | $ | (1,119) | | | $ | 101 | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
Derivatives Not Designated as Hedging Instruments
Interest Rate Contracts — The Company enters into interest rate contracts, which include interest rate swaps and options with its customers to allow the customers to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions, including central clearing organizations.
The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 |
| Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | Assets | | Liabilities | | | | Assets | | Liabilities |
Written options | | $ | 1,460,907 | | | $ | — | | | $ | 13,804 | | | Purchased options | | $ | 1,460,907 | | | $ | 13,867 | | | $ | — | |
Sold collars and corridors | | 210,909 | | | 307 | | | 3,869 | | | Collars and corridors | | 210,910 | | | 3,896 | | | 307 | |
Swaps | | 7,199,663 | | | 40,246 | | | 193,683 | | | Swaps | | 7,228,428 | | | 129,400 | | | 24,906 | |
Total | | $ | 8,871,479 | | | $ | 40,553 | | | $ | 211,356 | | | Total | | $ | 8,900,245 | | | $ | 147,163 | | | $ | 25,213 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | December 31, 2021 |
| Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | Assets | | Liabilities | | | | Assets | | Liabilities |
Written options | | $ | 1,118,074 | | | $ | — | | | $ | 2,148 | | | Purchased options | | $ | 1,118,074 | | | $ | 2,159 | | | $ | — | |
Sold collars and corridors | | 194,181 | | | 1,272 | | | 642 | | | Collars and corridors | | 194,181 | | | 646 | | | 1,275 | |
Swaps | | 7,460,836 | | | 211,727 | | | 39,650 | | | Swaps | | 7,490,074 | | | 24,418 | | | 136,190 | |
Total | | $ | 8,773,091 | | | $ | 212,999 | | | $ | 42,440 | | | Total | | $ | 8,802,329 | | | $ | 27,223 | | | $ | 137,465 | |
|
Included in the total notional amount of $8.90 billion of interest rate contracts entered into with financial counterparties as of March 31, 2022, was a notional amount of $2.59 billion of interest rate swaps that cleared through London Clearing House (“LCH”). Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair value of $71.2 million and liability fair value of $16.2 million as of March 31, 2022. In comparison, included in the total notional amount of $8.80 billion of interest rate contracts entered into with financial counterparties as of December 31, 2021 was a notional amount of $2.79 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair values of $18.1 million and liability fair values of $79.9 million as of December 31, 2021.
Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot, swap and option contracts to accommodate the business needs of its customers. The Company enters into offsetting foreign exchange contracts with third-party financial institutions to manage its foreign exchange exposure with its customers, or enters into bilateral collateral and master netting agreements with certain customer counterparties to manage its credit exposure. The Company also utilizes foreign exchange contracts, which are not designated as hedging instruments to mitigate the economic effect of currency fluctuations on certain foreign currency-denominated on-balance sheet assets and liabilities, primarily foreign currency-denominated deposits offered to its customers. A majority of the foreign exchange contracts had original maturities of one year or less as of both March 31, 2022 and December 31, 2021.
The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 |
| Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | Assets | | Liabilities | | | | Assets | | Liabilities |
Forwards and spot | | $ | 747,870 | | | $ | 8,675 | | | $ | 2,567 | | | Forwards and spot | | $ | 361,741 | | | $ | 1,685 | | | $ | 1,210 | |
Swaps | | 137,691 | | | 1,088 | | | 433 | | | Swaps | | 1,118,222 | | | 4,674 | | | 7,335 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total | | $ | 885,561 | | | $ | 9,763 | | | $ | 3,000 | | | Total | | $ | 1,479,963 | | | $ | 6,359 | | | $ | 8,545 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | December 31, 2021 |
| Customer Counterparty | | ($ in thousands) | | Financial Counterparty |
| Notional Amount | | Fair Value | | | Notional Amount | | Fair Value |
| | Assets | | Liabilities | | | | Assets | | Liabilities |
Forwards and spot | | $ | 900,290 | | | $ | 13,688 | | | $ | 9,446 | | | Forwards and spot | | $ | 267,689 | | | $ | 1,564 | | | $ | 2,695 | |
Swaps | | 66,474 | | | 1,034 | | | 17 | | | Swaps | | 599,654 | | | 4,745 | | | 3,116 | |
Written options | | 20,287 | | | 1 | | | — | | | Purchased options | | 20,287 | | | 1 | | | 2 | |
| | | | | | | | | | | | | | |
Total | | $ | 987,051 | | | $ | 14,723 | | | $ | 9,463 | | | Total | | $ | 887,630 | | | $ | 6,310 | | | $ | 5,813 | |
|
Credit Contracts — The Company may periodically enter into credit RPAs with institutional counterparties to manage the credit exposure of the interest rate contracts associated with the syndicated loans. The Company may enter into protection sold or protection purchased RPAs. The purchaser of credit protection that enters into an interest rate contract with the borrower, may in turn enter into an RPA with a seller of protection, under which the seller of protection receives a fee to accept a portion of the credit risk. A seller of credit protection is required to make payments to the buyer if a borrower defaults on the related interest rate contract. Credit risk on RPAs is managed by monitoring the credit worthiness of the borrowers and institutional counterparties, which is part of the normal credit review and monitoring process. The majority of the reference entities of the protection sold RPAs were investment grade as of both March 31, 2022 and December 31, 2021. Assuming the underlying borrowers referenced in the interest rate contracts defaulted as of March 31, 2022 and December 31, 2021, the maximum exposure of protection sold RPAs would be $887 thousand and $3.2 million, respectively. As of March 31, 2022 and December 31, 2021, the weighted-average remaining maturities of the outstanding protection sold RPAs were 2.8 years and 3.2 years, respectively.
The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table presents the notional amounts and the gross fair values of RPAs sold outstanding as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 | | December 31, 2021 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | Assets | | Liabilities | | | Assets | | Liabilities |
RPAs — protection sold | | $ | 122,560 | | | $ | — | | | $ | 67 | | | $ | 72,560 | | | $ | — | | | $ | 141 | |
| | | | | | | | | | | | |
Total RPAs | | $ | 122,560 | | | $ | — | | | $ | 67 | | | $ | 72,560 | | | $ | — | | | $ | 141 | |
|
Equity Contracts — From time to time, as part of the Company’s loan origination process, the Company obtains warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans. Warrants grant the Company the right to buy a certain class of the underlying company’s equity at a certain price before expiration. The Company held warrants in one public company and 13 private companies as of March 31, 2022, and held warrants in one public company and 12 private companies as of December 31, 2021. The total fair value of the warrants held was $314 thousand and $220 thousand as of March 31, 2022 and December 31, 2021, respectively.
Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of energy commodity price fluctuation. To economically hedge against the risk of commodity price fluctuation in the products offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions to manage the exposure.
The following tables present the notional amounts and fair values of the commodity derivative positions outstanding as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ and units in thousands) | | March 31, 2022 |
| Customer Counterparty | | ($ and units in thousands) | | Financial Counterparty |
| Notional Unit | | Fair Value | | | Notional Unit | | Fair Value |
| | Assets | | Liabilities | | | | Assets | | Liabilities |
Crude oil: | | | | | | | | | | Crude oil: | | | | | | | | |
Written options | | — | | | Barrels | | $ | 672 | | | $ | — | | | Purchased options | | — | | | Barrels | | $ | — | | | $ | 496 | |
Collars | | 2,957 | | | Barrels | | 80,352 | | | — | | | Collars | | 3,006 | | | Barrels | | — | | | 76,875 | |
Swaps | | 4,260 | | | Barrels | | 138,209 | | | 255 | | | Swaps | | 6,757 | | | Barrels | | 46,487 | | | 164,652 | |
Total | | 7,217 | | | | | $ | 219,233 | | | $ | 255 | | | Total | | 9,763 | | | | | $ | 46,487 | | | $ | 242,023 | |
| | | | | | | | | | | | | | | | | | |
Natural gas: | | | | | | | | | | Natural gas: | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Collars | | 23,156 | | | MMBTUs | | 41,807 | | | 4 | | | Collars | | 23,396 | | | MMBTUs | | 4 | | | 41,649 | |
Swaps | | 60,304 | | | MMBTUs | | 126,496 | | | — | | | Swaps | | 100,433 | | | MMBTUs | | 50,536 | | | 159,427 | |
Total | | 83,460 | | | | | $ | 168,303 | | | $ | 4 | | | Total | | 123,829 | | | | | $ | 50,540 | | | $ | 201,076 | |
| | | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 387,536 | | | $ | 259 | | | Total | | | | | | $ | 97,027 | | | $ | 443,099 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ and units in thousands) | | December 31, 2021 |
| Customer Counterparty | | ($ and units in thousands) | | Financial Counterparty |
| Notional Unit | | Fair Value | | | Notional Unit | | Fair Value |
| | Assets | | Liabilities | | | | Assets | | Liabilities |
Crude oil: | | | | | | | | | | Crude oil: | | | | | | | | |
Written options | | — | | | Barrels | | $ | 87 | | | $ | — | | | Purchased options | | — | | | Barrels | | $ | — | | | $ | 81 | |
Collars | | 2,837 | | | Barrels | | $ | 33,826 | | | $ | 106 | | | Collars | | 2,888 | | | Barrels | | $ | — | | | $ | 33,399 | |
Swaps | | 4,682 | | | Barrels | | 71,242 | | | 60 | | | Swaps | | 7,517 | | | Barrels | | 27,524 | | | 82,723 | |
Total | | 7,519 | | | | | $ | 105,155 | | | $ | 166 | | | Total | | 10,405 | | | | | $ | 27,524 | | | $ | 116,203 | |
| | | | | | | | | | | | | | | | | | |
Natural gas: | | | | | | | | | | Natural gas: | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Collars | | 24,315 | | | MMBTUs | | 10,903 | | | 458 | | | Collars | | 25,929 | | | MMBTUs | | 1,136 | | | 10,936 | |
Swaps | | 58,959 | | | MMBTUs | | 49,188 | | | 3,775 | | | Swaps | | 109,567 | | | MMBTUs | | 28,803 | | | 63,029 | |
Total | | 83,274 | | | | | $ | 60,091 | | | $ | 4,233 | | | Total | | 135,496 | | | | | $ | 29,939 | | | $ | 73,965 | |
| | | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 165,246 | | | $ | 4,399 | | | Total | | | | | | $ | 57,463 | | | $ | 190,168 | |
|
As of March 31, 2022, the notional amounts that cleared through the Chicago Mercantile Exchange (“CME”) totaled 720 thousand barrels of crude oil and 7,925 thousand MMBTUs of natural gas. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in reductions to the gross derivative liability fair value of $37.1 million as of March 31, 2022. In comparison, the notional amounts that cleared through CME totaled 1,036 thousand barrels of crude oil and 11,490 thousand MMBTUs of natural gas as of December 31, 2021. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in a reduction to the gross derivative asset fair value of $2.2 million and to the liability fair value of $25.8 million, respectively, as of December 31, 2021.
The following table presents the net gains (losses) recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | Classification on Consolidated Statement of Income | | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Interest rate contracts | | Interest rate contracts and other derivative income | | $ | 7,585 | | | $ | 13,901 | | | | | |
Foreign exchange contracts | | Foreign exchange income | | 7,322 | | | 10,243 | | | | | |
Credit contracts | | Interest rate contracts and other derivative income | | 74 | | | 45 | | | | | |
Equity contracts | | Lending fees | | 94 | | | 311 | | | | | |
Commodity contracts | | Interest rate contracts and other derivative income | | (49) | | | 169 | | | | | |
Net gains | | | | $ | 15,026 | | | $ | 24,669 | | | | | |
|
Credit Risk-Related Contingent Features — Certain of the Company’s over-the-counter derivative contracts contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit risk-related event. Such event primarily relates to a downgrade in the credit rating of East West Bank to below investment grade. As of March 31, 2022, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that were in a net liability position totaled $42.6 million, in which $42.1 million of collateral was posted to cover these positions. As of December 31, 2021, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that were in a net liability position totaled $66.8 million, in which $66.6 million of collateral was posted to cover these positions. In the event that the credit rating of East West Bank had been downgraded to below investment grade, minimal additional collateral would have been required to be posted as of March 31, 2022 and December 31, 2021.
Offsetting of Derivatives
The following tables present the gross derivative fair values, the balance sheet netting adjustments and the resulting net fair values recorded on the consolidated balance sheet, as well as the cash and noncash collateral associated with master netting arrangements. The gross amounts of derivative assets and liabilities are presented after the application of variation margin payments as settlements with central counterparties, where applicable. The collateral amounts in the following tables are limited to the outstanding balances of the related asset or liability, after the application of netting; therefore, instances of overcollateralization are not shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | As of March 31, 2022 |
| | | | | | | | | | |
| | Gross Amounts Recognized (1) | | Gross Amounts Offset on the Consolidated Balance Sheet | | Net Amounts Presented on the Consolidated Balance Sheet | | Gross Amounts Not Offset on the Consolidated Balance Sheet | | Net Amount |
| | Master Netting Arrangements | | Cash Collateral Received (3) | | | Security Collateral Received (5) | |
Derivative assets | | $ | 689,100 | | | $ | (108,782) | | | $ | (81,534) | | | $ | 498,784 | | | $ | — | | | $ | 498,784 | |
| | Gross Amounts Recognized (2) | | Gross Amounts Offset on the Consolidated Balance Sheet | | Net Amounts Presented on the Consolidated Balance Sheet | | Gross Amounts Not Offset on the Consolidated Balance Sheet | | Net Amount |
| | Master Netting Arrangements | | Cash Collateral Pledged (4) | | | Security Collateral Pledged (5) | |
Derivative liabilities | | $ | 692,029 | | | $ | (108,782) | | | $ | (326,299) | | | $ | 256,948 | | | $ | (42,627) | | | $ | 214,321 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | As of December 31, 2021 |
| | | | | | | | | | |
| | Gross Amounts Recognized (1) | | Gross Amounts Offset on the Consolidated Balance Sheet | | Net Amounts Presented on the Consolidated Balance Sheet | | Gross Amounts Not Offset on the Consolidated Balance Sheet | | Net Amount |
| | Master Netting Arrangements | | Cash Collateral Received (3) | | | Security Collateral Received (5) | |
Derivative assets | | $ | 484,184 | | | $ | (58,679) | | | $ | (42,274) | | | $ | 383,231 | | | $ | — | | | $ | 383,231 | |
| | Gross Amounts Recognized (2) | | Gross Amounts Offset on the Consolidated Balance Sheet | | Net Amounts Presented on the Consolidated Balance Sheet | | Gross Amounts Not Offset on the Consolidated Balance Sheet | | Net Amount |
| | Master Netting Arrangements | | Cash Collateral Pledged (4) | | | Security Collateral Pledged (5) | |
Derivative liabilities | | $ | 390,171 | | | $ | (58,679) | | | $ | (174,048) | | | $ | 157,444 | | | $ | (106,598) | | | $ | 50,846 | |
|
(1)Includes $811 thousand and $587 thousand of gross fair value assets with counterparties that were not subject to enforceable master netting arrangements or similar agreements as of March 31, 2022 and December 31, 2021, respectively.
(2)Includes $834 thousand and $666 thousand of gross fair value liabilities with counterparties that were not subject to enforceable master netting arrangements or similar agreements as of March 31, 2022 and December 31, 2021, respectively.
(3)Gross cash collateral received under master netting arrangements or similar agreements were $87.6 million and $47.0 million as of March 31, 2022 and December 31, 2021, respectively. Of the gross cash collateral received, $81.5 million and $42.3 million were used to offset against derivative assets as of March 31, 2022 and December 31, 2021, respectively.
(4)Gross cash collateral pledged under master netting arrangements or similar agreements were $330.2 million and $176.5 million as of March 31, 2022 and December 31, 2021, respectively. Of the gross cash collateral pledged, $326.3 million and $174.0 million were used to offset against derivative liabilities as of March 31, 2022 and December 31, 2021, respectively.
(5)Represents the fair value of security collateral received and pledged limited to derivative assets and liabilities that are subject to enforceable master netting arrangements or similar agreements. GAAP does not permit the netting of noncash collateral on the consolidated balance sheet but requires disclosure of such amounts.
In addition to the amounts included in the tables above, the Company also has balance sheet netting related to the resale and repurchase agreements. Refer to Note 4 — Assets Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements in this Form 10-Q for additional information. Refer to Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for fair value measurement disclosures on derivatives.
Note 7 — Loans Receivable and Allowance for Credit Losses
The following table presents the composition of the Company’s loans held-for-investment outstanding as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 | | December 31, 2021 |
Commercial: | | | | |
C&I (1) | | $ | 14,838,134 | | | $ | 14,150,608 | |
CRE: | | | | |
CRE | | 12,636,787 | | | 12,155,047 | |
Multifamily residential | | 3,894,463 | | | 3,675,605 | |
Construction and land | | 443,836 | | | 346,486 | |
Total CRE | | 16,975,086 | | | 16,177,138 | |
Total commercial | | 31,813,220 | | | 30,327,746 | |
Consumer: | | | | |
Residential mortgage: | | | | |
Single-family residential | | 9,283,429 | | | 9,093,702 | |
HELOCs | | 2,266,634 | | | 2,144,821 | |
Total residential mortgage | | 11,550,063 | | | 11,238,523 | |
Other consumer | | 127,399 | | | 127,512 | |
Total consumer | | 11,677,462 | | | 11,366,035 | |
Total loans held-for-investment (2) | | $ | 43,490,682 | | | $ | 41,693,781 | |
Allowance for loan losses | | (545,685) | | | (541,579) | |
Loans held-for-investment, net (2) | | $ | 42,944,997 | | | $ | 41,152,202 | |
|
(1)Includes Paycheck Protection Program loans of $318.1 million and $534.2 million as of March 31, 2022 and December 31, 2021, respectively.
(2)Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(42.7) million and $(50.7) million as of March 31, 2022 and December 31, 2021, respectively.
Loans held-for-investment accrued interest receivable was $112.2 million and $107.4 million as of March 31, 2022 and December 31, 2021, respectively, and is included in Other assets on the Consolidated Balance Sheet. Interest income reversed for the three months ended March 31, 2022 and 2021 was insignificant. For the Company’s accounting policy on accrued interest receivable related to loans held-for-investment, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2021 Form 10-K.
The Company’s FRBSF and FHLB borrowings are primarily secured by loans held-for-investment. Loans held-for-investment totaling $28.36 billion and $27.67 billion, respectively, were pledged to secure borrowings and provide additional borrowing capacity as of March 31, 2022 and December 31, 2021.
Credit Quality Indicators
All loans are subject to the Company’s credit review and monitoring process. For the commercial loan portfolio, loans are risk rated based on an analysis of the borrower’s current payment performance or delinquency, repayment sources, financial and liquidity factors, including industry and geographic considerations. For the consumer loan portfolio, payment performance or delinquency is typically the driving indicator for risk ratings.
The Company utilizes internal credit risk ratings to assign each individual loan a risk rating of 1 through 10:
•Pass — loans risk rated 1 through 5 are assigned an internal risk rating category of “Pass.” Loans risk rated 1 are typically loans fully secured by cash. Pass loans have sufficient sources of repayment to repay the loan in full, in accordance with all terms and conditions.
•Special mention — loans assigned a risk rating of 6 have potential weaknesses that warrant closer attention by management; these are assigned an internal risk rating category of “Special Mention.”
•Substandard — loans assigned a risk rating of 7 or 8 have well-defined weaknesses that may jeopardize the full and timely repayment of the loan; these are assigned an internal risk rating category of “Substandard.”
•Doubtful — loans assigned a risk rating of 9 have insufficient sources of repayment and a high probability of loss; these are assigned an internal risk rating category of “Doubtful.”
•Loss — loans assigned a risk rating of 10 are uncollectible and of such little value that they are no longer considered bankable assets; these are assigned an internal risk rating category of “Loss.”
Loan exposures categorized as criticized consist of special mention, substandard, doubtful and loss categories. The Company reviews the internal risk ratings of its loan portfolio on a regular basis, and adjusts the ratings based on changes in the borrowers’ financial status and the collectability of the loans.
The following tables summarize the Company’s loans held-for-investment by loan portfolio segments, internal risk ratings and vintage year as of March 31, 2022 and December 31, 2021. The vintage year is the year of origination, renewal or major modification.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
($ in thousands) | | March 31, 2022 |
| Term Loans by Origination Year | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
| | | |
| | | |
| | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
C&I: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 737,607 | | | $ | 3,443,409 | | | $ | 983,506 | | | $ | 571,374 | | | $ | 188,189 | | | $ | 303,396 | | | $ | 8,203,700 | | | $ | 28,621 | | | $ | 14,459,802 | |
Criticized (accrual) | | 51,594 | | | 22,381 | | | 60,176 | | | 49,533 | | | 43,741 | | | 20,353 | | | 78,781 | | | — | | | 326,559 | |
Criticized (nonaccrual) | | — | | | 13,403 | | | 6,018 | | | — | | | 5,634 | | | 12,799 | | | 13,919 | | | — | | | 51,773 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total C&I | | 789,201 | | | 3,479,193 | | | 1,049,700 | | | 620,907 | | | 237,564 | | | 336,548 | | | 8,296,400 | | | 28,621 | | | 14,838,134 | |
CRE: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Pass | | 1,029,501 | | | 2,646,859 | | | 1,993,446 | | | 2,108,508 | | | 1,737,301 | | | 2,628,811 | | | 157,525 | | | 6,351 | | | 12,308,302 | |
Criticized (accrual) | | 5,049 | | | 105,708 | | | 4,375 | | | 54,675 | | | 56,140 | | | 93,134 | | | — | | | — | | | 319,081 | |
Criticized (nonaccrual) | | — | | | 4,301 | | | — | | | — | | | — | | | 5,103 | | | — | | | — | | | 9,404 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total CRE | | 1,034,550 | | | 2,756,868 | | | 1,997,821 | | | 2,163,183 | | | 1,793,441 | | | 2,727,048 | | | 157,525 | | | 6,351 | | | 12,636,787 | |
Multifamily residential: | | | | | | | | | | | | | | | | | | |
Pass | | 354,628 | | | 980,895 | | | 698,645 | | | 683,149 | | | 386,920 | | | 709,085 | | | 19,704 | | | — | | | 3,833,026 | |
Criticized (accrual) | | — | | | — | | | — | | | 718 | | | 22,306 | | | 37,990 | | | — | | | — | | | 61,014 | |
Criticized (nonaccrual) | | — | | | — | | | — | | | — | | | — | | | 423 | | | — | | | — | | | 423 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total multifamily residential | | 354,628 | | | 980,895 | | | 698,645 | | | 683,867 | | | 409,226 | | | 747,498 | | | 19,704 | | | — | | | 3,894,463 | |
Construction and land: | | | | | | | | | | | | | | | | | | |
Pass | | 35,198 | | | 192,442 | | | 93,792 | | | 89,152 | | | 3,370 | | | 270 | | | — | | | — | | | 414,224 | |
Criticized (accrual) | | — | | | 3,311 | | | 4,347 | | | — | | | 21,954 | | | — | | | — | | | — | | | 29,612 | |
Criticized (nonaccrual) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction and land | | 35,198 | | | 195,753 | | | 98,139 | | | 89,152 | | | 25,324 | | | 270 | | | — | | | — | | | 443,836 | |
Total CRE | | 1,424,376 | | | 3,933,516 | | | 2,794,605 | | | 2,936,202 | | | 2,227,991 | | | 3,474,816 | | | 177,229 | | | 6,351 | | | 16,975,086 | |
Total commercial | | 2,213,577 | | | 7,412,709 | | | 3,844,305 | | | 3,557,109 | | | 2,465,555 | | | 3,811,364 | | | 8,473,629 | | | 34,972 | | | 31,813,220 | |
Consumer: | | | | | | | | | | | | | | | | | | |
Residential mortgage: | | | | | | | | | | | | | | | | | | |
Single-family residential: | | | | | | | | | | | | | | | | | | |
Pass (1) | | 592,760 | | | 2,610,094 | | | 2,006,265 | | | 1,271,347 | | | 996,334 | | | 1,780,965 | | | — | | | — | | | 9,257,765 | |
Criticized (accrual) | | — | | | 241 | | | 706 | | | 961 | | | 4,281 | | | 4,187 | | | — | | | — | | | 10,376 | |
Criticized (nonaccrual) (1) | | — | | | — | | | 397 | | | 2,024 | | | 3,902 | | | 8,965 | | | — | | | — | | | 15,288 | |
Total single-family residential mortgage | | 592,760 | | | 2,610,335 | | | 2,007,368 | | | 1,274,332 | | | 1,004,517 | | | 1,794,117 | | | — | | | — | | | 9,283,429 | |
HELOCs: | | | | | | | | | | | | | | | | | | |
Pass | | — | | | 1,956 | | | 3,756 | | | 1,590 | | | 1,463 | | | 11,629 | | | 2,061,729 | | | 174,742 | | | 2,256,865 | |
Criticized (accrual) | | — | | | — | | | — | | | 220 | | | — | | | 1 | | | 1,464 | | | 1,272 | | | 2,957 | |
Criticized (nonaccrual) | | — | | | 7 | | | — | | | — | | | 186 | | | 3,052 | | | — | | | 3,567 | | | 6,812 | |
Total HELOCs | | — | | | 1,963 | | | 3,756 | | | 1,810 | | | 1,649 | | | 14,682 | | | 2,063,193 | | | 179,581 | | | 2,266,634 | |
Total residential mortgage | | 592,760 | | | 2,612,298 | | | 2,011,124 | | | 1,276,142 | | | 1,006,166 | | | 1,808,799 | | | 2,063,193 | | | 179,581 | | | 11,550,063 | |
Other consumer: | | | | | | | | | | | | | | | | | | |
Pass | | 538 | | | 16,190 | | | 5,258 | | | — | | | — | | | 54,062 | | | 51,313 | | | — | | | 127,361 | |
Criticized (accrual) | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Criticized (nonaccrual) | | — | | | — | | | — | | | — | | | — | | | — | | | 37 | | | — | | | 37 | |
Total other consumer | | 539 | | | 16,190 | | | 5,258 | | | — | | | — | | | 54,062 | | | 51,350 | | | — | | | 127,399 | |
Total consumer | | 593,299 | | | 2,628,488 | | | 2,016,382 | | | 1,276,142 | | | 1,006,166 | | | 1,862,861 | | | 2,114,543 | | | 179,581 | | | 11,677,462 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 2,806,876 | | | $ | 10,041,197 | | | $ | 5,860,687 | | | $ | 4,833,251 | | | $ | 3,471,721 | | | $ | 5,674,225 | | | $ | 10,588,172 | | | $ | 214,553 | | | $ | 43,490,682 | |
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|
($ in thousands) | | December 31, 2021 |
| Term Loans by Origination Year | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
| | | |
| | | |
| | | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
C&I: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 3,911,722 | | | $ | 1,133,085 | | | $ | 629,007 | | | $ | 187,195 | | | $ | 132,392 | | | $ | 225,326 | | | $ | 7,383,485 | | | $ | 28,842 | | | $ | 13,631,054 | |
Criticized (accrual) | | 85,036 | | | 117,357 | | | 72,277 | | | 51,553 | | | 15,136 | | | 4,005 | | | 115,167 | | | — | | | 460,531 | |
Criticized (nonaccrual) | | 29,456 | | | 2,792 | | | 513 | | | 517 | | | 9,301 | | | 16,444 | | | — | | | — | | | 59,023 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total C&I | | 4,026,214 | | | 1,253,234 | | | 701,797 | | | 239,265 | | | 156,829 | | | 245,775 | | | 7,498,652 | | | 28,842 | | | 14,150,608 | |
| | | | | | | | | | | | | | | | | | |
CRE: | | | | | | | | | | | | | | | | | | |
Pass | | 2,792,193 | | | 2,090,503 | | | 2,230,520 | | | 1,863,481 | | | 1,120,682 | | | 1,727,862 | | | 128,668 | | | 6,389 | | | 11,960,298 | |
Criticized (accrual) | | 71,055 | | | 3,200 | | | 9,176 | | | 21,077 | | | 24,851 | | | 55,892 | | | — | | | — | | | 185,251 | |
Criticized (nonaccrual) | | 4,350 | | | — | | | — | | | — | | | 4,752 | | | 396 | | | — | | | — | | | 9,498 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total CRE | | 2,867,598 | | | 2,093,703 | | | 2,239,696 | | | 1,884,558 | | | 1,150,285 | | | 1,784,150 | | | 128,668 | | | 6,389 | | | 12,155,047 | |
Multifamily residential: | | | | | | | | | | | | | | | | | | |
Pass | | 1,026,295 | | | 726,772 | | | 688,453 | | | 419,319 | | | 308,087 | | | 424,947 | | | 20,524 | | | — | | | 3,614,397 | |
Criticized (accrual) | | — | | | — | | | 721 | | | 22,344 | | | 7,033 | | | 30,666 | | | — | | | — | | | 60,764 | |
Criticized (nonaccrual) | | — | | | — | | | — | | | — | | | — | | | 444 | | | — | | | — | | | 444 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total multifamily residential | | 1,026,295 | | | 726,772 | | | 689,174 | | | 441,663 | | | 315,120 | | | 456,057 | | | 20,524 | | | — | | | 3,675,605 | |
Construction and land: | | | | | | | | | | | | | | | | | | |
Pass | | 122,983 | | | 103,743 | | | 90,544 | | | 3,412 | | | — | | | 391 | | | — | | | — | | | 321,073 | |
Criticized (accrual) | | 3,355 | | | — | | | — | | | 22,058 | | | — | | | — | | | — | | | — | | | 25,413 | |
Criticized (nonaccrual) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total construction and land | | 126,338 | | | 103,743 | | | 90,544 | | | 25,470 | | | — | | | 391 | | | — | | | — | | | 346,486 | |
Total CRE | | 4,020,231 | | | 2,924,218 | | | 3,019,414 | | | 2,351,691 | | | 1,465,405 | | | 2,240,598 | | | 149,192 | | | 6,389 | | | 16,177,138 | |
Total commercial | | 8,046,445 | | | 4,177,452 | | | 3,721,211 | | | 2,590,956 | | | 1,622,234 | | | 2,486,373 | | | 7,647,844 | | | 35,231 | | | 30,327,746 | |
Consumer: | | | | | | | | | | | | | | | | | | |
Residential mortgage: | | | | | | | | | | | | | | | | | | |
Single-family residential: | | | | | | | | | | | | | | | | | | |
Pass (1) | | 2,616,958 | | | 2,108,370 | | | 1,375,929 | | | 1,079,030 | | | 763,351 | | | 1,127,516 | | | — | | | — | | | 9,071,154 | |
Criticized (accrual) | | — | | | — | | | 458 | | | 2,813 | | | 1,899 | | | 3,212 | | | — | | | — | | | 8,382 | |
Criticized (nonaccrual) (1) | | — | | | — | | | 1,751 | | | 3,889 | | | 4,295 | | | 4,231 | | | — | | | — | | | 14,166 | |
Total single-family residential mortgage | | 2,616,958 | | | 2,108,370 | | | 1,378,138 | | | 1,085,732 | | | 769,545 | | | 1,134,959 | | | — | | | — | | | 9,093,702 | |
HELOCs: | | | | | | | | | | | | | | | | | | |
Pass | | 648 | | | 3,277 | | | 4,644 | | | 1,347 | | | 3,268 | | | 11,215 | | | 1,913,478 | | | 197,414 | | | 2,135,291 | |
Criticized (accrual) | | — | | | — | | | — | | | — | | | — | | | 371 | | | 7 | | | 708 | | | 1,086 | |
Criticized (nonaccrual) | | — | | | — | | | 52 | | | 188 | | | 3,543 | | | 973 | | | — | | | 3,688 | | | 8,444 | |
Total HELOCs | | 648 | | | 3,277 | | | 4,696 | | | 1,535 | | | 6,811 | | | 12,559 | | | 1,913,485 | | | 201,810 | | | 2,144,821 | |
Total residential mortgage | | 2,617,606 | | | 2,111,647 | | | 1,382,834 | | | 1,087,267 | | | 776,356 | | | 1,147,518 | | | 1,913,485 | | | 201,810 | | | 11,238,523 | |
Other consumer: | | | | | | | | | | | | | | | | | | |
Pass | | 16,831 | | | 5,258 | | | — | | | — | | | 1,741 | | | 52,147 | | | 51,481 | | | — | | | 127,458 | |
Criticized (accrual) | | 2 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | |
Criticized (nonaccrual) | | — | | | — | | | — | | | — | | | — | | | — | | | 52 | | | — | | | 52 | |
Total other consumer | | 16,833 | | | 5,258 | | | — | | | — | | | 1,741 | | | 52,147 | | | 51,533 | | | — | | | 127,512 | |
Total consumer | | 2,634,439 | | | 2,116,905 | | | 1,382,834 | | | 1,087,267 | | | 778,097 | | | 1,199,665 | | | 1,965,018 | | | 201,810 | | | 11,366,035 | |
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| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 10,680,884 | | | $ | 6,294,357 | | | $ | 5,104,045 | | | $ | 3,678,223 | | | $ | 2,400,331 | | | $ | 3,686,038 | | | $ | 9,612,862 | | | $ | 237,041 | | | $ | 41,693,781 | |
|
(1)As of March 31, 2022 and December 31, 2021, $1.1 million and $1.6 million, respectively, of nonaccrual loans whose payments are guaranteed by the Federal Housing Administration were classified with a “Pass” rating.
Revolving loans that are converted to term loans presented in the table above are excluded from the term loans by vintage year columns. During the three months ended March 31, 2022, there were no conversions of HELOCs or CRE revolving loans to term loans. In comparison, HELOCs of $44.3 million and two CRE revolving loans of $5.0 million were converted to term loans during the three months ended March 31, 2021.
Nonaccrual and Past Due Loans
Loans that are 90 or more days past due are generally placed on nonaccrual status unless the loan is well-collateralized and in the process of collection. Loans that are less than 90 days past due but have identified deficiencies, such as when the full collection of principal or interest becomes uncertain, are also placed on nonaccrual status. The following tables present the aging analysis of total loans held-for-investment as of March 31, 2022 and December 31, 2021:
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|
($ in thousands) | | March 31, 2022 |
| Current Accruing Loans (1) | | Accruing Loans 30-59 Days Past Due | | Accruing Loans 60-89 Days Past Due | | | | | | Total Accruing Past Due Loans | | | | | | Total Nonaccrual Loans | | Total Loans |
Commercial: | | | | | | | | | | | | | | | | | | | | |
C&I | | $ | 14,759,847 | | | $ | 23,082 | | | $ | 3,432 | | | | | | | $ | 26,514 | | | | | | | $ | 51,773 | | | $ | 14,838,134 | |
CRE: | | | | | | | | | | | | | | | | | | | | |
CRE | | 12,624,346 | | | 2,895 | | | 142 | | | | | | | 3,037 | | | | | | | 9,404 | | | 12,636,787 | |
Multifamily residential | | 3,891,837 | | | 804 | | | 1,399 | | | | | | | 2,203 | | | | | | | 423 | | | 3,894,463 | |
Construction and land | | 443,836 | | | — | | | — | | | | | | | — | | | | | | | — | | | 443,836 | |
Total CRE | | 16,960,019 | | | 3,699 | | | 1,541 | | | | | | | 5,240 | | | | | | | 9,827 | | | 16,975,086 | |
Total commercial | | 31,719,866 | | | 26,781 | | | 4,973 | | | | | | | 31,754 | | | | | | | 61,600 | | | 31,813,220 | |
Consumer: | | | | | | | | | | | | | | | | | | | | |
Residential mortgage: | | | | | | | | | | | | | | | | | | | | |
Single-family residential | | 9,240,375 | | | 15,998 | | | 10,671 | | | | | | | 26,669 | | | | | | | 16,385 | | | 9,283,429 | |
HELOCs | | 2,253,750 | | | 3,116 | | | 2,956 | | | | | | | 6,072 | | | | | | | 6,812 | | | 2,266,634 | |
Total residential mortgage | | 11,494,125 | | | 19,114 | | | 13,627 | | | | | | | 32,741 | | | | | | | 23,197 | | | 11,550,063 | |
Other consumer | | 126,568 | | | 150 | | | 644 | | | | | | | 794 | | | | | | | 37 | | | 127,399 | |
Total consumer | | 11,620,693 | | | 19,264 | | | 14,271 | | | | | | | 33,535 | | | | | | | 23,234 | | | 11,677,462 | |
Total | | $ | 43,340,559 | | | $ | 46,045 | | | $ | 19,244 | | | | | | | $ | 65,289 | | | | | | | $ | 84,834 | | | $ | 43,490,682 | |
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|
($ in thousands) | | December 31, 2021 |
| Current Accruing Loans (1) | | Accruing Loans 30-59 Days Past Due | | Accruing Loans 60-89 Days Past Due | | | | Total Accruing Past Due Loans | | | | | | Total Nonaccrual Loans | | Total Loans |
Commercial: | | | | | | | | | | | | | | | | | | |
C&I | | $ | 14,080,516 | | | $ | 6,983 | | | $ | 4,086 | | | | | $ | 11,069 | | | | | | | $ | 59,023 | | | $ | 14,150,608 | |
CRE: | | | | | | | | | | | | | | | | | | |
CRE | | 12,141,827 | | | 3,722 | | | — | | | | | 3,722 | | | | | | | 9,498 | | | 12,155,047 | |
Multifamily residential | | 3,669,819 | | | 5,320 | | | 22 | | | | | 5,342 | | | | | | | 444 | | | 3,675,605 | |
Construction and land | | 346,486 | | | — | | | — | | | | | — | | | | | | | — | | | 346,486 | |
Total CRE | | 16,158,132 | | | 9,042 | | | 22 | | | | | 9,064 | | | | | | | 9,942 | | | 16,177,138 | |
Total commercial | | 30,238,648 | | | 16,025 | | | 4,108 | | | | | 20,133 | | | | | | | 68,965 | | | 30,327,746 | |
Consumer: | | | | | | | | | | | | | | | | | | |
Residential mortgage: | | | | | | | | | | | | | | | | | | |
Single-family residential | | 9,059,222 | | | 10,191 | | | 8,569 | | | | | 18,760 | | | | | | | 15,720 | | | 9,093,702 | |
HELOCs | | 2,130,523 | | | 4,776 | | | 1,078 | | | | | 5,854 | | | | | | | 8,444 | | | 2,144,821 | |
Total residential mortgage | | 11,189,745 | | | 14,967 | | | 9,647 | | | | | 24,614 | | | | | | | 24,164 | | | 11,238,523 | |
Other consumer | | 127,352 | | | 99 | | | 9 | | | | | 108 | | | | | | | 52 | | | 127,512 | |
Total consumer | | 11,317,097 | | | 15,066 | | | 9,656 | | | | | 24,722 | | | | | | | 24,216 | | | 11,366,035 | |
Total | | $ | 41,555,745 | | | $ | 31,091 | | | $ | 13,764 | | | | | $ | 44,855 | | | | | | | $ | 93,181 | | | $ | 41,693,781 | |
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(1)As of both March 31, 2022 and December 31, 2021, loans in payment deferral programs offered in response to the Coronavirus Disease 2019 (“COVID-19”) pandemic that are performing according to their modified terms are generally not considered delinquent, and are included in the “Current Accruing Loans” column.
The following table presents the amortized cost of loans on nonaccrual status for which there was no related allowance for loan losses as of both March 31, 2022 and December 31, 2021. Nonaccrual loans may not have an allowance for credit losses because there is no loss expectation when the loan balances are well-secured by the collateral value.
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|
($ in thousands) | | | March 31, 2022 | | | December 31, 2021 |
| | | | | | |
Commercial: | | | | | | |
C&I | | | $ | 24,864 | | | | $ | 22,967 | |
| | | | | | |
CRE | | | 9,053 | | | | 9,102 | |
| | | | | | |
| | | | | | |
| | | | | | |
Total commercial | | | 33,917 | | | | 32,069 | |
Consumer: | | | | | | |
| | | | | | |
Single-family residential | | | 7,265 | | | | 5,785 | |
HELOCs | | | 3,738 | | | | 5,033 | |
| | | | | | |
| | | | | | |
Total consumer | | | 11,003 | | | | 10,818 | |
Total nonaccrual loans with no related allowance for loan losses | | | $ | 44,920 | | | | $ | 42,887 | |
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Foreclosed Assets
The Company acquires assets from borrowers through loan restructurings, workouts, and foreclosures. Assets acquired may include real properties (e.g., residential real estate, land, and buildings) and commercial and personal properties. The Company recognizes foreclosed assets upon receiving assets in satisfaction of a loan (e.g., taking legal title or physical possession).
Foreclosed assets, consisting of OREO and other nonperforming assets, are included in Other assets on the Consolidated Balance Sheet. The Company had $9.5 million in foreclosed assets as of March 31, 2022, compared with $10.3 million as of December 31, 2021. The Company commences the foreclosure process on consumer mortgage loans after a borrower becomes more than 120 days delinquent in accordance with the Consumer Financial Protection Bureau guidelines. The carrying value of consumer real estate loans that were in the process of active or suspended foreclosure was $6.8 million and $7.3 million as of March 31, 2022 and December 31, 2021, respectively.
As part of our actions to support customers during the COVID-19 pandemic, the Company temporarily suspended certain mortgage foreclosure activities through December 31, 2021. Beginning January 1, 2022, the Company resumed these mortgage foreclosure activities. The Company continues to take proactive measures to prevent avoidable foreclosures.
Troubled Debt Restructurings
TDRs are individually evaluated, and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulties. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered. The Company implemented various commercial and consumer loan modification programs to provide its borrowers relief from the economic impacts of the COVID-19 pandemic. These COVID-related modifications occurred between March 2020 and January 1, 2022, and were generally not classified as TDRs due to the relief under the Coronavirus Aid, Relief, and Economic Security Act, as amended by the Consolidated Appropriations Act, 2021, and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), and therefore are not included in the discussion below. Assistance provided in response to the COVID-19 pandemic could have delayed the recognition of delinquencies, nonaccrual status, and net charge-offs for those borrowers who would have otherwise moved into past due or nonaccrual status. See Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Troubled Debt Restructurings to the Consolidated Financial Statements in the Company’s 2021 Form 10-K for additional information.
The following table presents the additions to TDRs for the three months ended March 31, 2022 and 2021:
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|
($ in thousands) | | Loans Modified as TDRs During the Three Months Ended March 31, |
| 2022 | | 2021 |
| Number of Loans | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment (1) | | Financial Impact (2) | | Number of Loans | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment (1) | | Financial Impact (2) |
Commercial: | | | | | | | | | | | | | | | | |
C&I | | 1 | | $ | 17,179 | | | $ | 9,224 | | | $ | 7,545 | | | 1 | | $ | 443 | | | $ | 433 | | | $ | 203 | |
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Total | | 1 | | $ | 17,179 | | | $ | 9,224 | | | $ | 7,545 | | | 1 | | $ | 443 | | | $ | 433 | | | $ | 203 | |
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(1)Includes subsequent payments after modification and reflects the balance as of March 31, 2022 and 2021.
(2)Includes charge-offs and specific reserves recorded since the modification date.
The following table presents the TDR post-modification outstanding balances by the primary modification type for the three months ended March 31, 2022 and 2021:
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|
($ in thousands) | | Modification Type During the Three Months Ended March 31, |
| 2022 | | 2021 |
| Principal (1) | | | | | | | | | | Total | | Principal (1) | | | | | | | | | | Total |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
C&I | | $ | 9,224 | | | | | | | | | | | $ | 9,224 | | | $ | 433 | | | | | | | | | | | $ | 433 | |
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Total | | $ | 9,224 | | | | | | | | | | | $ | 9,224 | | | $ | 433 | | | | | | | | | | | $ | 433 | |
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(1)Includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payments to interest payments only.
After a loan is modified as TDR, the Company continues to monitor its performance under its most recent restructured terms. A TDR may become delinquent and result in payment default (generally 90 days past due) subsequent to restructuring. The following table presents information on loans that entered into default during the three months ended March 31, 2022 and 2021 that were modified as TDRs during the 12 months preceding payment default:
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($ in thousands) | | Loans Modified as TDRs that Subsequently Defaulted During the Three Months Ended March 31, |
| 2022 | | 2021 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
Commercial: | | | | | | | | |
C&I | | 1 | | | $ | 3,250 | | | 1 | | | $ | 11,538 | |
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Total | | 1 | | | $ | 3,250 | | | 1 | | | $ | 11,538 | |
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As of March 31, 2022 and December 31, 2021, the remaining commitments to lend to borrowers whose terms of their outstanding owed balances were modified as TDRs was $2.8 million and $5.0 million, respectively.
Allowance for Credit Losses
The Company has an allowance framework under ASU 2016-13 for all financial assets measured at amortized cost and certain off-balance sheet credit exposures. The Company’s allowance for credit losses, which includes both the allowance for loan losses and the allowance for unfunded credit commitments, is calculated with the objective of maintaining a reserve sufficient to absorb losses inherent in our credit portfolios. The measurement of the allowance for credit losses is based on management’s best estimate of lifetime expected credit losses, and periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors.
The allowance for credit losses is deducted from the amortized cost basis of a financial asset or a group of financial assets so that the balance sheet reflects the net amount the Company expects to collect. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred fees and costs, and escrow advances. Subsequent changes in expected credit losses are recognized in net income as a provision for, or a reversal of, credit loss expense.
The allowance for credit losses estimation involves procedures to consider the unique risk characteristics of the portfolio segments. The majority of the Company’s credit exposures that share risk characteristics with other similar exposures are collectively evaluated. The collectively evaluated loans include performing risk-rated loans and unfunded credit commitments. If an exposure does not share risk characteristics with other exposures, the Company generally estimates expected credit losses on an individual basis. These individually assessed loans include TDR and nonaccrual loans.
Allowance for Collectively Evaluated Loans
The allowance for collectively evaluated loans consists of a quantitative component that assesses the different risk factors considered in our models and a qualitative component that considers risk factors external to the models. Each of these components are described below.
•Quantitative Component — The Company applies quantitative methods to estimate loan losses by considering a variety of factors such as historical loss experience, the current credit quality of the portfolio, and an economic outlook over the life of the loan. The Company incorporates forward-looking information using macroeconomic scenarios, which include variables that are considered key drivers of increases and decreases in credit losses. The Company utilizes a probability-weighted, multiple-scenario forecast approach. These scenarios may consist of a base forecast representing management's view of the most likely outcome, combined with downside or upside scenarios reflecting possible worsening or improving economic conditions. The quantitative models incorporate a probability-weighted calculation of these macroeconomic scenarios over a reasonable and supportable forecast period. If the life of loans extends beyond the reasonable and supportable forecast period, the Company will consider historical experience or long-run macroeconomic trends over the remaining lives of the loans to estimate the allowance for loan losses.
During the third quarter of 2021, the reasonable and supportable forecast period, key credit risk characteristics and macroeconomic variables to estimate the expected credit losses of the C&I segment were modified due to model enhancement. There were no changes to the overall model methodology. For the three months ended March 31, 2022, there were no changes to the reasonable and supportable forecast period and reversion to the historical loss experience method.
The following table provides key credit risk characteristics and macroeconomic variables that the Company uses to estimate the expected credit losses by portfolio segment:
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Portfolio Segment | | Risk Characteristics | | Macroeconomic Variables |
C&I | | Age (1), size and spread at origination, and risk rating | | Volatility Index (“VIX”) and BBB yield to 10-year U.S. Treasury spread (“BBB Spread”) (1) |
CRE, Multifamily residential, and Construction and land | | Delinquency status, maturity date, collateral value, property type, and geographic location | | Unemployment rate, Gross Domestic Product (“GDP”), and U.S. Treasury rates |
Single-family residential and HELOCs | | FICO score, delinquency status, maturity date, collateral value, and geographic location | | Unemployment rate, GDP, and home price index |
Other consumer | | Historical loss experience | | Immaterial (2) |
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(1)Due to model enhancements during the third quarter of 2021, the risk characteristic related to “time-to-maturity” was changed to “age”; while macroeconomic variables related to “unemployment rate and two- and ten-year U.S. Treasury spread” were changed to “VIX and BBB Spread”.
(2)Macroeconomic variables are included in the qualitative estimate.
Allowance for Loan Losses for the Commercial Loan Portfolio
The Company’s C&I lifetime loss rate model estimates credit losses by estimating a loss rate expected over the life of a loan. This loss rate is applied to the amortized cost basis, excluding accrued interest receivable, to determine expected credit losses. The lifetime loss rate model’s reasonable and supportable period spans 11 quarters, thereafter immediately reverting to the historical average loss rate, expressed through the loan-level lifetime loss rate.
For CRE, multifamily residential, and construction and land loans, projected probabilities of default (“PDs”) and loss given defaults (“LGDs”) are applied to the estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss at the loan level. The forecast of future economic conditions returns to long-run historical economic trends within the reasonable and supportable period.
In order to estimate the life of a loan under both models, the contractual term of the loan is adjusted for estimated prepayments based on historical prepayment experience.
Allowance for Loan Losses for the Consumer Loan Portfolio
For single-family residential and HELOC loans, projected PDs and LGDs are applied to the estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss at the loan level. The forecast of future economic conditions returns to long-run historical economic trends after the reasonable and supportable period. In order to estimate the life of a loan for the single-family residential and HELOC portfolios, the contractual term of the loan is adjusted for estimated prepayments based on historical prepayment experience. For other consumer loans, the Company uses a loss rate approach.
•Qualitative Component — The Company also considers the following qualitative factors in the determination of the collectively evaluated allowance, if these factors have not already been captured by the quantitative model. Such qualitative factors may include, but are not limited to:
–Loan growth trends;
–The volume and severity of past due financial assets, and the volume and severity of adversely classified financial assets;
–The Company’s lending policies and procedures, including changes in lending strategies, underwriting standards, collection, write-off and recovery practices;
–Knowledge of a borrower’s operations;
–The quality of the Company’s credit review system;
–The experience, ability and depth of the Company’s management, lending associates and other relevant associates;
–The effect of other external factors such as the regulatory and legal environments and changes in technology;
–Actual and expected changes in international, national, regional, and local economic and business conditions in which the Company operates; and
–Risk factors in certain industry sectors not captured by the quantitative models.
The magnitude of the impact of these factors on the Company’s qualitative assessment of the allowance for credit losses changes from period to period according to changes made by management in its assessment of these factors. The extent to which these factors change may be dependent on whether they are already reflected in quantitative loss estimates during the current period and the extent to which changes in these factors diverge from period to period.
While the Company’s allowance methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. The Company may hold additional qualitative reserves that are designed to provide coverage for losses attributable to such risk.
Allowance for Individually Evaluated Loans
When a loan no longer shares similar risk characteristics with other loans, such as in the case of certain nonaccrual or TDR loans, the Company estimates the allowance for loan losses on an individual loan basis. The allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and their fair value. For loans evaluated individually, the Company uses one of three different asset valuation measurement methods: (1) the fair value of collateral less costs to sell; (2) the present value of expected future cash flows; and (3) the loan's observable market price. If an individually evaluated loan is determined to be collateral dependent, the Company applies the fair value of the collateral less costs to sell method. If an individually evaluated loan is determined not to be collateral dependent, the Company uses the present value of future cash flows or the observable market value of the loan.
•Collateral-Dependent Loans — The allowance of a collateral-dependent loan is limited to the difference between the recorded value and fair value of the collateral less cost of disposal or sale. As of March 31, 2022, collateral-dependent commercial and consumer loans totaled $35.2 million and $14.2 million, respectively. In comparison, collateral-dependent commercial and consumer loans totaled $37.0 million and $14.0 million as of December 31, 2021, respectively. The Company's commercial collateral-dependent loans were secured by real estate, and its consumer collateral-dependent loans were all residential mortgage loans, secured by the underlying real estate. As of both March 31, 2022 and December 31, 2021, the collateral value of the properties securing the collateral-dependent loans, net of selling costs, exceeded the recorded value of the loans.
The following tables summarize the activity in the allowance for loan losses by portfolio segments for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Three Months Ended March 31, 2022 |
| Commercial | | Consumer | | Total |
| C&I | | CRE | | Residential Mortgage | | Other Consumer | |
| | CRE | | Multifamily Residential | | Construction and Land | | Single- Family Residential | | HELOCs | | |
Allowance for loan losses, beginning of period | | $ | 338,252 | | | $ | 150,940 | | | $ | 14,400 | | | $ | 15,468 | | | $ | 17,160 | | | $ | 3,435 | | | $ | 1,924 | | | $ | 541,579 | |
Provision for (reversal of) credit losses on loans | (a) | 9,262 | | | (3,493) | | | 9,657 | | | (4,506) | | | 926 | | | 299 | | | 107 | | | 12,252 | |
Gross charge-offs | | (11,188) | | | (398) | | | (1) | | | — | | | — | | | — | | | (46) | | | (11,633) | |
Gross recoveries | | 3,002 | | | 55 | | | 120 | | | 54 | | | 124 | | | 14 | | | — | | | 3,369 | |
Total net (charge-offs) recoveries | | (8,186) | | | (343) | | | 119 | | | 54 | | | 124 | | | 14 | | | (46) | | | (8,264) | |
Foreign currency translation adjustment | | 118 | | | — | | | — | | | — | | | — | | | — | | | — | | | 118 | |
Allowance for loan losses, end of period | | $ | 339,446 | | | $ | 147,104 | | | $ | 24,176 | | | $ | 11,016 | | | $ | 18,210 | | | $ | 3,748 | | | $ | 1,985 | | | $ | 545,685 | |
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($ in thousands) | | Three Months Ended March 31, 2021 |
| Commercial | | Consumer | | Total |
| C&I | | CRE | | Residential Mortgage | | Other Consumer | |
| | CRE | | Multifamily Residential | | Construction and Land | | Single- Family Residential | | HELOCs | | |
Allowance for loan losses, beginning of period | | $ | 398,040 | | | $ | 163,791 | | | $ | 27,573 | | | $ | 10,239 | | | $ | 15,520 | | | $ | 2,690 | | | $ | 2,130 | | | $ | 619,983 | |
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Provision for (reversal of) credit losses on loans | (a) | 3,839 | | | (10,277) | | | (1,391) | | | 8,592 | | | 376 | | | 22 | | | (113) | | | 1,048 | |
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Gross charge-offs | | (8,436) | | | (7,195) | | | (17) | | | (71) | | | (134) | | | (45) | | | (1) | | | (15,899) | |
Gross recoveries | | 760 | | | 80 | | | 1,242 | | | 329 | | | 77 | | | 3 | | | 2 | | | 2,493 | |
Total net (charge-offs) recoveries | | (7,676) | | | (7,115) | | | 1,225 | | | 258 | | | (57) | | | (42) | | | 1 | | | (13,406) | |
Foreign currency translation adjustment | | (119) | | | — | | | — | | | — | | | — | | | — | | | — | | | (119) | |
Allowance for loan losses, end of period | | $ | 394,084 | | | $ | 146,399 | | | $ | 27,407 | | | $ | 19,089 | | | $ | 15,839 | | | $ | 2,670 | | | $ | 2,018 | | | $ | 607,506 | |
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The allowance for unfunded credit commitments is maintained at a level that management believes to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities. See Note 10 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q for additional information related to unfunded credit commitments. The following table summarizes the activities in the allowance for unfunded credit commitments for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Unfunded credit facilities | | | | | | | | |
Allowance for unfunded credit commitments, beginning of period | | $ | 27,514 | | | $ | 33,577 | | | | | |
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Reversal of credit losses on unfunded credit commitments | (b) | (4,252) | | | (1,048) | | | | | |
Allowance for unfunded credit commitments, end of period | | 23,262 | | | 32,529 | | | | | |
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Provision for credit losses | (a) + (b) | $ | 8,000 | | | $ | — | | | | | |
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The allowance for credit losses was $568.9 million as of March 31, 2022, a decrease of $146 thousand, compared with $569.1 million as of December 31, 2021. The decrease in the allowance for credit losses was predominantly due to an improving economic outlook, as well as a decrease in net charge-offs, partially offset by an increase in provision for credit losses, primarily reflecting loan growth.
Loans Held-for-Sale
As of March 31, 2022 and December 31, 2021, loans held-for-sale consisted of $631 thousand and $635 thousand single-family residential loans. Refer to Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Loans Held-for-Sale to the Consolidated Financial Statements in the Company’s 2021 Form 10-K for additional details.
Loan Transfers, Sales and Purchases
The Company’s primary focus is on directly originated loans. The Company also purchases loans and participates in loans with other banks. In the normal course of doing business, the Company also provides other financial institutions with the ability to participate in commercial loans that it originates and sells loans to such institutions. Purchased loans may be transferred from held-for-investment to held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate. The following tables provide information on the carrying value of loans transferred, loans sold and purchased for the held-for-investment portfolio, during the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Three Months Ended March 31, 2022 |
| Commercial | | Consumer | | | | | | Total |
| C&I | | CRE | | | | Residential Mortgage | | | | | |
| | CRE | | Multifamily Residential | | | | Single-Family Residential | | | | | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 111,437 | | | $ | 21,780 | | | $ | — | | | | | $ | — | | | | | | | $ | 133,217 | |
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Sales (2)(3)(4) | | $ | 107,474 | | | $ | 21,780 | | | $ | — | | | | | $ | 451 | | | | | | | $ | 129,705 | |
Purchases (5) | | $ | 110,596 | | | $ | — | | | $ | — | | | | | $ | 114,375 | | | | | | | $ | 224,971 | |
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($ in thousands) | | Three Months Ended March 31, 2021 |
| Commercial | | Consumer | | | | | | Total |
| C&I | | CRE | | | | Residential Mortgage | | | | | |
| | CRE | | Multifamily Residential | | | | Single-Family Residential | | | | |
Loans transferred from held-for-investment to held-for-sale (1) | | $ | 125,840 | | | $ | 20,032 | | | $ | — | | | | | $ | — | | | | | | | $ | 145,872 | |
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Sales (2)(3)(4) | | $ | 125,879 | | | $ | 20,032 | | | $ | — | | | | | $ | 7,506 | | | | | | | $ | 153,417 | |
Purchases (5) | | $ | 178,678 | | | $ | — | | | $ | 370 | | | | | $ | 131,800 | | | | | | | $ | 310,848 | |
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(1)Includes write-downs of $59 thousand and $39 thousand to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the three months ended March 31, 2022 and 2021, respectively.
(2)Includes originated loans sold of $112.3 million and $131.0 million for the three months ended March 31, 2022 and 2021, respectively. Originated loans sold consisted primarily of C&I loans for both periods.
(3)Includes $17.4 million and $22.4 million of purchased loans sold in the secondary market for the three months ended March 31, 2022 and 2021, respectively.
(4)Net gains on sales of loans were $2.9 million and $1.8 million for the three months ended March 31, 2022 and 2021, respectively.
(5)C&I loan purchases were comprised primarily of syndicated C&I term loans.
Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities
The CRA encourages banks to meet the credit needs of their communities, particularly low- and moderate-income individuals and neighborhoods. The Company invests in certain affordable housing projects in the form of ownership interests in limited partnerships or limited liability companies that qualify for CRA consideration and tax credits. These entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. To fully utilize the available tax credits, each of these entities must meet the regulatory affordable housing requirements for a minimum 15-year compliance period. In addition to affordable housing projects, the Company also invests in small business investment companies and new market tax credit projects that qualify for CRA consideration, as well as eligible projects that qualify for renewable energy and historic tax credits. Investments in renewable energy tax credits help promote the development of renewable energy sources, and the investments in historic tax credits promote the rehabilitation of historic buildings and economic revitalization of the surrounding areas.
Investments in Qualified Affordable Housing Partnerships, Net
The Company records its investments in qualified affordable housing partnerships, net, using the proportional amortization method if certain criteria are met. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the amortization in Income tax expense on the Consolidated Statement of Income.
The following table presents the Company’s investments in qualified affordable housing partnerships, net, and related unfunded commitments as of March 31, 2022 and December 31, 2021:
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($ in thousands) | | March 31, 2022 | | December 31, 2021 |
Investments in qualified affordable housing partnerships, net | | $ | 289,423 | | | $ | 289,741 | |
Accrued expenses and other liabilities — Unfunded commitments | | $ | 148,110 | | | $ | 146,152 | |
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The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Tax credits and other tax benefits recognized | | $ | 12,830 | | | $ | 11,028 | | | | | |
Amortization expense included in income tax expense | | $ | 10,025 | | | $ | 8,712 | | | | | |
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Investments in Tax Credit and Other Investments, Net
Depending on the ownership percentage and the influence the Company has on the investments in tax credit and other investments, net, the Company applies the equity or cost method of accounting, or the measurement alternative as elected under ASU 2016-01 for equity investments without readily determinable fair value.
The following table presents the Company’s investments in tax credit and other investments, net, and related unfunded commitments as of March 31, 2022 and December 31, 2021:
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($ in thousands) | | March 31, 2022 | | December 31, 2021 |
Investments in tax credit and other investments, net | | $ | 318,562 | | | $ | 338,522 | |
Accrued expenses and other liabilities — Unfunded commitments | | $ | 140,070 | | | $ | 163,464 | |
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Amortization of tax credit and other investments totaled $13.9 million and $25.4 million for the three months ended March 31, 2022 and 2021, respectively.
The Company held equity securities that are mutual funds with readily determinable fair values of $25.5 million and $26.6 million, as of March 31, 2022 and December 31, 2021, respectively. The Company invested in these mutual funds for CRA purposes. These equity securities were measured at fair value with changes in fair value recorded in Other investment income on the Consolidated Statement of Income. The Company recorded unrealized losses of $1.2 million and $497 thousand on these equity securities for the three months ended March 31, 2022 and 2021, respectively. Equity securities with readily determinable fair value were included in Investments in tax credit and other investments, net on the Consolidated Balance Sheet.
The Company held equity securities without readily determinable fair values totaling $33.0 million and $33.1 million as of March 31, 2022 and December 31, 2021, respectively, which were measured using the measurement alternative at cost less impairment and adjusted for observable price changes. For the three months ended March 31, 2022 and 2021, there were no adjustments made to these securities. Equity securities without readily determinable fair values were included in Investments in qualified affordable housing partnerships, tax credit and other investments, net and Other assets on the Consolidated Balance Sheet.
Tax credit investments are evaluated for possible OTTI on an annual basis or when events or changes in circumstances suggest that the carrying amount of the tax credit investments may not be realizable. OTTI charges and impairment recoveries are recorded within Amortization of tax credit and other investments on the Consolidated Statement of Income. Refer to Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for a discussion on the Company’s impairment evaluation and monitoring process of tax credit investments. For the three months ended March 31, 2022, the Company recorded no impairment recoveries and no OTTI charges. In comparison, the Company recorded an impairment recovery of $374 thousand and no OTTI charges for the three months ended March 31, 2021.
Variable Interest Entities
The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation, and wind and solar energy projects, of which the majority of such investments are variable interest entities (“VIEs”). As a limited partner in these partnerships, these investments are designed to generate a return primarily through the realization of federal tax credits and tax benefits. An unrelated third party is typically the general partner or managing member who has control over the significant activities of such investments. While the Company’s interest in some of the investments may exceed 50% of the outstanding equity interests, the Company does not consolidate these structures due to the general partner’s or managing member’s ability to manage the entity, which is indicative of the general partner’s or managing member’s power over the entity. The Company’s maximum exposure to loss in connection with these partnerships consists of the unamortized investment balance and any tax credits claimed that may become subject to recapture.
Special purpose entities formed in connection with securitization transactions are generally considered VIEs. A CLO is a VIE that purchases a pool of assets consisting primarily of non-investment grade corporate loans, and issues multiple tranches of notes to investors to fund the asset purchases and pay upfront expenses associated with forming the CLO. The Company served as the collateral manager of a CLO that closed in 2019 and subsequently reassigned its portfolio manager responsibilities in 2020. The Company retained the top three investment grade-rated tranches issued by the CLO, for which the total carrying amount was $291.2 million and $291.7 million as of March 31, 2022 and December 31, 2021, respectively.
Note 9 — Goodwill
Goodwill
Total goodwill was $465.7 million as of both March 31, 2022 and December 31, 2021. The Company’s annual goodwill impairment testing is performed as of December 31 of each year, or more frequently as events occur or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. Based on the Company’s annual goodwill impairment testing as of December 31, 2021, there was no impairment. Additional information pertaining to the Company’s accounting policy for goodwill is summarized in Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Goodwill and Other Intangible Assets to the Consolidated Financial Statements in the Company’s 2021 Form 10-K. As of March 31, 2022, the Company reviewed the macroeconomic conditions, including the impacts of the ongoing COVID-19 pandemic on its business performance and market capitalization, and concluded that goodwill was not impaired.
Note 10 — Commitments and Contingencies
Commitments to Extend Credit — In the normal course of doing business, the Company provides customers loan commitments on predetermined terms. These outstanding commitments to extend credit are not reflected in the accompanying Consolidated Financial Statements. While the Company does not anticipate losses from these transactions, commitments to extend credit are included in determining the appropriate level of the allowance for unfunded credit commitments, and outstanding commercial letters of credit and standby letters of credit (“SBLCs”).
The following table presents the Company’s credit-related commitments as of March 31, 2022 and December 31, 2021:
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| | March 31, 2022 | | December 31, 2021 |
($ in thousands) | | Expire in One Year or Less | | Expire After One Year Through Three Years | | Expire After Three Years Through Five Years | | Expire After Five Years | | Total | | Total |
Loan commitments | | $ | 3,481,279 | | | $ | 2,587,458 | | | $ | 812,857 | | | $ | 125,471 | | | $ | 7,007,065 | | | $ | 6,911,398 | |
Commercial letters of credit and SBLCs | | 984,831 | | | 415,463 | | | 106,139 | | | 706,947 | | | 2,213,380 | | | 2,221,699 | |
Total | | $ | 4,466,110 | | | $ | 3,002,921 | | | $ | 918,996 | | | $ | 832,418 | | | $ | 9,220,445 | | | $ | 9,133,097 | |
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Loan commitments are agreements to lend to customers provided there are no violations of any conditions established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements.
Commercial letters of credit are issued to facilitate domestic and foreign trade transactions, while SBLCs are generally contingent upon the failure of the customers to perform according to the terms of the underlying contract with the third party. As a result, the total contractual amounts do not necessarily represent future funding requirements. The Company’s historical experience is that SBLCs typically expire without being funded. Additionally, in many cases, the Company holds collateral in various forms against these SBLCs. As part of its risk management activities, the Company monitors the creditworthiness of customers in conjunction with its SBLC exposure. Customers are obligated to reimburse the Company for any payment made on the customers’ behalf. If the customers fail to pay, the Company would, as applicable, liquidate the collateral and/or offset existing accounts. As of March 31, 2022, total letters of credit of $2.21 billion consisted of SBLCs of $2.16 billion and commercial letters of credit of $53.6 million. As of December 31, 2021, total letters of credit of $2.22 billion consisted of SBLCs of $2.14 billion and commercial letters of credit of $78.9 million. As of both March 31, 2022 and December 31, 2021, substantially all SBLCs were rated as “Pass” by the Bank’s internal credit risk rating system.
The Company applies the same credit underwriting criteria to extend loans, commitments and conditional obligations to customers. Each customer’s creditworthiness is evaluated on a case-by-case basis. Collateral and financial guarantees may be obtained based on management’s assessment of a customer’s credit risk. Collateral may include cash, accounts receivable, inventory, property, plant and equipment, and real estate property.
Estimated exposure to loss from these commitments is included in the allowance for unfunded credit commitments and amounted to $23.2 million and $27.5 million as of March 31, 2022 and December 31, 2021, respectively.
Guarantees — From time to time, the Company sells or securitizes single-family and multifamily residential loans with recourse in the ordinary course of business. The Company is obligated to repurchase up to the recourse component of the loans if the loans default. The following table presents the carrying amounts of loans sold or securitized with recourse and the maximum potential future payments as of March 31, 2022 and December 31, 2021:
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($ in thousands) | | Maximum Potential Future Payments | | Carrying Value |
| March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
| Expire in One Year or Less | | | | Expire After One Year Through Three Years | | Expire After Three Years Through Five Years | | Expire After Five Years | | Total | | Total | | Total | | Total |
Single-family residential loans sold or securitized with recourse | | $ | 21 | | | | | $ | 239 | | | $ | 35 | | | $ | 7,341 | | | $ | 7,636 | | | $ | 7,926 | | | $ | 7,636 | | | $ | 7,926 | |
Multi-family residential loans sold or securitized with recourse | | — | | | | | — | | | — | | | 14,996 | | | 14,996 | | | 14,996 | | | 22,416 | | | 23,169 | |
Total | | $ | 21 | | | | | $ | 239 | | | $ | 35 | | | $ | 22,337 | | | $ | 22,632 | | | $ | 22,922 | | | $ | 30,052 | | | $ | 31,095 | |
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The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit commitments and totaled $23 thousand and $29 thousand as of March 31, 2022 and December 31, 2021, respectively. The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. The Company continues to experience minimal losses from the single-family and multifamily residential loan portfolios sold or securitized with recourse.
Litigation — The Company is a party to various legal actions arising in the ordinary course of its business. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more, than the amounts accrued.
Other Commitments — The Company has commitments to invest in qualified affordable housing partnerships, tax credit and other investments as discussed in Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities to the Consolidated Financial Statements in this Form 10-Q. As of March 31, 2022 and December 31, 2021, these commitments were $288.2 million and $309.6 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.
Note 11 — Stock Compensation Plans
Pursuant to the Company’s 2021 Stock Incentive Plan, as amended, the Company may issue stocks, stock options, restricted stock, restricted stock units (“RSUs”) including performance-based RSUs, stock purchase warrants, stock appreciation rights, phantom stock and dividend equivalents to eligible employees, non-employee directors, consultants, and other service providers of the Company and its subsidiaries. There were no outstanding awards other than RSUs as of March 31, 2022 and December 31, 2021.
The following table presents a summary of the total share-based compensation expense and the related net tax benefits associated with the Company’s various employee share-based compensation plans for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Stock compensation costs | | $ | 8,433 | | | $ | 7,817 | | | | | |
Related net tax benefits for stock compensation plans | | $ | 5,159 | | | $ | 1,620 | | | | | |
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Restricted Stock Units — RSUs are granted under the Company’s long-term incentive plan at no cost to the recipient. RSUs generally cliff vest after three years of continued employment from the date of the grant, and are authorized to settle predominantly in shares of the Company’s common stock. Certain RSUs are settled in cash. Dividends are accrued during the vesting period and paid at the time of vesting. While a portion of RSUs are time-based vesting awards, others vest subject to the attainment of specified performance goals, referred to as “performance-based RSUs.” Performance-based RSUs are granted annually upon approval by the Company’s Compensation Committee based on the performance in the year prior to the grant date of the award. The number of awards that vest can range from zero to a maximum of 200% of the granted number of awards based on the Company’s achievement of specified performance criteria over a performance period of three years.
Compensation costs are calculated using the quoted market price of the Company’s common stock at the grant date. Compensation costs for certain time-based awards that will be settled in cash are adjusted to fair value based on changes in the share price of the Company’s common stock up to the settlement date. For performance-based RSUs, the compensation costs are based on grant date fair value which considers both performance and market conditions, and is subject to subsequent adjustments based on the Company’s outcome in meeting the performance criteria at the end of the performance period. Compensation costs of both time and performance-based awards are estimated based on awards ultimately expected to vest, and are recognized net of estimated forfeitures on a straight-line basis from the grant date until the vesting date of each grant. For accounting on stock-based compensation plans, see Note 1 — Summary of Significant Accounting Policies - Significant Accounting Policies — Stock-Based Compensation to the Consolidated Financial Statements of the Company’s 2021 Form 10-K for additional information.
During the first quarter of 2022, the Company modified 31,523 time-based RSUs held by 119 foreign employees from vesting in cash to vesting in shares without changing any of the other terms. There was no incremental compensation expense recognized as a result of the modification for the three months ended March 31, 2022.
The following table presents a summary of the activities for the Company’s time-based and performance-based RSUs that will be settled in shares for the three months ended March 31, 2022. The number of performance-based RSUs stated below reflects the number of awards granted on the grant date.
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| | | | | | | | | Shares | | Weighted- Average Grant Date Fair Value | | Shares | | Weighted- Average Grant Date Fair Value |
Outstanding, January 1, 2022 | | | | | | | | | | 1,329,946 | | | $ | 52.65 | | | 369,731 | | | $ | 54.28 | |
Modified from cash-settled RSUs | | | | | | | | | | 31,523 | | | 77.28 | | | — | | | — | |
Granted | | | | | | | | | | 395,486 | | | 53.16 | | | 91,874 | | | 77.91 | |
Vested | | | | | | | | | | (356,650) | | | 53.30 | | | (125,213) | | | 54.64 | |
Forfeited | | | | | | | | | | (28,220) | | | 56.77 | | | — | | | — | |
Outstanding, March 31, 2022 | | | | | | | | | | 1,372,085 | | | $ | 53.11 | | | 336,392 | | | $ | 60.60 | |
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The following table presents a summary of the activities for the Company’s time-based RSUs that are cash-settled for the three months ended March 31, 2022. In the first quarter of 2022, the amount of cash paid to settle the RSUs that vested was $318 thousand.
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| | | | Shares |
Outstanding, January 1, 2022 | | | | 32,647 | |
Modified to share-settled RSUs | | | | (31,523) | |
Granted | | | | 2,668 | |
Vested | | | | (3,471) | |
Forfeited | | | | (321) | |
Outstanding, March 31, 2022 | | | | — | |
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As of March 31, 2022, there were $43.1 million and $23.2 million of total unrecognized compensation costs related to unvested time-based and performance-based RSUs, respectively. Both of these costs are expected to be recognized over a weighted-average period of 2.32 years and 2.31 years, respectively.
Note 12 — Stockholders’ Equity and Earnings Per Share
The following table presents the basic and diluted EPS calculations for the three months ended March 31, 2022 and 2021. For more information on the calculation of EPS, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Earnings Per Share to the Consolidated Financial Statements of the Company’s 2021 Form 10-K.
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($ and shares in thousands, except per share data) | | Three Months Ended March 31, | | | | | |
| 2022 | | 2021 | | | | | | | |
Basic: | | | | | | | | | | | |
Net income | | $ | 237,652 | | | $ | 204,994 | | | | | | | | |
Weighted-average number of shares outstanding | | 142,025 | | | 141,646 | | | | | | | | |
Basic EPS | | $ | 1.67 | | | $ | 1.45 | | | | | | | | |
Diluted: | | | | | | | | | | | |
Net income | | $ | 237,652 | | | $ | 204,994 | | | | | | | | |
Weighted-average number of shares outstanding | | 142,025 | | | 141,646 | | | | | | | | |
Add: Dilutive impact of unvested RSUs | | 1,198 | | | 1,198 | | | | | | | | |
Diluted weighted-average number of shares outstanding | | 143,223 | | | 142,844 | | | | | | | | |
Diluted EPS | | $ | 1.66 | | | $ | 1.44 | | | | | | | | |
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Approximately 123 thousand and 140 thousand weighted-average shares of anti-dilutive RSUs were excluded from the diluted EPS computations for the three months ended March 31, 2022 and 2021, respectively.
Note 13 — Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the components of AOCI balances for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Debt Securities | | Cash Flow Hedges | | Foreign Currency Translation Adjustments (1) | | Total |
Balance, January 1, 2021 | | $ | 52,247 | | | $ | (1,230) | | | $ | (6,692) | | | $ | 44,325 | |
Net unrealized (losses) gains arising during the period | | (133,313) | | | 305 | | | (1,349) | | | (134,357) | |
Amounts reclassified from AOCI | | (135) | | | 127 | | | — | | | (8) | |
Changes, net of tax | | (133,448) | | | 432 | | | (1,349) | | | (134,365) | |
Balance, March 31, 2021 | | $ | (81,201) | | | $ | (798) | | | $ | (8,041) | | | $ | (90,040) | |
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Balance, January 1, 2022 | | $ | (85,703) | | | $ | 257 | | | $ | (4,935) | | | $ | (90,381) | |
Net unrealized (losses) gains arising during the period | | (281,361) | | | (23,227) | | | 129 | | | (304,459) | |
Amounts reclassified from AOCI | | 1,411 | | | (1,496) | | | — | | | (85) | |
Changes, net of tax | | (279,950) | | | (24,723) | | | 129 | | | (304,544) | |
Balance, March 31, 2022 | | $ | (365,653) | | (2) | $ | (24,466) | | | $ | (4,806) | | | $ | (394,925) | |
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(1)Represents foreign currency translation adjustments related to the Company’s net investment in non-U.S. operations, including related hedges. The functional currency and reporting currency of the Company’s foreign subsidiary was RMB and USD, respectively.
(2)Includes after-tax unamortized losses of $113.0 million related to AFS debt securities that were transferred to HTM. For further information, refer to Note 5 — Securities to the Consolidated Financial Statements in this Form 10-Q.
The following table presents the components of other comprehensive income (loss), reclassifications to net income and the related tax effects for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Three Months Ended March 31, |
| 2022 | | 2021 |
| Before-Tax | | Tax Effect | | Net-of-Tax | | Before-Tax | | Tax Effect | | Net-of-Tax |
Debt securities: | | | | | | | | | | | | |
Net unrealized losses arising during the period | | $ | (399,462) | | | $ | 118,101 | | | $ | (281,361) | | | $ | (189,276) | | | $ | 55,963 | | | $ | (133,313) | |
Reclassification adjustments: | | | | | | | | | | | | |
Net realized (gains) reclassified into net income (1) | | (1,278) | | | 378 | | | (900) | | | (192) | | | 57 | | | (135) | |
Amortization of unrealized losses on transferred securities (2) | | 3,281 | | | (970) | | | 2,311 | | | — | | | — | | | — | |
Net change | | (397,459) | | | 117,509 | | | (279,950) | | | (189,468) | | | 56,020 | | | (133,448) | |
Cash flow hedges: | | | | | | | | | | | | |
Net unrealized (losses) gains arising during the period | | (32,609) | | | 9,382 | | | (23,227) | | | 426 | | | (121) | | | 305 | |
Net realized (gains) losses reclassified into net income (3) | | (2,100) | | | 604 | | | (1,496) | | | 177 | | | (50) | | | 127 | |
Net change | | (34,709) | | | 9,986 | | | (24,723) | | | 603 | | | (171) | | | 432 | |
Foreign currency translation adjustments, net of hedges: | | | | | | | | | | | | |
Net unrealized (losses) gains arising during the period | | (322) | | | 451 | | | 129 | | | (1,309) | | | (40) | | | (1,349) | |
Net change | | (322) | | | 451 | | | 129 | | | (1,309) | | | (40) | | | (1,349) | |
Other comprehensive income | | $ | (432,490) | | | $ | 127,946 | | | $ | (304,544) | | | $ | (190,174) | | | $ | 55,809 | | | $ | (134,365) | |
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(1)For the three months ended March 31, 2022 and 2021, pre-tax amounts were reported in Gains on sales of AFS debt securities on the Consolidated Statement of Income.
(2)Represents unrealized losses amortized over the remaining lives of securities that were transferred from the AFS to HTM portfolio.
(3)For the three months ended March 31, 2022 and 2021, pre-tax amounts were reported in Interest expense on the Consolidated Statement of Income.
Note 14 — Business Segments
The Company organizes its operations into three reportable operating segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These segments are defined by the type of customers served, and the related products and services provided. The segments reflect how financial information is currently evaluated by management. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of certain balance sheet and income statement items. The information presented is not indicative of how the segments would perform if they operated as independent entities due to the interrelationships among the segments.
The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network and digital banking platform. This segment offers consumer and commercial deposits, mortgage and home equity loans, and other products and services. It also originates commercial loans for small- and medium-sized enterprises through the Company’s branch network. Other products and services provided by this segment include wealth management, treasury management, interest rate risk hedging and foreign exchange services.
The Commercial Banking segment primarily generates commercial loan and deposit products. Commercial loan products include CRE lending, construction finance, working capital lines of credit, trade finance, letters of credit, commercial business lending, affordable housing lending, asset-based lending, asset-backed finance, project finance and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services and interest rate and commodity risk hedging.
The remaining centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, namely the Consumer and Business Banking and the Commercial Banking segments.
The Company utilizes an internal reporting process to measure the performance of the three operating segments within the Company. The internal reporting process derives operating segment results by utilizing allocation methodologies for revenues and expenses. Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for funding charges or credits through the Company’s internal funds transfer pricing (“FTP”) process. Noninterest income and noninterest expense directly attributable to a business segment are assigned to that segment. Indirect costs, including technology-related costs and corporate overhead, are allocated based on a segment’s estimated usage using factors including but not limited to, full-time equivalent employees, net interest income, and loan and deposit volume. Charge-offs are recorded to the segment directly associated with the respective loans charged off, and provision for credit losses is recorded to the segments based on the related loans for which allowances are evaluated. The Company’s internal reporting process utilizes a full-allocation methodology. Under this methodology, corporate and indirect expenses incurred by the Other segment are allocated to the Consumer and Business Banking and the Commercial Banking segments, except certain corporate treasury-related expenses and insignificant unallocated expenses.
The corporate treasury function within the Other segment is responsible for the Company’s liquidity and interest rate management. The Company’s internal FTP process is also managed by the corporate treasury function within the Other segment. The process is formulated with the goal of encouraging loan and deposit growth that is consistent with the Company’s overall profitability objectives, as well as to provide a reasonable and consistent basis for the measurement of its business segments’ net interest margins and profitability. The FTP process charges a cost to fund loans (“FTP charges for loans”) and allocates credits for funds provided from deposits (“FTP credits for deposits”) using internal FTP rates. FTP charges for loans are determined based on a matched cost of funds, which is tied to the pricing and term characteristics of the loans. FTP credits for deposits are based on matched funding credit rates, which are tied to the implied or stated maturity of the deposits. FTP credits for deposits reflect the long-term value generated by the deposits. The net spread between the total internal FTP charges and credits is recorded as part of net interest income in the Other segment. The FTP process transfers the corporate interest rate risk exposure to the treasury function within the Other segment, where such exposures are centrally managed. The Company’s internal FTP assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions.
The following tables present the operating results and other key financial measures for the individual operating segments as of and for the three months ended March 31, 2022 and 2021:
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($ in thousands) | | Consumer and Business Banking | | Commercial Banking | | Other | | Total |
Three Months Ended March 31, 2022 | | | | | | | | |
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Net interest income (loss) before provision for credit losses | | $ | 213,214 | | | $ | 208,077 | | | $ | (5,678) | | | $ | 415,613 | |
Provision for credit losses | | 3,104 | | | 4,896 | | | — | | | 8,000 | |
Noninterest income | | 25,199 | | | 49,077 | | | 5,467 | | | 79,743 | |
Noninterest expense | | 96,095 | | | 73,395 | | | 19,960 | | | 189,450 | |
Segment income (loss) before income taxes | | 139,214 | | | 178,863 | | | (20,171) | | | 297,906 | |
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Segment net income | | $ | 99,164 | | | $ | 127,507 | | | $ | 10,981 | | | $ | 237,652 | |
As of March 31, 2022 | | | | | | | | |
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Segment assets | | $ | 15,338,579 | | | $ | 30,199,416 | | | $ | 16,703,461 | | | $ | 62,241,456 | |
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($ in thousands) | | Consumer and Business Banking | | Commercial Banking | | Other | | Total |
Three Months Ended March 31, 2021 | | | | | | | | |
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Net interest income before (reversal of) provision for credit losses | | $ | 149,899 | | | $ | 177,092 | | | $ | 26,704 | | | $ | 353,695 | |
(Reversal of) provision for credit losses | | (4,249) | | | 4,249 | | | — | | | — | |
Noninterest income (1) | | 23,442 | | | 47,396 | | | 2,028 | | | 72,866 | |
Noninterest expense | | 89,286 | | | 69,257 | | | 32,534 | | | 191,077 | |
Segment income (loss) before income taxes (1) | | 88,304 | | | 150,982 | | | (3,802) | | | 235,484 | |
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Segment net income (1) | | $ | 63,251 | | | $ | 108,207 | | | $ | 33,536 | | | $ | 204,994 | |
As of March 31, 2021 | | | | | | | | |
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Segment assets | | $ | 14,147,094 | | | $ | 27,222,272 | | | $ | 15,504,780 | | | $ | 56,874,146 | |
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(1)During the fourth quarter of 2021, the Company enhanced its segment allocation methodology related to the fair values of interest rate and commodity derivative contracts, which are included in noninterest income. These fair values, which were previously allocated to the “Commercial Banking” segment prior to the fourth quarter of 2021, have since been reclassified between “Consumer and Business Banking” and “Commercial Banking.” Balances for the first quarter of 2021 have been reclassified to reflect these allocation changes for comparability.