EAST WEST BANCORP, INC.
Page
Forward-Looking Statements 62
Overview 64
Financial Review 66
Results of Operations 67
Net Interest Income 67
Noninterest Income 73
Noninterest Expense 75
Income Taxes 75
Operating Segment Results 76
Balance Sheet Analysis 79
Debt Securities 79
Loan Portfolio 81
Foreign Outstandings 87
Capital 87
Deposits and Other Sources of Fund ing 88
Regulatory Capital and Ratios 89
Risk Management 90
Credit Risk Management 91
Liquidity Risk Management 96
Market Risk Management 98
Critical Accounting Policies and Estimates 104
Reconciliation of GAAP to Non-GAAP Financial Measures 104
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Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q (this "Form 10-Q") contain forward-looking statements that are intended to be covered by the safe harbor for such statements provided by the Private Securities Litigation Reform Act of 1995. In addition,East West Bancorp, Inc. (referred to herein on an unconsolidated basis as "East West" and on a consolidated basis as the "Company," "we" or "EWBC") may make forward-looking statements in other documents that it files with, or furnishes to,the United States ("U.S.")Securities and Exchange Commission ("SEC") and management may make forward-looking statements to analysts, investors, media members and others. Forward-looking statements are those that do not relate to historical facts, and that are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company's control. These statements may relate to the Company's financial condition, results of operations, plans, objectives, future performance and/or business and usually can be identified by the use of forward-looking language, such as "anticipates," "assumes," "believes," "can," "continues," "could," "estimates," "expects," "forecasts," "goal," "intends," "likely," "may," "might," "objective," "plans," "potential," "projects," "remains," "should," "target," "trend," "will," "would," or similar expressions, and the negative thereof. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described below. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company.
There are a number of important factors that could cause future results to differ materially from historical performance and any forward-looking statements. Factors that might cause such differences, include, but are not limited to:
•changes in the global economy, including an economic slowdown, market or supply
chain disruption, level of inflation, interest rate environment, housing prices,
employment levels, rate of growth and general business conditions;
•the impact of any future federal government shutdown and uncertainty regarding
the federal government's debt limit;
•changes in local, regional and global business, economic and political
conditions and geopolitical events;
•the economic, financial, reputational and other impacts of the ongoing
Coronavirus Disease 2019 ("COVID-19") pandemic, including variants thereof, and
any other pandemic, epidemic or health-related crisis, as well as a
deterioration of asset quality and an increase in credit losses due to the
COVID-19 pandemic;
•changes in laws or the regulatory environment, including regulatory reform
initiatives and policies of the U.S. Department of the Treasury , the Board of
Governors of the Federal Reserve System ("Federal Reserve"), the Federal Deposit
Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency ,
the SEC , the Consumer Financial Protection Bureau , and the California Department
of Financial Protection and Innovation - Division of Financial Institutions ;
•changes and effects thereof in trade, monetary and fiscal policies and laws,
including the ongoing economic and political disputes between the U.S. and the
People's Republic of China and the monetary policies of the Federal Reserve ;
•changes in the commercial and consumer real estate markets;
•changes in consumer or commercial spending, savings and borrowing habits, and
patterns and behaviors;
•fluctuations in the Company's stock price;
•the impact from potential changes to income tax laws and regulations, federal
spending and economic stimulus programs;
•the Company's ability to compete effectively against financial institutions in
its banking markets and other entities, including as a result of emerging
technologies;
•the soundness of other financial institutions;
•the success and timing of the Company's business strategies;
•the Company's ability to retain key officers and employees;
•impact on the Company's funding costs, net interest income and net interest
margin from changes in key variable market interest rates, competition,
regulatory requirements and the Company's product mix;
•changes in the Company's costs of operation, compliance and expansion;
•the Company's ability to adopt and successfully integrate new technologies into
its business in a strategic manner;
•the impact of the benchmark interest rate reform in the U.S. including the
transition away from the U.S. dollar ("USD") London Interbank Offered Rate
("LIBOR") to alternative reference rates;
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•the impact of communications or technology disruption, failure in, or breach
of, the Company's operational or security systems or infrastructure, or those of
third party vendors with which the Company does business, including as a result
of cyber-attacks; and other similar matters which could result in, among other
things, confidential and/or proprietary information being disclosed or misused,
and materially impact the Company's ability to provide services to its clients;
•the adequacy of the Company's risk management framework, disclosure controls
and procedures and internal control over financial reporting;
•future credit quality and performance, including the Company's expectations
regarding future credit losses and allowance levels;
•the impact of adverse changes to the Company's credit ratings from major credit
rating agencies;
•impact of adverse judgments or settlements in litigation;
•the impact on the Company's operations due to political developments,
pandemics, wars, civil unrest, terrorism or other hostilities that may disrupt
or increase volatility in securities or otherwise affect business and economic
conditions;
•heightened regulatory and governmental oversight and scrutiny of the Company's
business practices, including dealings with consumers;
•the impact of reputational risk from negative publicity, fines, penalties and
other negative consequences from regulatory violations, legal actions and the
Company's interactions with business partners, counterparties, service providers
and other third parties;
•the impact of regulatory investigations and enforcement actions;
•changes in accounting standards as may be required by the Financial Accounting
Standards Board or other regulatory agencies and their impact on critical
accounting policies and assumptions;
•the Company's capital requirements and its ability to generate capital
internally or raise capital on favorable terms;
•the impact on the Company's liquidity due to changes in the Company's ability
to receive dividends from its subsidiaries;
•any future strategic acquisitions or divestitures;
•changes in the equity and debt securities markets;
•fluctuations in foreign currency exchange rates;
•the impact of increased focus on social, environmental and sustainability
matters, which may affect the Company's operations as well as those of its
customers and the economy more broadly;
•significant turbulence or disruption in the capital or financial markets, which
could result in, among other things, reduced investor demand for loans, a
reduction in the availability of funding or increases in funding costs, declines
in asset values and/or recognition of allowance for credit losses on securities
held in the Company's debt securities and equity securities portfolio; and
•the impact of climate change, natural or man-made disasters or calamities, such
as wildfires, droughts and earthquakes, all of which are particularly common in
California , or other events that may directly or indirectly result in a negative
impact on the Company's financial performance.
For a more detailed discussion of some of the factors that might cause such
differences, see the Company's Annual Report on Form 10-K for the year ended
December 31, 2021 , filed with the SEC on February 28, 2022 (the "Company's 2021
Form 10-K") under the heading Item 1A. Risk Factors and the information set
forth under Item 1A. Risk Factors in this Form 10-Q. The Company does not
undertake, and specifically disclaims any obligation to update or revise any
forward-looking statements to reflect the occurrence of events or circumstances
after the date of such statements except as required by law.
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--------------------------------------------------------------------------------Overview
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of the Company and its subsidiaries, including its subsidiary bank,East West Bank and its subsidiaries (referred to herein as "East West Bank " or the "Bank"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company's results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented elsewhere in this report, and the Company's 2021 Form 10-K.
Organization and Strategy
East West is a bank holding company incorporated inDelaware onAugust 26, 1998 and is registered under the Bank Holding Company Act of 1956, as amended. The Company commenced business onDecember 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of the Bank, which became its principal asset. The Bank is an independent commercial bank headquartered inCalifornia that focuses on the financial service needs of the Asian-American community. Through over 120 locations in theU.S. andChina , the Company provides a full range of consumer and commercial products and services through the following three business segments: (1) Consumer and Business Banking, and (2) Commercial Banking, with the remaining operations recorded in (3) Other. The Company's principal activity is lending to and accepting deposits from businesses and individuals. We are committed to enhancing long-term stockholder value by growing loans, deposits and revenue, improving profitability, and investing for the future while managing risks, expenses and capital. Our business model is built on promoting customer loyalty and engagement, understanding our customers' financial goals, and meeting their financial needs through our diverse products and services. We expect our relationship-focused business model to continue to generate organic growth from existing customers and to expand our targeted customer bases. As ofSeptember 30, 2022 , the Company had$62.58 billion in assets and approximately 3,200 full-time equivalent employees. For additional information on our strategy, and the products and services provided by the Bank, see Item 1. Business - Strategy and Banking Services in the Company's 2021 Form 10-K.
Developments
Economic Developments
Heightened inflationary pressures caused by rising oil and other commodity prices due toRussia's invasion ofUkraine , and global supply chain disruptions related to the COVID-19 pandemic continue to weigh on the economy. Concerns of a potential recession have increased as the federal government continues to hike interest rates to slow down inflation. AlthoughU.S. economic conditions have continued to recover from the COVID-19 pandemic, the ongoing effects of its impact on the macroeconomic environment may persist for some time. The Company continues to closely monitor the economy and its effects on its business, customers, employees, communities and markets.
Further discussion of the potential impacts on the Company's business due to interest rate hikes have been provided in Item 1A. - Risk Factors - Risks Related to Financial Matters in the Company's 2021 Form 10-K.
LIBOR Transition
LIBOR is a widely referenced benchmark rate that is intended to reflect the rate at which banks can borrow wholesale funds from other banks on an unsecured and short-term basis. InMarch 2021 , theUnited Kingdom's Financial Conduct Authority andIntercontinental Exchange Benchmark Administration announced that the one-week and two-month USD LIBOR settings and non-USD LIBOR settings would cease to be published afterDecember 31, 2021 . The publication of the overnight, one-, three-, six- and 12-month USD LIBOR settings has been extended throughJune 30, 2023 , which will provide additional time to wind down or renegotiate existing contracts that reference these LIBOR settings. InMarch 2022 ,President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the "LIBOR Act"). The LIBOR Act provides a clear and uniform federal solution to transition legacy LIBOR-based contracts that either contain insufficient contractual fallback provisions addressing the LIBOR cessation and its transition to a benchmark selected by theFederal Reserve or lack contractual fallback provisions entirely. The LIBOR Act also establishes a safe harbor for lenders, shielding lenders from potential litigation resulting from their choice of a replacement rate, under certain situations including the use of aFederal Reserve -selected replacement rate based on the Secured Overnight Financing Rate ("SOFR"). TheFederal Reserve published its proposed rulemaking that implements the LIBOR Act in theFederal Register inJuly 2022 , which establishes benchmark replacement recommendations for various product types. 64 -------------------------------------------------------------------------------- The Company holds a significant volume of LIBOR-based products, including loans, derivatives, debt securities, assets purchased under resale agreements ("resale agreements"), junior subordinated debt, and assets sold under repurchase agreements ("repurchase agreements") that are indexed to LIBOR tenors that will cease to be published afterJune 30, 2023 . The Company has a cross-functional team to manage the communication of the Company's transition plans with both internal and external stakeholders. The team helps to ensure that the Company appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruption during and after the LIBOR transition. The Company has invested in updates to business and legal processes, models, analytical tools, and information and operational systems to facilitate the transition of legacy LIBOR products and offer products under alternative rates. The Company started offering loans based on alternative reference rates, including SOFR and the Bloomberg Short-Term Bank Yield Index during the fourth quarter of 2021, and ceased offering new LIBOR loans and LIBOR loan renewals beginningJanuary 1, 2022 . The Company continues to engage with customers to proactively modify LIBOR-based product contracts and transition to a benchmark replacement prior toJune 30, 2023 . The Company will leverage relevant contractual and statutory solutions, if necessary, including the LIBOR Act and other relevant legislation, to transition any residual LIBOR-based product exposures maturing afterJune 2023 to appropriate benchmark replacements. The Company's LIBOR transition is anticipated to continue throughJune 30, 2023 . The Company will continue to monitor potential risks and impacts associated with the transition. For additional information related to the potential impact surrounding the transition from LIBOR on the Company's business, see Item 1A. Risk Factors - Risks Related to Financial Matters in the Company's 2021 Form 10-K.
Deposit Insurance Assessment Rates
InOctober 2022 , theFDIC adopted a final rule to increase the initial base deposit insurance assessment rate schedules uniformly for insured depository institutions by two basis points ("bps"), beginning in the first quarterly assessment period of 2023. The increase in the assessment rate schedules is intended to: (1) increase the likelihood that the reserve ratio of theDeposit Insurance Fund ("DIF") will reach at least 1.35 percent by the statutory deadline ofSeptember 30, 2028 ; (2) reduce theFDIC's need to consider a potentially pro-cyclical assessment rate increase, and (3) support growth in the DIF in progressing towards theFDIC's long-term goal of a 2 percent Designated Reserve Ratio. The new assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds 2 percent. As a result of the adoption of the assessment rate schedules, theFDIC insurance costs of the Bank will likely increase but not have a material impact on its consolidated financial statements.
Community Reinvestment Act
OnMay 5, 2022 , the federal banking agencies issued a proposed rule that would substantially revise how they evaluate an insured depository institution's record of satisfying the credit needs of its entire communities, including low- and moderate-income individuals and neighborhoods, under the Community Reinvestment Act ("CRA"). We are evaluating the potential impact of the proposed rule on the Bank. Inflation Reduction Act OnAugust 16, 2022 , theU.S. federal government enacted the Inflation Reduction Act of 2022. The bill contains numerous tax provisions, including a 15 percent corporate minimum tax. At this point, the legislation is not expected to have a material impact on the Company's consolidated financial statements. 65 --------------------------------------------------------------------------------
Financial Review
Three Months Ended Nine Months Ended September 30,
($ and shares in thousands, except per share, and ratio September 30,
data) 2022 2021 2022 2021
Summary of operations:
Net interest income before provision for (reversal of) $ 551,809 $ 395,706 $ 1,440,374 $ 1,125,874
credit losses
Noninterest income 75,552 73,109 233,739 214,406
Total revenue 627,361 468,815 1,674,113 1,340,280
Provision for (reversal of) credit losses 27,000 (10,000) 48,500 (25,000)
Noninterest expense 215,973 205,384 602,283 585,984
Income before income taxes 384,388 273,431 1,023,330 779,296
Income tax expense 89,049 47,982 232,010 124,111
Net income $ 295,339 $ 225,449 $ 791,320 $ 655,185
Per common share:
Basic earnings $ 2.10 $ 1.59 $ 5.59 $ 4.62
Diluted earnings $ 2.08 $ 1.57 $ 5.55 $ 4.58
Dividends declared $ 0.40 $ 0.33 $ 1.20 $ 0.99
Weighted-average number of shares outstanding:
Basic 140,917 141,880 141,453 141,799
Diluted 142,011 143,143 142,601 143,051
Performance metrics:
Return on average assets ("ROA") 1.86 % 1.46 % 1.70 % 1.50 %
Return on average equity ("ROE") 20.30 % 15.75 % 18.35 % 15.98 %
Tangible return on average tangible equity (1) 22.16 % 17.25 % 20.04 % 17.56 %
Common dividend payout ratio 19.33 % 21.05 % 21.75 % 21.72 %
Net interest margin 3.68 % 2.70 % 3.27 % 2.72 %
Efficiency ratio (2) 34.43 % 43.81 % 35.98 % 43.72 %
Adjusted efficiency ratio (1) 31.18 % 35.55 % 32.98 % 36.80 %
At period end: September 30, 2022 December 31, 2021
Total assets $ 62,576,061 $ 60,870,701
Total loans $ 47,456,755 $ 41,694,416
Total deposits $ 53,857,362 $ 53,350,532
Common shares outstanding at period-end 140,918 141,908
Book value per common share $ 40.17 $
41.13
Tangible equity per common share (1) $ 36.80 $
37.79
(1)For additional information regarding the reconciliation of these non-U.S. Generally Accepted Accounting Principles ("GAAP") financial measures, refer to Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") - Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-Q. (2)Efficiency ratio is calculated as noninterest expense divided by total revenue. The Company's third quarter 2022 net income was$295.3 million , an increase of$69.9 million or 31%, compared with third quarter 2021 net income of$225.4 million . Net income for the first nine months of 2022 was$791.3 million , an increase of$136.1 million or 21%, compared with the first nine months of 2021 net income of$655.2 million . The year-over-year increases in both periods were primarily due to higher net interest income, partially offset by higher income tax expense and provision for credit losses. Noteworthy items about the Company's third quarter and first nine months of 2022 performance included: •Net interest income growth and net interest margin expansion. Third quarter 2022 net interest income before provision for (reversal of) credit losses was$551.8 million , an increase of$156.1 million or 39% from the third quarter of 2021. Third quarter 2022 net interest margin of 3.68% expanded 98 bps year-over-year. For the first nine months of 2022, net interest income before provision for (reversal of) credit losses was$1.44 billion , an increase of$314.5 million or 28% year-over-year. The net interest margin for the first nine months of 2022 was 3.27%, up 55 bps year-over-year. 66 --------------------------------------------------------------------------------
•Improved efficiency. Efficiency ratios of 34.43% and 35.98% for the third quarter and first nine months of 2022, respectively, both improved year-over-year. The adjusted efficiency ratios of 31.18% and 32.98% for the third quarter and first nine months of 2022, respectively, both improved year-over-year. For additional details, see the reconciliation of non-GAAP measures presented under Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.
•Expanding profitability. Third quarter 2022 ROA, ROE and the tangible return on average tangible equity of 1.86%, 20.30% and 22.16%, respectively, all expanded compared with third quarter 2021. Likewise, for the first nine months of 2022, ROA, ROE and the tangible return on average tangible equity of 1.70%, 18.35% and 20.04%, respectively, all expanded year-over-year. For additional details, see the reconciliation of non-GAAP measures presented under Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.
•Total assets reached
•Total loans were$47.46 billion as ofSeptember 30, 2022 , an increase of$5.76 billion or 14% from$41.69 billion as ofDecember 31, 2021 . This was primarily driven by well-diversified growth across the commercial real estate ("CRE"), residential mortgage, and commercial and industrial ("C&I") loan segments. •Total deposits were$53.86 billion as ofSeptember 30, 2022 , an increase of$506.8 million or 1% from$53.35 billion as ofDecember 31, 2021 . Growth was primarily driven by increased time deposits, partially offset by decreases in noninterest-bearing demand and money market accounts.
Results of Operations
Net Interest Income
The Company's primary source of revenue is net interest income, which is the
interest income earned on interest-earning assets less interest expense paid on
interest-bearing liabilities. Net interest margin is the ratio of net interest
income to average interest-earning assets. Net interest income and net interest
margin are impacted by several factors, including changes in average balances
and the composition of interest-earning assets and funding sources, market
interest rate fluctuations and the slope of the yield curve, repricing
characteristics and maturity of interest-earning assets and interest-bearing
liabilities, the volume of noninterest-bearing sources of funds, and asset
quality.
[[Image Removed: ewbc-20220930_g1.jpg]]
67-------------------------------------------------------------------------------- Third quarter 2022 net interest income before provision for credit losses was$551.8 million , an increase of$156.1 million or 39%, compared with$395.7 million for the third quarter 2021. For the first nine months of 2022, net interest income was$1.44 billion , an increase of$314.5 million or 28%, compared with$1.13 billion for the first nine months of 2021. Third quarter 2022 net interest margin was 3.68%, an increase of 98 bps from 2.70% for the third quarter of 2021. The year-over-year changes in net interest income and net interest margin primarily reflected higher loan yields, strong loan growth and higher debt securities yields. For the first nine months of 2022, net interest margin was 3.27%, an increase of 55 bps from 2.72% for the first nine months of 2021. The year-over-year changes in net interest income and net interest margin primarily reflected higher loan yields, strong loan growth and higher debt securities volume and yields. The changes in yields and rates reflected rising benchmark interest rates. [[Image Removed: ewbc-20220930_g2.jpg]] Average interest-earning assets were$59.48 billion for the third quarter of 2022, an increase of$1.24 billion or 2% from$58.24 billion for the third quarter of 2021. For the first nine months of 2022, the average interest-earning assets were$58.95 billion , an increase of$3.60 billion or 7% from$55.35 billion for the first nine months of 2021. The increases in average interest-earning assets in both periods primarily reflected growth in loans and debt securities, partially offset by a decrease in interest-bearing cash and deposits with banks. The yield on average interest-earning assets for the third quarter of 2022 was 4.19%, an increase of 136 bps from 2.83% for the third quarter of 2021. The yield on average interest-earning assets for the first nine months of 2022 was 3.54%, an increase of 65 bps from 2.89% for the first nine months of 2021. The year-over-year changes in the yield on average interest-bearing assets primarily resulted from rising benchmark interest rates and a changed earning asset mix in favor of higher-yielding assets. [[Image Removed: ewbc-20220930_g3.jpg]] 68 -------------------------------------------------------------------------------- The average loan yield for the third quarter of 2022 was 4.75%, an increase of 114 bps from 3.61% for the third quarter of 2021. The average loan yield for the first nine months of 2022 was 4.13%, an increase of 54 bps from 3.59% for the first nine months of 2021. The year-over-year changes in the average loan yield reflect the loan portfolio's sensitivity to rising benchmark interest rates. Approximately 62% and 65% of loans held-for-investment were variable-rate or hybrid loans in their adjustable-rate period as ofSeptember 30, 2022 and 2021, respectively. [[Image Removed: ewbc-20220930_g4.jpg]] [[Image Removed: ewbc-20220930_g5.jpg]] Deposits are an important source of funds and impact both net interest income and net interest margin. Average deposits were$54.05 billion for the third quarter of 2022, an increase of$554.9 million or 1% from$53.50 billion for the third quarter of 2021. For the first nine months of 2022, average deposits were$54.07 billion , an increase of$3.54 billion or 7% from$50.53 billion for the first nine months of 2021. Average noninterest-bearing deposits were$22.42 billion for the third quarter of 2022, a decrease of$745.7 million or 3% from$23.17 billion for the third quarter of 2021. For the first nine months of 2022, average noninterest-bearing deposits were$23.24 billion , an increase of$2.90 billion or 14% from$20.35 billion for the first nine months of 2021. Average noninterest-bearing deposits made up 41% and 43% of average deposits for the third quarters of 2022 and 2021, respectively, and 43% and 40% for the first nine months of 2022 and 2021, respectively. The average cost of deposits was 0.51% for the third quarter of 2022, a 39 bps increase from 0.12% for the third quarter of 2021. The average cost of interest-bearing deposits was 0.86% for the third quarter of 2022, a 65 bps increase from 0.21% for the third quarter of 2021. The average cost of deposits was 0.26% for the first nine months of 2022, an increase of 11 bps from 0.15% for the first nine months of 2021. The average cost of interest-bearing deposits was 0.45% for the first nine months of 2022, a 20 bps increase from 0.25% for the first nine months of 2021. The year-over-year increases primarily reflected higher rates paid on money market accounts and time deposits. 69 -------------------------------------------------------------------------------- The average cost of funds calculation includes deposits,Federal Home Loan Bank ("FHLB") advances, repurchase agreements, long-term debt and short-term borrowings. For the third quarter of 2022, the average cost of funds was 0.55%, a 41 bps increase from 0.14% for the third quarter of 2021. For the first nine months of 2022, the average cost of funds was 0.29%, an 11 bps increase from 0.18% for the first nine months of 2021. The year-over-year changes in the average cost of funds were driven by the changes in the cost of deposits discussed above. The Company utilizes various tools to manage interest rate risk. Refer to the Interest Rate Risk Management section of Item 2. MD&A - Risk Management - Market Risk Management in this Form 10-Q. 70 -------------------------------------------------------------------------------- The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the third quarters of 2022 and 2021: Three Months Ended September 30, 2022 2021 Average Average Average Yield/ Average Yield/ ($ in thousands) Balance Interest Rate (1) Balance Interest Rate (1) ASSETS Interest-earning assets: Interest-bearing cash and deposits with banks$ 2,287,010 $ 9,080 1.58 %$ 7,036,823 $ 4,521 0.25 % Resale agreements 1,037,292 6,769 2.59 % 2,382,741 8,957 1.49 % Available-for-sale ("AFS") debt securities (2)(3) 6,204,729 38,383 2.45 % 8,782,682 37,826 1.71 % Held-to-maturity ("HTM") debt securities (2)(4) 3,017,063 12,709 1.67 % - - - % Loans (5)(6) 46,854,541 560,452 4.75 % 39,960,151 363,503 3.61 % Restricted equity securities 78,054 843 4.28 % 77,083 500 2.57 % Total interest-earning assets$ 59,478,689 $ 628,236 4.19 %$ 58,239,480 $ 415,307 2.83 % Noninterest-earning assets: Cash and due from banks 615,836 627,640 Allowance for loan losses (566,369) (584,827) Other assets 3,551,288 3,077,240 Total assets$ 63,079,444 $ 61,359,533 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Checking deposits$ 6,879,632 $ 8,493 0.49 %$ 6,646,515 $ 3,186 0.19 % Money market deposits 12,351,571 33,101 1.06 % 12,604,827 3,446 0.11 % Savings deposits 2,961,634 2,268 0.30 % 2,792,702 1,943 0.28 % Time deposits 9,435,063 25,032 1.05 % 8,283,265 7,395 0.35 % Federal funds purchased and other short-term borrowings 211,794 1,177 2.20 % 620 - - % FHLB advances 86,243 392 1.80 % 248,614 857 1.37 % Repurchase agreements 624,821 4,421 2.81 % 310,997 2,012 2.57 % Long-term debt and finance lease liabilities 152,565 1,543 4.01 % 151,870 762 1.99 % Total interest-bearing liabilities$ 32,703,323 $ 76,427 0.93 %$ 31,039,410 $ 19,601 0.25 % Noninterest-bearing liabilities and stockholders' equity: Demand deposits 22,423,633 23,169,323 Accrued expenses and other liabilities 2,179,850 1,470,494 Stockholders' equity 5,772,638 5,680,306 Total liabilities and stockholders' equity$ 63,079,444 $ 61,359,533 Interest rate spread 3.26 % 2.58 % Net interest income and net interest margin$ 551,809 3.68 %$ 395,706 2.70 % (1)Annualized. (2)Yields on tax-exempt securities are not presented on a tax-equivalent basis. (3)Includes the amortization of premiums on AFS debt securities of$16.5 million and$22.6 million for the third quarters of 2022 and 2021, respectively. (4)Includes the amortization of premiums on HTM debt securities of$189 thousand for the third quarter of 2022. (5)Average balances include nonperforming loans and loans held-for-sale. (6)Loans include the accretion of net deferred loan fees and amortization of net premiums, which totaled$12.5 million and$17.0 million for the third quarters of 2022 and 2021, respectively. 71 -------------------------------------------------------------------------------- The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the first nine months of 2022 and 2021: Nine Months Ended September 30, 2022 2021 Average Average Average Yield/ Average Yield/ ($ in thousands) Balance Interest Rate (1) Balance Interest Rate (1) ASSETS Interest-earning assets: Interest-bearing cash and deposits with banks$ 3,175,596 $ 17,127 0.72 %$ 6,078,982 $ 11,781 0.26 % Resale agreements 1,588,452 23,705 2.00 % 1,994,776 23,077 1.55 % AFS debt securities (2)(3) 6,886,268 106,290 2.06 % 7,755,029 101,616 1.75 % HTM debt securities (2)(4) 2,672,797 33,645 1.68 % - - - % Loans (5)(6) 44,548,520 1,376,978 4.13 % 39,441,751 1,057,964 3.59 % Restricted equity securities 77,824 2,274 3.91 % 80,107 1,588 2.65 % Total interest-earning assets$ 58,949,457 $ 1,560,019 3.54 %$ 55,350,645 $ 1,196,026 2.89 % Noninterest-earning assets: Cash and due from banks 656,772 602,830 Allowance for loan losses (551,818) (603,523) Other assets 3,307,207 2,913,050 Total assets$ 62,361,618 $ 58,263,002 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Checking deposits$ 6,747,711 $ 13,073 0.26 %$ 6,571,231 $ 11,177 0.23 % Money market deposits 12,526,222 45,196 0.48 % 12,262,173 11,869 0.13 % Savings deposits 2,954,098 5,836 0.26 % 2,715,114 5,762 0.28 % Time deposits 8,596,728 40,266 0.63 % 8,635,250 26,982 0.42 % Federal funds purchased and other short-term borrowings 93,370 1,427 2.04 % 1,871 42 3.00 % FHLB advances 128,137 1,529 1.60 % 457,273 6,025 1.76 % Repurchase agreements 433,340 8,855 2.73 % 304,745 5,981 2.62 % Long-term debt and finance lease liabilities 152,259 3,463 3.04 % 152,018 2,314 2.04 % Total interest-bearing liabilities$ 31,631,865 $ 119,645 0.51 %$ 31,099,675 $ 70,152 0.30 % Noninterest-bearing liabilities and stockholders' equity: Demand deposits 23,244,247 20,345,370 Accrued expenses and other liabilities 1,719,869 1,335,252 Stockholders' equity 5,765,637 5,482,705 Total liabilities and stockholders' equity$ 62,361,618 $ 58,263,002 Interest rate spread 3.03 % 2.59 % Net interest income and net interest margin$ 1,440,374 3.27 %$ 1,125,874 2.72 % (1)Annualized. (2)Yields on tax-exempt securities are not presented on a tax-equivalent basis. (3)Includes the amortization of premiums on AFS debt securities of$60.3 million and$62.7 million for the first nine months of 2022 and 2021, respectively. (4)Includes the amortization of premiums on HTM debt securities of$423 thousand for the first nine months of 2022. (5)Average balances include nonperforming loans and loans held-for-sale. (6)Loans include the accretion of net deferred loan fees and amortization of net premiums, which totaled$36.3 million and$46.8 million for the first nine months of 2022 and 2021, respectively. 72 -------------------------------------------------------------------------------- The following table summarizes the extent to which changes in (1) interest rates, and (2) volume of average interest-earning assets and average interest-bearing liabilities affected the Company's net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Three Months Ended September 30, Nine Months Ended September 30, 2022 vs. 2021 2022 vs. 2021 Total Changes Due to Total Changes Due to ($ in thousands) Change Volume Yield/Rate Change Volume Yield/Rate Interest-earning assets: Interest-bearing cash and deposits with banks$ 4,559 $ (4,874) $ 9,433 $ 5,346 $ (7,746) $ 13,092 Resale agreements (2,188) (6,674) 4,486 628 (5,263) 5,891 AFS debt securities 557 (13,051) 13,608 4,674 (12,166) 16,840 HTM debt securities 12,709 12,709 - 33,645 33,645 - Loans 196,949 69,707 127,242 319,014 146,568 172,446 Restricted equity securities 343 6 337 686 (46) 732 Total interest and dividend income$ 212,929 $ 57,823 $ 155,106 $ 363,993 $ 154,992 $ 209,001 Interest-bearing liabilities: Checking deposits$ 5,307 $ 116 $ 5,191 $ 1,896 $ 307 $ 1,589 Money market deposits 29,655 (71) 29,726 33,327 261 33,066 Savings deposits 325 122 203 74 488 (414) Time deposits 17,637 1,162 16,475 13,284 (121) 13,405 Federal funds purchased and other short-term borrowings 1,177 - 1,177 1,385 1,403 (18) FHLB advances (465) (680) 215 (4,496) (3,975) (521) Repurchase agreements 2,409 2,204 205 2,874 2,619 255 Long-term debt and finance lease liabilities 781 4 777 1,149 4 1,145 Total interest expense$ 56,826 $ 2,857 $ 53,969 $ 49,493 $ 986 $ 48,507 Change in net interest income$ 156,103 $ 54,966 $ 101,137 $ 314,500 $ 154,006 $ 160,494 Noninterest Income
The following table presents the components of noninterest income for the third quarters and first nine months of 2022 and 2021:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 % Change 2022 2021 % Change
Lending fees $ 20,289 $ 17,516 16% $ 59,869 $ 56,965 5%
Deposit account fees 23,636 18,508 28% 66,323 51,233 29%
Interest rate contracts and other
derivative income 8,761 7,156 22% 29,695 20,981 42%
Foreign exchange income 10,083 13,101 (23)% 34,143 35,634 (4)%
Wealth management fees 8,903 5,598 59% 21,494 20,460 5%
Net gains on sales of loans 2,129 3,329 (36)% 5,968 6,601 (10)%
Gains on sales of AFS debt securities - 354 (100)% 1,306 1,178 11%
Other investment (loss) income (580) 5,349 (111)% 5,910 13,870 (57)%
Other income 2,331 2,198 6% 9,031 7,484 21%
Total noninterest income $ 75,552 $ 73,109 3% $ 233,739 $ 214,406 9%
73-------------------------------------------------------------------------------- Noninterest income comprised 12% and 14% of total revenue for the third quarter and the first nine months of 2022, respectively, compared with 16% for both the third quarter and first nine months of 2021, respectively. Third quarter 2022 noninterest income was$75.6 million , an increase of$2.4 million or 3%, compared with$73.1 million for the same period in 2021. This increase was primarily due to increases in deposit account fees, wealth management fees and lending fees, partially offset by other investment loss and a decrease in foreign exchange income. Noninterest income for the first nine months of 2022 was$233.7 million , an increase of$19.3 million or 9%, compared with$214.4 million for the same period in 2021. This increase was primarily due to increases in deposit account fees, interest rate contracts and other derivative income; and lending fees, partially offset by lower other investment income. Lending fees were$20.3 million for the third quarter of 2022, an increase of$2.8 million or 16% compared with$17.5 million for the same period in 2021. This was primarily due to increased syndication, unused commitment and other loan fees. For the first nine months of 2022, lending fees were$59.9 million , an increase of$2.9 million or 5%, compared with$57.0 million for the same period in 2021. This was primarily due to increased unused commitment and other loan fees, partially offset by a decrease in syndication fees. Deposit account fees were$23.6 million for the third quarter of 2022, an increase of$5.1 million or 28%, compared with$18.5 million for the same period in 2021. For the first nine months of 2022, deposit account fees were$66.3 million , an increase of$15.1 million or 29%, compared with$51.2 million for the same period in 2021. These increases were primarily driven by growth in treasury management fees from commercial deposits. Interest rate contracts and other derivative income was$8.8 million for the third quarter of 2022, an increase of$1.6 million or 22%, compared with$7.2 million for the same period in 2021. For the first nine months of 2022, interest rate contracts and other derivative income was$29.7 million , an increase of$8.7 million or 42%, compared with$21.0 million for the same period in 2021. These increases were primarily due to higher favorable credit valuation adjustments during the third quarter and first nine months of 2022, compared with the same periods in 2021. Foreign exchange income was$10.1 million for the third quarter of 2022, a decrease of$3.0 million or 23%, compared with$13.1 million for the same period in 2021. For the first nine months of 2022, foreign exchange income was$34.1 million , a decrease of$1.5 million or 4%, compared with$35.6 million for the first nine months of 2021. The decreases for the third quarter and first nine months of 2022, compared with the prior year periods, primarily reflected increased losses on foreign exchange trades, partially offset by the favorable valuation of certain foreign currency denominated balance sheet items. Wealth management fees were$8.9 million for the third quarter of 2022, an increase of$3.3 million or 59%, compared with$5.6 million for the same period in 2021. For the first nine months of 2022, wealth management fees were$21.5 million , an increase of$1.0 million or 5%, compared with$20.5 million for the first nine months of 2021. These increases were primarily due to a higher volume of customer activity. Other investment loss was$580 thousand for the third quarter of 2022, compared with income of$5.3 million for the same period in 2021. For the first nine months of 2022, other investment income was$5.9 million , a decrease of$8.0 million or 57% from$13.9 million for the first nine months of 2021. These decreases primarily reflected unfavorable equity valuation adjustments in the Company's CRA investments in 2022, compared with the same year-ago periods. 74 --------------------------------------------------------------------------------
Noninterest Expense
The following table presents the components of noninterest expense for the third quarters and first nine months of 2022 and 2021:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 % 2022 2021 %
Compensation and employee benefits $ 127,580 $ 105,751 21 % $ 357,213 $ 318,985 12 %
Occupancy and equipment expense 15,920 15,851 0 % 46,853 47,150 (1) %
Deposit insurance premiums and
regulatory assessments 4,875 4,641 5 % 14,519 12,791 14 %
Deposit account expense 6,707 4,136 62 % 17,071 11,845 44 %
Data processing 3,725 3,575 4 % 10,876 12,088 (10) %
Computer software expense 6,889 8,426 (18) % 20,755 23,106 (10) %
Consulting expense 1,620 1,635 (1) % 5,474 4,978 10 %
Legal expense 689 2,363 (71) % 2,454 5,840 (58) %
Other operating expense 28,094 20,998 34 % 78,315 58,544 34 %
Amortization of tax credit and other
investments 19,874 38,008 (48) % 48,753 90,657 (46) %
Total noninterest expense $ 215,973 $ 205,384 5 % $ 602,283 $ 585,984 3 %
Third quarter 2022 noninterest expense was $216.0 million , an increase of $10.6
million or 5%, compared with $205.4 million for the same period in 2021. First
nine months of 2022 noninterest expense was $602.3 million , an increase of $16.3
million or 3%, compared with $586.0 million for the same period in 2021. These
increases were primarily due to higher compensation and employee benefits and
other operating expense, partially offset by a decrease in the amortization of
tax credit and other investments.
Compensation and employee benefits were $127.6 million for the third quarter of
2022, an increase of $21.8 million or 21%, compared with $105.8 million for the
same period in 2021. For the first nine months of 2022, compensation and
employee benefits were $357.2 million , an increase of $38.2 million or 12%,
compared with $319.0 million for the same period in 2021. These increases were
primarily due to headcount growth and the year-over-year change in deferred loan
costs.
Other operating expense was $28.1 million for the third quarter of 2022, an
increase of $7.1 million or 34%, compared with $21.0 million for the same period
in 2021, primarily due to a reduction in foreclosure related gains and interest
expense paid on cash collateral. For the first nine months of 2022, other
operating expense was $78.3 million , an increase of $19.8 million or 34%,
compared with $58.5 million for the same period in 2021, primarily due to
increased charitable contributions, foreclosure expenses, miscellaneous
operational losses and travel-related expenses.
Amortization of tax credit and other investments was $19.9 million for the third
quarter of 2022, a decrease of $18.1 million or 48%, compared with $38.0 million
for the same period in 2021. For the first nine months of 2022, amortization of
tax credit and other investments was $48.8 million , a decrease of $41.9 million
or 46%, compared with $90.7 million for the same period in 2021. The
year-over-year change reflects the mix of tax credits being recognized, which
have differing amortization periods, as well as the impact of investments that
close in a given period.
Income Taxes
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 % Change 2022 2021 % Change
Income before income taxes $ 384,388 $273,431 41 %$ 1,023,330 $ 779,296 31 % Income tax expense$ 89,049 $ 47,982 86 %$ 232,010 $ 124,111 87 % Effective tax rate 23.2 % 17.5 % 22.7 % 15.9 % Third quarter 2022 income tax expense was$89.0 million and the effective tax rate was 23.2%, compared with third quarter 2021 income tax expense of$48.0 million and an effective tax rate of 17.5%. For the first nine months of 2022, income tax expense was$232.0 million and the effective tax rate was 22.7%, compared with income tax expense of$124.1 million and an effective tax rate of 15.9% for the same period in 2021. The year-over-year increases in the income tax expense and the effective tax rate reflected a higher level of income before income taxes and a decrease in tax credits recognized in 2022. 75 --------------------------------------------------------------------------------
Operating Segment Results
The Company organizes its operations into three reportable operating segments:
(1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These
segments are defined by the type of customers served and the related products
and services provided. The segments reflect how financial information is
currently evaluated by management. For additional description of the Company's
internal management reporting process, including the segment cost allocation
methodology, see Note 14 - Business Segments to the Consolidated Financial
Statements in this Form 10-Q.
Segment net interest income represents the difference between actual interest
earned on assets and interest incurred on liabilities of the segment, adjusted
for funding charges or credits through the Company's internal funds transfer
pricing ("FTP") process.
The following tables present the results by operating segment for the periods indicated:
Three Months Ended
Commercial
Consumer and Business Banking Banking Other
($ in thousands) 2022 2021 2022 2021 2022 2021
Total revenue (loss) (1) $ 357,230 $ 198,777 $ 271,637 $ 233,063 $ (1,506) $ 36,975
Provision for (reversal
of) credit losses 8,974 1,293 18,026 (11,293) - -
Noninterest expense 104,005 90,575 81,386 66,731 30,582 48,078
Segment income (loss)
before income taxes (1) 244,251 106,909 172,225 177,625 (32,088) (11,103)
Segment net income (loss)
(1) $ 173,982 $ 76,577 $ 122,869 $ 126,984 $ (1,512) $ 21,888 Nine Months Ended
Commercial
Consumer and Business Banking Banking Other
($ in thousands) 2022 2021 2022 2021 2022 2021
Total revenue (loss) (1) $ 908,400 $ 570,225 $ 807,787 $ 682,921 $ (42,074) $ 87,134
Provision for (reversal
of) credit losses 14,976 (598) 33,524 (24,402) - -
Noninterest expense 294,395 267,511 235,804 204,042 72,084 114,431
Segment income (loss)
before income taxes (1) 599,029 303,312 538,459 503,281 (114,158) (27,297)
Segment net income (loss)
(1) $ 426,695 $ 217,257 $ 384,237 $ 360,275 $ (19,612) $ 77,653
(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 third
quarter and nine months of 2021 have been reclassified to reflect these
allocation changes for comparability.
Consumer and Business Banking
The Consumer and Business Banking segment primarily provides financial products
and services to consumer and commercial customers through the Company's domestic
branch network. This segment offers consumer and commercial deposits, mortgage
and home equity loans, and other products and services. It also originates
commercial loans for small- and medium-sized enterprises. Other products and
services provided by this segment include wealth management, treasury
management, interest rate risk hedging and foreign exchange services.
76
--------------------------------------------------------------------------------The following tables present additional financial information for the Consumer and Business Banking segment for the periods indicated:
Three Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest income before provision for
credit losses $ 326,411 $ 176,678 $ 149,733 85 %
Noninterest income (1) 30,819 22,099 8,720 39 %
Total revenue (1) 357,230 198,777 158,453 80 %
Provision for credit losses 8,974 1,293 7,681 594 %
Noninterest expense 104,005 90,575 13,430 15 %
Segment income before income taxes (1) 244,251 106,909 137,342 128 %
Income tax expense 70,269 30,332 39,937 132 %
Segment net income (1) $ 173,982 $ 76,577 $ 97,405 127 %
Average loans $ 16,405,433 $ 14,186,630 $ 2,218,803 16 %
Average deposits $ 33,271,717 $ 32,516,678 $ 755,039 2 %
Nine Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest income before provision for
(reversal of) credit losses $ 823,998 $ 500,352 $ 323,646 65 %
Noninterest income (1) 84,402 69,873 14,529 21 %
Total revenue (1) 908,400 570,225 338,175 59 %
Provision for (reversal of) credit losses 14,976 (598) 15,574 2604 %
Noninterest expense 294,395 267,511 26,884 10 %
Segment income before income taxes (1) 599,029 303,312 295,717 97 %
Income tax expense 172,334 86,055 86,279 100 %
Segment net income (1) $ 426,695 $ 217,257 $ 209,438 96 %
Average loans $ 15,448,874 $ 13,787,675 $ 1,661,199 12 %
Average deposits $ 33,272,271 $ 31,304,335 $ 1,967,936 6 %
(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 third
quarter and nine months of 2021 have been reclassified to reflect these
allocation changes for comparability.
Consumer and Business Banking segment net income increased $97.4 million or 127%
year-over-year to $174.0 million for the third quarter of 2022, and $209.4
million or 96% year-over-year to $426.7 million for the first nine months of
2022. The increases in both periods reflected revenue growth, partially offset
by higher income tax expense and noninterest expense. Net interest income before
provision for credit losses increased $149.7 million or 85% year-over-year to
$326.4 million for the third quarter of 2022, and $323.6 million or 65%
year-over-year to $824.0 million for the first nine months of 2022. The
increases in both periods were primarily driven by higher deposit fund transfer
pricing credits due to noninterest-bearing deposit growth, and higher loan
interest income, primarily from growth in residential mortgage loans.
Noninterest expense increased $13.4 million or 15% year-over-year to $104.0
million for the third quarter of 2022, and $26.9 million or 10% year-over-year
to $294.4 million for the first nine months of 2022. The increases in both
periods primarily reflected higher compensation and employee benefits expense.
Commercial Banking
The Commercial Banking segment primarily generates commercial loan and deposit
products. Commercial loan products include CRE lending, construction finance,
working capital lines of credit, trade finance, letters of credit, commercial
business lending, affordable housing lending, asset-based lending, asset-backed
finance, project finance and equipment financing. Commercial deposit products
and other financial services include treasury management, foreign exchange
services, and interest rate and commodity risk hedging.
77
--------------------------------------------------------------------------------The following tables present additional financial information for the Commercial Banking segment for the periods indicated:
Three Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest income before provision for
(reversal of) credit losses $ 222,996 $ 189,791 $ 33,205 17 %
Noninterest income (1) 48,641 43,272 5,369 12 %
Total revenue (1) 271,637 233,063 38,574 17 %
Provision for (reversal of) credit losses 18,026 (11,293) 29,319 260 %
Noninterest expense 81,386 66,731 14,655 22 %
Segment income before income taxes (1) 172,225 177,625 (5,400) (3) %
Income tax expense 49,356 50,641 (1,285) (3) %
Segment net income (1) $ 122,869 $ 126,984 $ (4,115) (3) %
Average loans $ 30,449,108 $ 25,773,521 $ 4,675,587 18 %
Average deposits $ 16,627,353 $ 18,275,884 $ (1,648,531) (9) %
Nine Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest income before provision for
(reversal of) credit losses $ 662,037 $ 559,579 $ 102,458 18 %
Noninterest income (1) 145,750 123,342 22,408 18 %
Total revenue (1) 807,787 682,921 124,866 18 %
Provision for (reversal of) credit losses 33,524 (24,402) 57,926 237 %
Noninterest expense 235,804 204,042 31,762 16 %
Segment income before income taxes (1) 538,459 503,281 35,178 7 %
Income tax expense 154,222 143,006 11,216 8 %
Segment net income (1) $ 384,237 $ 360,275 $ 23,962 7 %
Average loans $ 29,099,646 $ 25,654,076 $ 3,445,570 13 %
Average deposits $ 17,296,919 $ 16,611,906 $ 685,013 4 %
(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 2021, have since been reclassified between "Consumer
and Business Banking" and "Commercial Banking." Balances for the third quarter
and nine months of 2021 have been reclassified to reflect these allocation
changes for comparability.
Commercial Banking segment net income decreased $4.1 million or 3%,
year-over-year to $122.9 million for the third quarter of 2022, due to increases
in provision for credit losses and noninterest expense, partially offset by
revenue growth. For the first nine months of 2022, this segment's net income
increased $24.0 million or 7% year-over-year to $384.2 million . This increase
reflected revenue growth, partially offset by higher provision for credit losses
and noninterest expense. Net interest income before provision for credit losses
increased $33.2 million or 17% year-over-year to $223.0 million for the third
quarter of 2022, and $102.5 million or 18% year-over-year to $662.0 million for
the first nine months of 2022. The increases in both periods were primarily due
to higher loan interest income from commercial loan growth. Provision for credit
losses increased $29.3 million or 260% year-over-year to $18.0 million for the
third quarter of 2022, and $57.9 million or 237% year-over-year to $33.5 million
for the first nine months of 2022, primarily driven by the current macroeconomic
outlook and commercial loan growth. Noninterest expense increased $14.7 million
or 22% year-over-year to $81.4 million for the third quarter of 2022, primarily
due to higher compensation and employee benefits and higher corporate overhead
allocations. For the first nine months of 2022, this segment's noninterest
expense increased $31.8 million or 16% year-over-year to $235.8 million , driven
by increases in compensation and employee benefits, corporate overhead
allocations and other operating expenses.
Other
Centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, namely the Consumer and Business Banking, and the Commercial Banking segments.
78
--------------------------------------------------------------------------------The following tables present additional financial information for the Other segment for the periods indicated:
Three Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest income before provision for
credit losses $ 2,402 $ 29,237 $ (26,835) (92) %
Noninterest (loss) income (3,908) 7,738 (11,646) (151) %
Total (loss) revenue (1,506) 36,975 (38,481) (104) %
Noninterest expense 30,582 48,078 (17,496) (36) %
Segment loss before income taxes (32,088) (11,103) (20,985) 189 %
Income tax benefit (30,576) (32,991) 2,415 (7) %
Segment net (loss) income $ (1,512) $ 21,888 $ (23,400) (107) %
Average deposits $ 4,152,463 $ 2,704,070 $ 1,448,393 54 %
Nine Months Ended September 30,
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest (loss) income before provision
for credit losses $ (45,661) $ 65,943 $ (111,604) (169) %
Noninterest income 3,587 21,191 (17,604) (83) %
Total (loss) revenue (42,074) 87,134 (129,208) (148) %
Noninterest expense 72,084 114,431 (42,347) (37) %
Segment loss before income taxes (114,158) (27,297) (86,861) 318 %
Income tax benefit (94,546) (104,950) 10,404 (10) %
Segment net (loss) income $ (19,612) $ 77,653 $ (97,265) (125) %
Average deposits $ 3,499,816 $ 2,612,897 $ 886,919 34 %
The Other segment reported segment loss before income taxes of $32.1 million and
segment net loss of $1.5 million for the third quarter of 2022, reflecting an
income tax benefit of $30.6 million . For the first nine months of 2022, the
Other segment reported segment loss before income taxes of $114.2 million and
segment net loss of $19.6 million , reflecting an income tax benefit of $94.5
million . The increases in segment losses before income taxes for both periods
were primarily driven by lower revenue, partially offset by decreases in
noninterest expense. The $26.8 million and $111.6 million decreases in net
interest income before provision for credit losses for the third quarter and
first nine months of 2022, respectively, compared to the same prior year
periods, were primarily driven by lower FTP spread income absorbed by the Other
segment, partially offset by an increase in interest income from investments due
to a higher yield on debt securities for the third quarter of 2022, and a higher
volume of debt securities for the first nine months of 2022. Noninterest expense
decreased $17.5 million year-over-year to $30.6 million for the third quarter of
2022, and $42.3 million year-over-year to $72.1 million for the first nine
months of 2022, primarily due to lower amortization of tax credits and other
investments.
The income tax expense or benefit in the Other segment consists of the remaining
unallocated income tax expense or benefit after allocating income tax expense to
the two core segments. Income tax expense is allocated to the Consumer and
Business Banking and the Commercial Banking segments by applying statutory
income tax rates to the segment income before income taxes.
Balance Sheet Analysis
Debt Securities
The Company maintains a portfolio of high quality and liquid debt securities with a moderate duration profile. It closely manages the overall portfolio interest rate and liquidity risks. The Company's debt securities provide:
•interest income for earnings and yield enhancement;
•availability for funding needs arising during the normal course of business;
•the ability to execute interest rate risk management strategies in response to
changes in economic or market conditions; and
•collateral to support pledging agreements as required and/or to enhance the
Company's borrowing capacity.
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While the Company intends to hold its debt securities indefinitely, it may sell
AFS securities in response to changes in the balance sheet and related interest
rate risk to meet liquidity, regulatory and strategic requirements.
The following table presents the distribution of the Company's AFS and HTM debt
securities portfolio as of
September 30, 2022 December 31, 2021 Ratings as ofSeptember 30, 2022 (1) Amortized Fair % of Fair Amortized Fair % of Fair BB and ($ in thousands) Cost Value Value Cost Value ValueAAA /AA A BBB Lower No Rating (2) AFS debt securities:U.S. Treasury securities$ 676,312 $ 600,677 10 %$ 1,049,238 $ 1,032,681 10 % 100 % - % - % - % - %U.S. government agency andU.S. government-sponsored enterprise debt securities 319,070 260,424 5 % 1,333,984 1,301,971 13 % 100 % - % - % - % - %U.S. government agency andU.S. government-sponsored enterprise mortgage-backed securities 2,639,133 2,315,314 39 % 4,210,832 4,157,263 42 % 100 % - % - % - % - % Municipal securities 307,084 249,502 4 % 519,381 523,158 5 % 91 % 5 % - % - % 4 % Non-agency mortgage-backed securities 1,233,490 1,069,513 18 % 1,388,857 1,378,374 14 % 82 % - % - % - % 18 % Corporate debt securities 673,502 529,565 9 % 657,516 649,665 6 % - % 31 % 67 % 2 % - % Foreign government bonds 238,720 225,810 4 % 260,447 257,733 3 % 47 % 53 % - % - % - % Asset-backed securities 66,793 64,870 1 % 74,674 74,558 1 % 100 % - % - % - % - % Collateralized loan obligations ("CLOs") 617,250 590,415 10 % 592,250 589,950 6 % 96 % 4 % - % - % - % Total AFS debt securities$ 6,771,354 $ 5,906,090
100 %$ 10,087,179 $ 9,965,353 100 % 85 % 5 % 6 % 0 % 4 % HTM debt securities:U.S. Treasury securities$ 522,713 $ 466,085 19 % $ - $ - - % 100 % - % - % - % - %U.S. government agency andU.S. government-sponsored enterprise debt securities 998,233 782,617 32 % - - - % 100 % - % - % - % - %U.S. government agency andU.S. government-sponsored enterprise mortgage-backed securities 1,301,824 1,066,339 43 % - - - % 100 % - % - % - % - % Municipal securities 189,897 144,094 6 % - - - % 100 % - % - % - % - % Total HTM debt securities$ 3,012,667 $ 2,459,135 100 % $ - $ - - % 100 % - % - % - % - % Total debt securities$ 9,784,021 $ 8,365,225 $ 10,087,179 $ 9,965,353 (1)Credit ratings express opinions about the credit quality of a debt security. The Company determines the credit rating of a security according to the lowest credit rating made available by nationally recognized statistical rating organizations ("NRSROs"). Debt securities rated investment grade, which are those with ratings similar to BBB- or above (as defined by NRSROs), are generally considered by the rating agencies and market participants to be low credit risk. Ratings percentages are allocated based on fair value. (2)For debt securities not rated by NRSROs, the Company uses other factors which include but are not limited to the priority in collections within the securitization structure, and whether the contractual payments have historically been on time. The Company's AFS and HTM debt securities portfolios had an effective duration, defined as the sensitivity of the value of the portfolio to interest rate changes, of 5.3 as ofSeptember 30, 2022 . This increased from 5.0 as ofDecember 31, 2021 , primarily due to both the upshifting and steepening of the yield curve.
The fair value of the AFS debt securities portfolio totaled$5.91 billion as ofSeptember 30, 2022 , a decrease of$4.06 billion or 41% from$9.97 billion as ofDecember 31, 2021 . The decrease was primarily due to the Company's transfer of$3.01 billion of AFS securities to HTM securities during the first quarter of 2022 and a decline in the portfolio valuation within the rising interest rate environment. For further discussion regarding the transfer, refer to theHeld-to-Maturity Debt Securities section below. The Company's AFS debt securities are carried at fair value with noncredit-related unrealized gains and losses, net of tax, reported in Other comprehensive (loss) income on the Consolidated Statement of Comprehensive Income. Pre-tax net unrealized losses on AFS debt securities were$865.3 million as ofSeptember 30, 2022 , compared with$121.8 million as ofDecember 31, 2021 . 80 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 , 96% of the carrying value of the AFS debt securities portfolio was rated investment grade by NRSROs, compared with 98% as ofDecember 31, 2021 . Of the AFS debt securities with gross unrealized losses, substantially all were rated investment grade as ofSeptember 30, 2022 andDecember 31, 2021 . There was no allowance for credit losses as ofSeptember 30, 2022 andDecember 31, 2021 , provided against the AFS debt securities. Additionally, there were no credit losses recognized in earnings for both the third quarters and first nine months of 2022 and 2021. For additional discussion on the allowance for credit losses, see Note 5 - Securities - Allowance for Credit Losses onAvailable-for-Sale Debt Securities to the Consolidated Financial Statements in this Form 10-Q.
During the first quarter of 2022, the Company transferred$3.01 billion in aggregate fair value ofU.S. Treasury , government agency and government-sponsored enterprise debt and mortgage-back securities, and municipal securities from AFS to HTM. In comparison, there were no HTM debt securities as ofDecember 31, 2021 . The Company's HTM debt securities are carried at amortized cost. The unrealized gains or losses at the date of transfer of these securities continue to be reported in Accumulated other comprehensive income (loss) ("AOCI"), net of tax on the Consolidated Balance Sheet and are amortized over the remaining life of the securities. All HTM debt securities were issued, guaranteed, or supported by theU.S. government or government-sponsored enterprises. Accordingly, the Company applied a zero credit loss assumption for these securities and no allowance for credit loss was recorded as ofSeptember 30, 2022 . For additional discussion on the allowance for credit losses, see Note 5 - Securities - Allowance for Credit Losses onHeld-to-Maturity Debt Securities to the Consolidated Financial Statements in this Form 10-Q. For additional information on AFS and HTM securities, see Note 1 - Summary of Significant Accounting Policies 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, Note 3 - Fair Value Measurement and Fair Value of Financial Instruments and Note 5 - Securities to the Consolidated Financial Statements in this Form 10-Q.
Loan Portfolio
The Company offers a broad range of financial products designed to meet the
credit needs of its borrowers. The Company's loan portfolio segments include
commercial loans, which consist of C&I, CRE, multifamily residential,
construction and land loans, and consumer loans, which consist of single-family
residential, home equity lines of credit ("HELOCs"), and other consumer loans.
Total net loans were $46.87 billion as of September 30, 2022 , an increase of
$5.72 billion or 14% from $41.15 billion as of December 31, 2021 . This increase
was primarily driven by well-diversified growth throughout our major loan
categories including increases of $2.53 billion or 16% in total CRE loans, $1.80
billion or 16% in residential mortgage loans, and $1.47 billion or 10% in C&I
loans. The composition of the loan portfolio as of September 30, 2022 was
similar to the composition as of December 31, 2021 .
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The following table presents the composition of the Company's total loan
portfolio by loan type as of
September 30, 2022 December 31, 2021
($ in thousands) Amount % Amount %
Commercial:
C&I (1) $ 15,625,072 33 % $ 14,150,608 34 %
CRE:
CRE 13,573,157 28 % 12,155,047 29 %
Multifamily residential 4,559,302 10 % 3,675,605 9 %
Construction and land 556,894 1 % 346,486 1 %
Total CRE 18,689,353 39 % 16,177,138 39 %
Total commercial 34,314,425 72 % 30,327,746 73 %
Consumer:
Residential mortgage:
Single-family residential 10,855,345 23 % 9,093,702 22 %
HELOCs 2,184,924 5 % 2,144,821 5 %
Total residential mortgage 13,040,269 28 % 11,238,523 27 %
Other consumer 87,561 0 % 127,512 0 %
Total consumer 13,127,830 28 % 11,366,035 27 %
Total loans held-for-investment (2) 47,442,255 100 % 41,693,781 100 %
Allowance for loan losses (582,517) (541,579)
Loans held-for-sale (3) 14,500 635
Total loans, net $ 46,874,238 $ 41,152,837
(1)Includes $110.9 million and $534.2 million of Paycheck Protection Program
("PPP") loans as of September 30, 2022 and December 31, 2021 , respectively.
(2)Includes $(60.3) million and $(50.7) million of net deferred loan fees and
net unamortized premiums as of September 30, 2022 and December 31, 2021 ,
respectively.
(3)Consists of a multi-family residential loan as of September 30, 2022 and
single-family residential loans as of December 31, 2021 .
Commercial
The commercial loan portfolio comprised 72% and 73% of total loans as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The Company actively monitors the commercial lending portfolio for elevated levels of credit risk and reviews credit exposures for sensitivity to changing economic conditions. Commercial - Commercial and Industrial Loans. Total C&I loan commitments (loans outstanding plus unfunded credit commitments, excluding issued letters of credit) were$22.21 billion as ofSeptember 30, 2022 , an increase of$1.92 billion or 9% from$20.29 billion as ofDecember 31, 2021 . Total C&I loans were$15.63 billion as ofSeptember 30, 2022 , an increase of$1.47 billion or 10% from$14.15 billion . Total C&I loans made up 33% and 34% of total loans held-for-investment as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The C&I loan portfolio includes loans and financing for businesses in a wide spectrum of industries, comprised of working capital lines of credit, trade finance, letters of credit, affordable housing lending, asset-based lending, asset-backed finance, project finance and equipment financing. The C&I loan portfolio also includes PPP loans. Additionally, the Company has a portfolio of broadly syndicated C&I loans, which represent revolving or term loan facilities that are marketed and sold primarily to institutional investors. This portfolio totaled$948.2 million and$939.4 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The majority of the C&I loans had variable interest rates as of bothSeptember 30, 2022 andDecember 31, 2021 . 82 -------------------------------------------------------------------------------- The C&I portfolio is well-diversified by industry. The Company monitors concentrations within the C&I loan portfolio by customer exposure and industry classification, setting diversification targets and exposure limits by industry or loan product. The following charts illustrate the industry mix within our C&I portfolio as ofSeptember 30, 2022 andDecember 31, 2021 .
[[Image Removed: ewbc-20220930_g6.jpg]][[Image Removed: ewbc-20220930_g7.jpg]]
Commercial - Total Commercial Real Estate Loans. Total CRE loans outstanding were$18.69 billion as ofSeptember 30, 2022 , which grew by$2.51 billion or 16% from$16.18 billion as ofDecember 31, 2021 , and accounted for 39% of total loans held-for-investment as of bothSeptember 30, 2022 andDecember 31, 2021 . The total CRE loan portfolio consists of CRE, multifamily residential, and construction and land loans. The year-to-date growth in total CRE loans was primarily driven by multifamily and industrial property types. The Company's total CRE portfolio is diversified by property type with an average CRE loan size of$2.7 million and$2.5 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The following table summarizes the Company's total CRE loans by property type as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 ($ in thousands) Amount % Amount % Property types: Retail (1)$ 3,991,541 21 %$ 3,685,900 23 % Multifamily 4,559,302 24 % 3,675,605 23 % Office (1) 2,943,391 16 % 2,804,006 17 % Industrial (1) 3,474,909 19 % 2,807,325 18 % Hospitality (1) 2,099,226 11 % 1,993,995 12 % Construction and land 556,894 3 % 346,486 2 % Other (1) 1,064,090 6 % 863,821 5 % Total CRE loans$ 18,689,353 100 %$ 16,177,138 100 %
(1)Included in CRE loan category.
The weighted-average loan-to-value ("LTV") ratio of the total CRE portfolio was
51% as of both September 30, 2022 and December 31, 2021 . The low
weighted-average LTV ratio was consistent across CRE property types.
Approximately 87% and 89% of total CRE loans had an LTV ratio of 65% or lower as
of September 30, 2022 and December 31, 2021 , respectively. The consistency of
the Company's low LTV underwriting standards has historically resulted in lower
credit losses for CRE and multifamily residential loans.
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The following tables provide a summary of the Company's CRE, multifamily
residential, and construction and land loans by geography as of September 30,
2022 and December 31, 2021 . The distribution of the total CRE loan portfolio
reflects the Company's geographic footprint, which is primarily concentrated in
California :
September 30, 2022
Multifamily Construction
($ in thousands) CRE % Residential % and Land % Total CRE %
Geographic markets:
Southern California $ 7,022,529 $ 2,257,999 $ 203,939 $ 9,484,467
Northern California 2,802,337 871,497 209,083 3,882,917
California 9,824,866 72 % 3,129,496 69 % 413,022 74 % 13,367,384 72 %
Texas 1,140,975 8 % 412,316 9 % 3,037 1 % 1,556,328 8 %
New York 684,810 5 % 214,032 5 % 82,135 15 % 980,977 5 %
Washington 467,321 4 % 170,864 4 % 13,132 2 % 651,317 3 %
Nevada 160,055 1 % 110,203 2 % 23,693 4 % 293,951 2 %
Arizona 226,931 2 % 99,367 2 % 407 0 % 326,705 2 %
Other markets 1,068,199 8 % 423,024 9 % 21,468 4 % 1,512,691 8 %
Total loans $ 13,573,157 100 % $ 4,559,302 100 % $ 556,894 100 % $ 18,689,353 100 %
December 31, 2021
Multifamily Construction
($ in thousands) CRE % Residential % and Land % Total CRE %
Geographic markets:
Southern California $ 6,406,609 $ 2,030,938 $ 138,953 $ 8,576,500
Northern California 2,622,398 748,631 109,483 3,480,512
California 9,029,007 75 % 2,779,569 77 % 248,436 70 % 12,057,012 75 %
Texas 1,005,455 8 % 308,652 8 % 1,896 1 % 1,316,003 8 %
New York 630,442 5 % 157,099 4 % 78,368 23 % 865,909 5 %
Washington 408,913 3 % 116,047 3 % 9,865 3 % 534,825 3 %
Nevada 128,395 1 % 115,163 3 % 5,775 2 % 249,333 2 %
Arizona 122,164 1 % 49,836 1 % - - % 172,000 1 %
Other markets 830,671 7 % 149,239 4 % 2,146 1 % 982,056 6 %
Total loans $ 12,155,047 100 % $ 3,675,605 100 % $ 346,486 100 % $ 16,177,138 100 %
Because 72% and 75% of total CRE loans were concentrated in California as of
September 30, 2022 and December 31, 2021 , respectively, changes in California's
economy and real estate values could have a significant impact on the
collectability of these loans and the required level of allowance for loan
losses. For additional information related to the higher degree of risk from a
downturn in the California real estate market, see Item 1A. Risk Factors - Risks
Related to Geopolitical Uncertainties to the Company's 2021 Form 10-K.
Commercial - Commercial Real Estate Loans. The Company focuses on providing
financing to experienced real estate investors and developers who have moderate
levels of leverage, many of whom are long-time customers of the Bank. CRE loans
totaled $13.57 billion as of September 30, 2022 , compared with $12.16 billion as
of December 31, 2021 . CRE loans made up 28% and 29% of total loans
held-for-investment as of September 30, 2022 and December 31, 2021 ,
respectively. Interest rates on CRE loans may be fixed, variable or hybrid. As
of September 30, 2022 , 66% of our CRE portfolio was variable rate, of which 48%
had customer-level interest rate derivative contracts in place. These are
hedging contracts offered by the Company to help our customers manage their
interest rate risk while the Bank's own exposure remained variable rate. In
comparison, as of December 31, 2021 , 75% of our CRE portfolio was variable rate,
of which 52% had customer-level interest rate derivative contracts in place.
Loans are underwritten with conservative standards for cash flows, debt service
coverage and LTV.
Owner-occupied properties comprised 19% and 20% of the CRE loans as of
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Commercial - Multifamily Residential Loans. The multifamily residential loan
portfolio is largely comprised of loans secured by residential properties with
five or more units. Multifamily residential loans totaled $4.56 billion as of
September 30, 2022 , compared with $3.68 billion as of December 31, 2021 , and
accounted for 10% and 9% of total loans held-for-investment as of September 30,
2022 and December 31, 2021 , respectively. The Company offers a variety of first
lien mortgages, including fixed- and variable-rate loans, as well as hybrid
loans with interest rates that adjust annually after an initial fixed rate
period of three to ten years. As of September 30, 2022 , 56% of our multifamily
residential portfolio was variable rate, of which 35% had customer-level
interest rate derivative contracts in place. These are hedging contracts offered
by the Company to help our customers manage their interest rate risk while the
Bank's own exposure remained variable rate. In comparison, as of December 31,
2021 , 66% of our multifamily residential portfolio was variable rate, of which
39% had customer-level interest rate derivative contracts in place.
Commercial - Construction and Land Loans. Construction and land loans provide
financing for a portfolio of projects diversified by real estate property type.
Construction and land loans totaled $556.9 million as of September 30, 2022 ,
compared with $346.5 million as of December 31, 2021 , and accounted for 1% of
total loans held-for-investment as of both dates. Construction loan exposure was
made up of $452.2 million in loans outstanding, plus $613.8 million in unfunded
commitments as of September 30, 2022 , compared with $297.9 million in loans
outstanding, plus $361.2 million in unfunded commitments as of December 31,
2021 . Land loans totaled $104.7 million as of September 30, 2022 , compared with
$48.6 million as of December 31, 2021 .
Consumer
The following tables summarize the Company's single-family residential and HELOC loan portfolios by geography as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 Single-Family Total Residential ($ in thousands) Residential % HELOCs % Mortgage %
Geographic markets:
Southern California$ 4,021,598 $ 974,763
Northern California 1,252,150 512,356 1,764,506 California 5,273,748 48 % 1,487,119 68 % 6,760,867 52 % New York 3,849,305 35 % 295,946 14 % 4,145,251 32 % Washington 621,347 6 % 247,570 11 % 868,917 7 % Massachusetts 291,154 3 % 90,052 4 % 381,206 3 % Georgia 282,611 3 % 24,212 1 % 306,823 2 % Texas 300,007 3 % - - % 300,007 2 % Other markets 237,173 2 % 40,025 2 % 277,198 2 % Total$ 10,855,345 100 %$ 2,184,924 100 %$ 13,040,269 100 % Lien priority: First mortgage$ 10,855,345 100 %$ 1,855,057 85 %$ 12,710,402 97 % Junior lien mortgage - - % 329,867 15 % 329,867 3 % Total$ 10,855,345 100 %$ 2,184,924 100 %$ 13,040,269 100 % 85
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December 31 , 2021
Single-Family Total Residential
($ in thousands) Residential % HELOCs % Mortgage %
Geographic markets:
Southern California $ 3,520,010 $ 971,731 $ 4,491,741
Northern California 1,024,564 506,310 1,530,874
California 4,544,574 49 % 1,478,041 68 % 6,022,615 54 %
New York 3,102,129 34 % 292,540 14 % 3,394,669 30 %
Washington 526,721 6 % 230,294 11 % 757,015 7 %
Massachusetts 258,372 3 % 75,815 4 % 334,187 3 %
Georgia 279,328 3 % 25,208 1 % 304,536 3 %
Texas 230,402 3 % - - % 230,402 2 %
Other markets 152,176 2 % 42,923 2 % 195,099 1 %
Total $ 9,093,702 100 % $ 2,144,821 100 % $ 11,238,523 100 %
Lien priority:
First mortgage $ 9,093,702 100 % $ 1,872,440 87 % $ 10,966,142 98 %
Junior lien mortgage - - % 272,381 13 % 272,381 2 %
Total $ 9,093,702 100 % $ 2,144,821 100 % $ 11,238,523 100 %
Consumer - Single-Family Residential Mortgages. Single-family residential loans
totaled $10.86 billion or 23% of total loans held-for-investment as of
September 30, 2022 , compared with $9.09 billion or 22% of total loans
held-for-investment as of December 31, 2021 . Year-to-date, single-family
residential mortgages increased $1.76 billion or 19%, primarily driven by net
growth in California and New York . The Company was in a first lien position for
all of its single-family residential loans as of both September 30, 2022 and
December 31, 2021 . Many of these loans are reduced documentation loans, for
which a substantial down payment is required, resulting in a low LTV ratio at
origination, typically 65% or less. These loans have historically experienced
low delinquency and loss rates. The Company offers a variety of single-family
residential first lien mortgage loan programs, including fixed- and
variable-rate loans, as well as hybrid loans with interest rates that adjust on
a regular basis, typically each year, after an initial fixed rate period.
Consumer - Home Equity Lines of Credit. Total HELOC commitments were $3.27
billion as of September 30, 2022 , which grew by $775.2 million or 31% from $2.49
billion as of December 31, 2021 . Unfunded HELOC commitments are unconditionally
cancellable. HELOCs outstanding totaled $2.18 billion as of September 30, 2022 ,
compared with $2.14 billion as of December 31, 2021 , and accounted for 5% of
total loans held-for-investment as of both dates. Year-to-date, HELOCs increased
$40.1 million or 2%, primarily driven by growth in Washington, Massachusetts ,
and California . The Company was in a first lien position for 85% and 87% of
total outstanding HELOCs as of September 30, 2022 and December 31, 2021 ,
respectively. Many of these loans are reduced documentation loans, for which a
substantial down payment is required, resulting in a low LTV ratio at
origination, typically 65% or less. These loans have historically experienced
low delinquency and loss rates. Substantially all of the Company's HELOCs were
variable-rate loans as of both September 30, 2022 and December 31, 2021 .
All originated commercial and consumer loans are subject to the Company's
underwriting guidelines and loan origination standards. Management believes that
the Company's underwriting criteria and procedures adequately consider the
unique risks associated with these products. The Company conducts a variety of
quality control procedures and periodic audits, including the review of lending
and legal requirements, to ensure that the Company is in compliance with these
requirements.
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The Company's overseas offices, which include the branch inHong Kong and the subsidiary bank inChina , are subject to the general risks inherent in conducting business in foreign countries, such as regulatory, economic and political uncertainties. As such, the Company's international operation risk exposure is largely concentrated inChina andHong Kong . In addition, the Company's financial assets held in theHong Kong branch and the subsidiary bank inChina may be affected by fluctuations in currency exchange rates or other factors. The following table presents the major financial assets held in the Company's overseas offices as ofSeptember 30, 2022 andDecember 31, 2021 :September 30, 2022 December 31, 2021 % of Total % of Total Consolidated
Consolidated ($ in thousands) Amount Assets Amount AssetsHong Kong branch: Cash and cash equivalents $ 871,196 1 % $ 831,283 1 % Interest-bearing deposits with banks $ 72,245 0 % $ - - % AFS debt securities (1) $ 280,817 0 % $ 242,926 0 % Loans held-for-investment (2) $ 907,153 1 % $ 849,573 1 % Total assets$ 2,152,110 3 %$ 1,933,164 3 % Subsidiary bank inChina : Cash and cash equivalents $ 539,133 1 % $ 543,134 1 % Interest-bearing deposits with banks $ 13,049 0 % $ 51,243 0 % AFS debt securities (3) $ 120,178 0 % $ 141,404 0 % Loans held-for-investment (2)$ 1,192,883 2 % $ 984,591 2 % Total assets$ 1,850,531 3 %$ 1,709,640 3 % (1)Comprised ofU.S. Treasury securities and foreign government bonds as of bothSeptember 30, 2022 andDecember 31, 2021 . (2)Primarily comprised of C&I loans as of bothSeptember 30, 2022 andDecember 31, 2021 . (3)Comprised of foreign government bonds as of bothSeptember 30, 2022 andDecember 31, 2021 .
The following table presents the total revenue generated by the Company's overseas offices for the third quarter and first nine months of 2022 and 2021:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
% of Total % of Total % of Total % of Total
Consolidated Consolidated Consolidated Consolidated
($ in thousands) Amount Revenue Amount Revenue Amount Revenue Amount Revenue
Hong Kong Branch:
Total revenue $ 14,296 2 % $ 5,912 1 % $ 32,405 2 % $ 18,252 1 %
Subsidiary Bank in China :
Total revenue $ 11,616 2 % $ 7,592 2 % $ 30,652 2 % $ 20,271 2 %
Capital
The Company maintains a strong capital base to support its anticipated asset
growth, operating needs, and credit risks, and to ensure that the Company and
the Bank are in compliance with all regulatory capital guidelines. The Company
engages in regular capital planning processes on at least an annual basis to
optimize the use of available capital and to appropriately plan for future
capital needs, allocating capital to existing and future business activities.
Furthermore, the Company conducts capital stress tests as part of its capital
planning process. The stress tests enable the Company to assess the impact of
adverse changes in the economy and interest rates on its capital base.
On March 3, 2020 , the Company's Board of Directors authorized the repurchase of
$500.0 million of the Company's common stock, of which $254.0 million remains
available. During the second quarter of 2022, the Company repurchased
$100.0 million of common stock or 1,385,517 shares, at an average price of
$72.17 per share. The Company did not repurchase shares during the third quarter
of 2022. For additional information about the share repurchases, see Part II,
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds in this
Form 10-Q.
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The Company's stockholders' equity was $5.66 billion as of September 30, 2022 , a
decrease of $176.6 million or 3% from $5.84 billion as of December 31, 2021 . The
year-to-date decrease in the Company's stockholders' equity was primarily due to
a negative change in AOCI of $709.7 million , $172.1 million in common dividends
declared, and $100.0 million in common stock repurchases, partially offset by
$791.3 million in net income. The negative change in AOCI was primarily due to
increased unrealized losses in AFS debt securities. For other factors that
contributed to the changes in stockholders' equity, refer to Item 1.
Consolidated Financial Statements - Consolidated Statement of Changes in
Stockholders' Equity in this Form 10-Q.
Book value was $40.17 per common share as of September 30, 2022 , a decrease of
2% from $41.13 per common share as of December 31, 2021 , primarily as a result
of the factors described above. Tangible equity per common share was $36.80 as
of September 30, 2022 , compared with $37.79 as of December 31, 2021 . For
additional details, see the reconciliation of non-GAAP measures presented under
Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this
Form 10-Q.
The Company paid a quarterly cash dividend of $0.40 and $0.33 per common share
during the third quarters of 2022 and 2021, respectively. In October 2022 , the
Company's Board of Directors declared fourth quarter 2022 cash dividend of $0.40
per common share. The dividend is payable on November 15, 2022 , to stockholders
of record as of November 1, 2022 .
Deposits and Other Sources of Funding
Deposits are the Company's primary source of funding, the cost of which has a significant impact on the Company's net interest income and net interest margin. Additional funding is provided by short- and long-term borrowings, and long-term debt. See Item 2. MD&A - Risk Management - Liquidity Risk Management - Liquidity in this Form 10-Q for a discussion of the Company's liquidity management. The following table summarizes the Company's sources of funds as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 Change ($ in thousands) Amount % Amount % $ % Deposits: Noninterest-bearing demand$ 21,645,394 40 %$ 22,845,464 43 %$ (1,200,070) (5) % Interest-bearing checking 6,822,343 13 % 6,524,721 12 % 297,622 5 % Money market 12,113,292 23 % 13,130,300 25 % (1,017,008) (8) % Savings 2,917,770 5 % 2,888,065 5 % 29,705 1 % Time deposits 10,358,563 19 % 7,961,982 15 % 2,396,581 30 % Total deposits$ 53,857,362 100 %$ 53,350,532 100 %$ 506,830 1 % Other Funds: Federal funds purchased $ 200,000 $ -$ 200,000 100 % FHLB advances 324,920 249,331 75,589 30 % Repurchase agreements 611,785 300,000 311,785 104 % Long-term debt 147,875 147,658 217 0 % Total other funds$ 1,284,580 $ 696,989$ 587,591 84 % Total sources of funds$ 55,141,942
$ 54,047,521 $ 1,094,421 2 % Deposits The Company offers a wide variety of deposit products to consumer and commercial customers. To provide a stable and low-cost source of funding and liquidity, the Company's strategy is to grow and retain relationship-based deposits. Total deposits were$53.86 billion as ofSeptember 30, 2022 , an increase of$506.8 million or 1% from$53.35 billion as ofDecember 31, 2021 . The increase in deposits was primarily due to growth in time deposits, partially offset by decreases in noninterest-bearing demand and money market deposits. This move from noninterest-bearing and lower paying non-maturity deposits to time deposits was largely driven by continued increases in benchmark rates. Noninterest-bearing demand deposits comprised 40% and 43% of total deposits as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. 88 -------------------------------------------------------------------------------- Additional information regarding the impact of deposits on net interest income, with a comparison of average deposit balances and rates, is provided in Item 2. MD&A - Results of Operations - Net Interest Income in this Form 10-Q. See also the discussion of the impact of deposits on liquidity at Item 2. MD&A - Liquidity Risk Management - Liquidity in this Form 10-Q.
Other Sources of Funding
The Company had an outstanding overnight federal funds purchase of
As ofSeptember 30, 2022 , the Company had FHLB advances of$324.9 million , compared with advances totaling$249.3 million as ofDecember 31, 2021 . As ofSeptember 30, 2022 , the FHLB advances were comprised of an overnight advance of$250.0 million with a fixed interest rate of 3.22% and a term advance of$74.9 million with a floating interest rate of 3.25% that matures inNovember 2022 . Gross repurchase agreements totaled$611.8 million and$300.0 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Resale and repurchase agreements are reported net, pursuant to Accounting Standards Codification ("ASC") 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of bothSeptember 30, 2022 andDecember 31, 2021 , the Company did not have any gross resale agreements that were eligible for netting pursuant to ASC 210-20-45-11. The weighted-average interest rates were 2.81% and 2.57% for the third quarters of 2022 and 2021, respectively; and 2.73% and 2.62% for the first nine months of 2022 and 2021, respectively. As ofSeptember 30, 2022 , gross repurchase agreements had original terms between six months and nine years and remaining maturities between three months and 11 months. Repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the assets are sold. As ofSeptember 30, 2022 , the collateral for the repurchase agreements was comprised ofU.S. government agency andU.S. government-sponsored enterprise mortgage-backed securities, andU.S. Treasury securities. To ensure the market value of the underlying collateral remains sufficient, the Company monitors the fair value of collateral pledged relative to the principal amounts borrowed under repurchase agreements. The Company manages liquidity risks related to the repurchase agreements by sourcing funds from a diverse group of counterparties, and entering into repurchase agreements with longer durations, when appropriate. For additional details, see Note 4 - Assets Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements in this Form 10-Q. The Company uses long-term debt to provide funding to acquire interest-earning assets, and to enhance liquidity and regulatory capital adequacy. Long-term debt totaled$147.9 million and$147.7 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Long-term debt consists of junior subordinated debt, which qualifies as Tier 2 capital for regulatory purposes. The junior subordinated debt was issued in connection with the Company's various pooled trust preferred securities offerings, as well as with common stock issued by the six wholly-owned subsidiaries of the Company in conjunction with these offerings. The junior subordinated debt had weighted-average interest rates of 2.86% and 1.74% for the first nine months of 2022 and 2021, respectively, with remaining maturities ranging between 12.2 years and 15.0 years as ofSeptember 30, 2022 .
The federal banking agencies have risk-based capital adequacy requirements intended to ensure that banking organizations maintain capital that is commensurate with the degree of risk associated with their operations. The Company and the Bank are each subject to these regulatory capital adequacy requirements. See Item 1. Business - Supervision and Regulation - Regulatory Capital Requirements andRegulatory Capital-Related Development in the Company's 2021 Form 10-K for additional details. The Company adopted Accounting Standards Update ("ASU") 2016-13 onJanuary 1, 2020 , which requires the measurement of the allowance for credit losses to be based on management's best estimate of lifetime expected credit losses inherent in the Company's relevant financial assets. The Company has elected the phase-in option provided by a final rule that delays an estimate of the current expected credit losses methodology ("CECL") effect on regulatory capital for two years and phases in the impact over three years. The rule permits certain banking organizations to exclude from regulatory capital the initial adoption impact of CECL, plus 25% of the cumulative changes in the allowance for credit losses under CECL for each period untilDecember 31, 2021 , followed by a three-year phase-out period in which the aggregate benefit is reduced by 25% in 2022, 50% in 2023 and 75% in 2024. Accordingly, the capital ratios as ofSeptember 30, 2022 delayed 75% of the estimated impact of CECL on regulatory capital through the year 2021. 89 -------------------------------------------------------------------------------- The following table presents the Company's and the Bank's capital ratios as ofSeptember 30, 2022 andDecember 31, 2021 , under the Basel III Capital Rules, and those required by regulatory agencies for capital adequacy and well-capitalized classification purposes: Basel III Capital Rules Minimum September 30, 2022 December 31, 2021 Regulatory Minimum Requirements Well- Regulatory including Capital Capitalized Company Bank Company Bank Requirements Conservation Buffer Requirements Risk-based capital ratios: Common Equity Tier 1 capital 12.3 % 12.1 % 12.8 % 12.3 % 4.5 % 7.0 % 6.5 % Tier 1 capital (1) 12.3 % 12.1 % 12.8 % 12.3 % 6.0 % 8.5 % 8.0 % Total capital 13.6 % 13.1 % 14.1 % 13.2 % 8.0 % 10.5 % 10.0 % Tier 1 leverage (1) 9.6 % 9.4 % 9.0 % 8.6 % 4.0 % 4.0 % 5.0 % (1)The Tier 1 leverage well-capitalized requirement applies only to the Bank since there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company. The minimum Tier 1 risk-based capital ratio requirement for the Company to be considered well-capitalized is 6.0%. The Company is committed to maintaining strong capital levels to assure its investors, customers and regulators that the Company and the Bank are financially sound. As of bothSeptember 30, 2022 andDecember 31, 2021 , the Company and the Bank continued to exceed all "well-capitalized" capital requirements and the required minimum capital requirements under the Basel III Capital Rules. Total risk-weighted assets were$49.27 billion as ofSeptember 30, 2022 , an increase of$5.68 billion or 13% from$43.59 billion as ofDecember 31, 2021 . The increase in the risk-weighted assets was primarily due to loan growth. Risk Management Overview In the normal course of conducting its business, the Company is exposed to a variety of risks, some of which are inherent to the financial services industry and others of which are more specific to the Company's businesses. The Company operates under a Board-approved enterprise risk management ("ERM") framework, which outlines the company-wide approach to risk management and oversight, and describes the structures and practices employed to manage the current and emerging risks inherent to the Company. The Company's ERM program incorporates risk management throughout the organization in identifying, managing, monitoring, and reporting risks. It identifies the Company's major risk categories as credit risk, liquidity risk, capital risk, market risk, operational risk, compliance and regulatory risks, legal risks, strategic risks, and reputational risks.The Risk Oversight Committee of the Board of Directors monitors the ERM program through established risk categories and provides oversight of the Company's risk appetite and control environment.The Risk Oversight Committee provides focused oversight of the Company's identified enterprise risk categories on behalf of the full Board of Directors. Under the direction of theRisk Oversight Committee , management committees apply targeted strategies to reduce the risks to which the Company's operations are exposed. The Company's ERM program is executed along the three lines of defense model, which provides for a consistent and standardized risk management control environment across the enterprise. The first line of defense is comprised of production, operational, and support units. The second line of defense is comprised of various risk management and control functions charged with monitoring and managing specific major risk categories and/or risk subcategories. The third line of defense is comprised of the Internal Audit function and Independent Asset Review ("IAR"). Internal Audit and IAR provides assurance and evaluates the effectiveness of risk management, control and governance processes as established by the Company. Reporting directly to the Board's Audit Committee, Internal Audit maintains organizational independence and objectivity. Further discussion and analysis of the primary risk areas are detailed in the following subsections of Risk Management. 90 --------------------------------------------------------------------------------
Credit Risk Management
Credit risk is the risk that a borrower or a counterparty will fail to perform according to the terms and conditions of a loan or investment and expose the Company to loss. Credit risk exists with many of the Company's assets and exposures such as loans and certain derivatives. The majority of the Company's credit risk is associated with lending activities.The Risk Oversight Committee has primary oversight responsibility for identified enterprise risk categories including credit risk.The Risk Oversight Committee monitors management's assessment of asset quality, credit risk trends, credit quality administration, underwriting standards, and portfolio credit risk management strategies and processes, such as diversification and concentration limits, all of which enable management to control credit risk. At the management level, the Credit Risk Management Committee has primary oversight responsibility for credit risk. The Senior Credit Supervision function manages credit policy for the line of business transactional credit risk, assuring that all exposure is risk-rated according to the requirements of the credit risk rating policy. The Senior Credit Supervision function evaluates and reports the overall credit risk exposure to senior management and theRisk Oversight Committee . Reporting directly to the Board'sRisk Oversight Committee , the Independent Asset Review function provides additional support to the Company's strong credit risk management culture by providing an independent and objective assessment of underwriting and documentation quality. A key focus of our credit risk management is adherence to a well-controlled underwriting process.
The Company assesses the overall credit quality performance of the loans held-for-investment portfolio through an integrated analysis of specific performance ratios. This approach forms the basis of the discussion in the sections immediately following: Nonperforming Assets, Troubled Debt Restructurings ("TDR") and Allowance for Credit Losses.
Credit Quality
The Company utilizes a credit risk rating system to assist in monitoring credit quality. Loans are evaluated using the Company's internal credit risk rating of 1 through 10. For more information on the Company's credit quality indicators and internal credit risk ratings, refer to Note 7 - Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-Q.
The following table presents the Company's criticized loans as of
Change
September 30,
($ in thousands) 2022 December 31, 2021 $ %
Criticized loans:
Special mention loans $ 470,964 $ 384,694 $ 86,270 22 %
Classified loans 434,242 448,362 (14,120) (3) %
Total criticized loans (1) $ 905,206 $ 833,056 $ 72,150 9 %
Special mention loans to loans
held-for-investment 0.99 % 0.92 %
Classified loans to loans
held-for-investment 0.92 % 1.08 %
Criticized loans to loans
held-for-investment 1.91 % 2.00 %
(1)Excludes loans held-for-sale.
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, other real estate owned
("OREO") and other nonperforming assets. Other nonperforming assets and OREO are
repossessed assets and properties, respectively, acquired through foreclosure,
or through full or partial satisfaction of loans held-for-investment.
Nonperforming assets were $97.0 million or 0.16% of total assets as of
September 30, 2022 , a decrease of $6.4 million or 6%, compared with $103.5
million or 0.17% of total assets as of December 31, 2021 .
91
--------------------------------------------------------------------------------
The following table presents nonperforming assets information as of
Change
($ in thousands) September 30, 2022 December 31, 2021 $ %
Commercial:
C&I $ 47,988 $ 59,023 $ (11,035) (19) %
CRE:
CRE 11,035 9,498 1,537 16 %
Multifamily residential 174 444 (270) (61) %
Total CRE 11,209 9,942 1,267 13 %
Consumer:
Residential mortgage:
Single-family residential 12,741 15,720 (2,979) (19) %
HELOCs 10,568 8,444 2,124 25 %
Total residential mortgage 23,309 24,164 (855) (4) %
Other consumer 37 52 (15) (29) %
Total nonaccrual loans 82,543 93,181 (10,638) (11) %
OREO, net - 363 (363) (100) %
Other nonperforming assets - 9,938 (9,938) (100) %
Nonperforming loans HFS 14,500 - 14,500 100 %
Total nonperforming assets $ 97,043 $ 103,482 $ (6,439) (6) %
Nonperforming assets to total assets 0.16 % 0.17 %
Nonaccrual loans to loans
held-for-investment 0.17 % 0.22 %
Allowance for loan losses to nonaccrual
loans 705.71 % 581.21 %
TDRs included in nonperforming loans $ 32,688
$ 30,383
Loans are generally placed on nonaccrual status when they become 90 days past due or when the full collection of principal or interest becomes uncertain regardless of the length of past due status. Collectability is generally assessed based on economic and business conditions, the borrower's financial condition, and the adequacy of collateral, if any. For additional details regarding the Company's nonaccrual loan policy, see Note 1 - Summary of Significant Accounting Policies - Significant Accounting Policies - Loans Held-for-Investment to the Consolidated Financial Statements in the Company's 2021 Form 10-K. Nonaccrual loans were$82.5 million as ofSeptember 30, 2022 , a decrease of$10.6 million or 11% from$93.2 million as ofDecember 31, 2021 . This decrease was predominantly the result of charge-offs and paydowns of commercial loans. As ofSeptember 30, 2022 ,$54.4 million or 66% of nonaccrual loans were less than 90 days delinquent. In comparison,$54.2 million or 58%, of nonaccrual loans were less than 90 days delinquent as ofDecember 31, 2021 . 92 --------------------------------------------------------------------------------
The following table presents the accruing loans past due by portfolio segment as
of
Percentage of
Total Accruing Past Due Loans (1) Change Total Loans Outstanding
September 30, December 31, September 30, December 31,
($ in thousands) 2022 2021 $ % 2022 2021
Commercial:
C&I $ 20,960 $ 11,069 $ 9,891 89 % 0.13 % 0.08 %
CRE:
CRE 623 3,722 (3,099) (83) % 0.00 % 0.03 %
Multifamily residential 795 5,342 (4,547) (85) % 0.02 % 0.15 %
Total CRE 1,418 9,064 (7,646) (84) % 0.01 % 0.06 %
Total commercial 22,378 20,133 2,245 11 % 0.07 % 0.07 %
Consumer:
Residential mortgage:
Single-family residential 22,239 18,760 3,479 19 % 0.20 % 0.21 %
HELOCs 4,916 5,854 (938) (16) % 0.22 % 0.27 %
Total residential mortgage 27,155 24,614 2,541 10 % 0.21 % 0.22 %
Other consumer 80 108 (28) (26) % 0.09 % 0.08 %
Total consumer 27,235 24,722 2,513 10 % 0.21 % 0.22 %
Total $ 49,613 $ 44,855 $ 4,758 11 % 0.10 % 0.11 %
(1)There were no accruing loans past due 90 days or more as of both
Troubled Debt Restructurings
TDRs are loans for which contractual terms have been modified by the Company for economic or legal reasons related to a borrower's financial difficulties, and for which a concession to the borrower was granted that the Company would not otherwise consider. The Company's loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower's financial needs. The following table presents the performing and nonperforming TDRs by portfolio segment as ofSeptember 30, 2022 andDecember 31, 2021 . The allowance for loan losses for TDRs was$16.9 million as ofSeptember 30, 2022 and$4.8 million as ofDecember 31, 2021 . September 30, 2022 December 31, 2021 Performing Nonperforming Performing Nonperforming ($ in thousands) TDRs TDRs Total TDRs TDRs Total Commercial: C&I$ 58,273 $ 32,121 $ 90,394 $ 77,256 $ 28,239 $ 105,495 CRE: CRE 22,768 - 22,768 23,379 - 23,379 Multifamily residential 3,876 174 4,050 4,042 197 4,239 Total CRE 26,644 174 26,818 27,421 197 27,618 Consumer: Residential mortgage: Single-family residential 4,786 68 4,854 6,585 1,102 7,687 HELOCs 2,244 325 2,569 2,553 845 3,398 Total residential mortgage 7,030 393 7,423 9,138 1,947 11,085 Total TDRs$ 91,947 $ 32,688 $ 124,635 $ 113,815 $ 30,383 $ 144,198 93
-------------------------------------------------------------------------------- Performing TDRs were$91.9 million as ofSeptember 30, 2022 , a decrease of$21.9 million or 19% from$113.8 million as ofDecember 31, 2021 . This decrease primarily reflected the payoffs and paydowns of performing C&I and single-family residential TDR loans. Approximately 94% of the performing TDRs were current as of bothSeptember 30, 2022 andDecember 31, 2021 , respectively. Nonperforming TDRs were$32.7 million as ofSeptember 30, 2022 , an increase of$2.3 million or 8% from$30.4 million as ofDecember 31, 2021 . This increase primarily reflected newly designated nonperforming C&I TDR loans, partially offset by payoffs and paydowns of C&I and single-family residential nonperforming TDR loans. Existing TDRs that were subsequently modified in response to the COVID-19 pandemic continue to be classified as TDRs. Customers who require further assistance upon exiting from the COVID-19 deferral programs may receive further modifications which may be classified as TDRs. As ofSeptember 30, 2022 , there were no TDRs that were provided modifications related to the COVID-19 pandemic, and the amount of TDRs that were provided modification related to the COVID-19 pandemic were insignificant as ofDecember 31, 2021 .
Loan Modifications Due to COVID-19 Pandemic
The Company has granted a range of commercial and consumer loan accommodations, predominantly in the form of payment deferrals, to provide relief to borrowers experiencing financial hardship due to the COVID-19 pandemic. For COVID-19 related loan modifications, which occurred betweenMarch 1, 2020 throughJanuary 1, 2022 , that have met the loan modification criteria under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, or under the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), the Company elected to temporarily suspend TDR accounting under ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors. As ofSeptember 30, 2022 , COVID-19 loans under payment deferral and forbearance programs totaled$42.4 million , or 0.1% of total loans, compared with$363.1 million , or 0.9% of total loans as ofDecember 31, 2021 . Loans that have exited the modification program were substantially all current as ofSeptember 30, 2022 .
Allowance for Credit Losses
ASU 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments requires the measurement of the allowance for credit losses to be based on management's best estimate of lifetime expected credit losses inherent in the Company's relevant financial assets. The allowance for credit losses estimate uses various models and estimation techniques based on historical loss experience, current borrower characteristics, current conditions, reasonable and supportable forecasts, and other relevant factors. In addition to the allowance for loan losses, the Company maintains an allowance for unfunded credit commitments. The Company has three general areas for which it provides the allowance for unfunded credit commitments: (1) recourse obligations for loans sold, (2) letters of credit, and (3) unfunded lending commitments. The Company's methodology for determining the allowance calculation for unfunded lending commitments uses the lifetime loss rates of the on-balance sheet commitment. Recourse obligations for loans sold and letters of credit use the weighted loss rates for the applicable segment of the individual credit. In the case of loans and securities, allowance for credit losses are contra-asset valuation accounts that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected. In the case of unfunded credit commitments, the allowance for credit losses is a liability account that is reported as a component of Accrued expenses and other liabilities in our Consolidated Balance Sheet. The Company is committed to maintaining the allowance for credit losses at a level that is commensurate with the estimated inherent losses in the loan portfolio, including unfunded credit facilities. While the Company believes that the allowance for credit losses as ofSeptember 30, 2022 was appropriate to absorb losses inherent in the loan portfolio and in unfunded credit commitments based on the information available, future allowance levels may increase or decrease based on a variety of factors, including but not limited to, accounting standard and regulatory changes, loan growth, portfolio performance and general economic conditions. This evaluation is inherently subjective as it requires numerous estimates and judgements. For a description of the policies, methodologies and judgments used to determine the allowance for credit losses, see Item 7. MD&A - Critical Accounting Estimates and Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Company's 2021 Form 10-K, and Note 7 - Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-Q. 94 -------------------------------------------------------------------------------- The following table presents an allocation of the allowance for loan losses by loan portfolio segments and unfunded credit commitments as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 Allowance % of Loan Type to Allowance % of Loan Type to ($ in thousands) Allocation Total Loans Allocation Total Loans Allowance for loan losses Commercial: C&I$ 371,749 33 %$ 338,252 34 % CRE: CRE 145,301 29 % 150,940 29 % Multifamily residential 25,680 10 % 14,400 9 % Construction and land 7,506 1 % 15,468 1 % Total CRE 178,487 40 % 180,808 39 % Total commercial 550,236 73 % 519,060 73 % Consumer: Residential mortgage: Single-family residential 27,263 23 % 17,160 22 % HELOCs 3,324 4 % 3,435 5 % Total residential mortgage 30,587 27 % 20,595 27 % Other consumer 1,694 0 % 1,924 0 % Total consumer 32,281 27 % 22,519 27 % Total allowance for loan losses$ 582,517 100 %$ 541,579 100 % Allowance for unfunded credit commitments$ 24,041 $ 27,514 Total allowance for credit losses$ 606,558 $ 569,093 Loans held-for-investment$ 47,442,255 $ 41,693,781 Allowance for loan losses to loans held-for-investment 1.23 % 1.30 % Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Average loans held-for-investment$ 46,845,030 $
39,959,972
Annualized net charge-offs to average loans held-for-investment 0.06 % 0.13 % 0.02 % 0.14 % The allowance for loan losses was$582.5 million as ofSeptember 30, 2022 , an increase of$40.9 million from$541.6 million as ofDecember 31, 2021 , primarily reflecting of our current macroeconomic outlook and loan growth. Third quarter 2022 net charge-offs were$6.6 million , or annualized 0.06% of average loans held-for-investment, compared with net charge-offs of$13.5 million , or annualized 0.13% of average loans held-for-investment, for the third quarter of 2021. The decrease in net charge-offs for the third quarter of 2022 compared with the same period in 2021 was primarily due to a decrease in CRE charge-offs, partially offset by increases in multifamily residential and C&I charge-offs. In the first nine months of 2022, net charge-offs were$8.3 million , or annualized 0.02% of average loans held-for investment, compared with$40.2 million or annualized 0.14% of average loans held-for-investment for the first nine months of 2021. The decrease in net charge-offs for the first nine months of 2022, compared with the same period in 2021, was mainly due to a decrease in CRE charge-offs and an increase in C&I recoveries. 95 -------------------------------------------------------------------------------- The Company considers multiple economic scenarios to develop the estimate of the allowance for loan losses. The scenarios may consist of a baseline forecast representing management's view of the most likely outcome, and downside or upside scenarios reflecting possible worsening or improving economic conditions. As ofSeptember 30, 2022 , the Company assigned a lower weighting to its downside scenario and higher weightings to the baseline and upside scenarios, compared with the weightings assigned as ofDecember 31, 2021 . The current forecast as ofSeptember 30, 2022 incorporates an updated impact of high inflation, lower than previously expected annual Gross Domestic Product ("GDP") growth, rising interest rates, and continued global oil and supply chain issues caused by the Russian invasion ofUkraine . Macroeconomic assumptions underlying the baseline forecast include annual GDP growth of 1.6% and 1.4% for 2022 and 2023, respectively, and the unemployment rate to average 3.7% and 3.9% for 2022 and 2023, respectively. The downside scenario assumed annual GDP growth of 1.5% in 2022 dropping to a 2.0% decline for 2023, and the unemployment rate to rise from a 4.2% average for 2022 to a 7.3% average for 2023. The upside scenario assumed annual GDP growth of 1.9% and 4.1% for 2022 and 2023, respectively, and the unemployment rate to improve from an average of 3.6% for 2022 to 3.3% for 2023. As ofSeptember 30, 2022 andDecember 31, 2021 , PPP loans outstanding were$110.9 million and$534.2 million , respectively. Because these loans are fully guaranteed by theSmall Business Administration , there was no allowance for loan losses established for these loans as ofSeptember 30, 2022 andDecember 31, 2021 .
The allowance for unfunded credit commitments was
Liquidity Risk Management
Liquidity
Liquidity is a financial institution's capacity to meet its deposit and obligations to other counterparties as they come due, or to obtain adequate funding at a reasonable cost to meet those obligations. The objective of liquidity management is to manage the potential mismatch of asset and liability cash flows. Maintaining an adequate level of liquidity depends on the institution's ability to efficiently meet both expected and unexpected cash flows, and collateral needs without adversely affecting daily operations or the financial condition of the institution. To achieve this objective, the Company analyzes its liquidity risk, maintains readily available liquid assets, and utilizes diverse funding sources including its stable core deposit base. The Board ofDirectors' Risk Oversight Committee has primary oversight responsibility over liquidity risk management. At the management level, the Company's Asset/Liability Committee ("ALCO") establishes the liquidity guidelines that govern the day-to-day active management of the Company's liquidity position by requiring sufficient asset-based liquidity to cover potential funding requirements and avoid over-dependence on volatile, less reliable funding markets. These guidelines are established and monitored for both the Bank and East West on a stand-alone basis to ensure that the Company can serve as a source of strength for its subsidiaries. The ALCO regularly monitors the Company's liquidity status and related management processes, providing regular reports to the Board of Directors. The Company's liquidity management practices have been effective under normal operating and stressed market conditions. Liquidity Risk - Liquidity Sources. The Company's primary source of funding is from deposits generated by its banking business, which are relatively stable and low-cost. Total deposits amounted to$53.86 billion as ofSeptember 30, 2022 , compared with$53.35 billion as ofDecember 31, 2021 . The Company's loan-to-deposit ratio was 88% as ofSeptember 30, 2022 , compared with 78% as ofDecember 31, 2021 . 96 -------------------------------------------------------------------------------- In addition to deposits, the Company has access to various sources of wholesale financing, including borrowing capacity with theFHLB andFederal Reserve Bank of San Francisco ("FRBSF"), unsecured federal funds lines of credit with various correspondent banks, and several master repurchase agreements with major brokerage companies to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute its business strategy. Economic conditions and the stability of capital markets impact the Company's access to and the cost of wholesale financing. The Company's access to capital markets is also affected by the ratings received from various credit rating agencies. As ofSeptember 30, 2022 , the Company had available borrowing capacity of$20.51 billion . The available borrowing capacity included$10.88 billion with the FHLB,$2.17 billion with the FRBSF, unsecured federal funds lines of credit with correspondent banks of$936.0 million , and borrowing capacity from unpledged debt securities of$6.52 billion . Unencumbered loans and/or debt securities were pledged to the FHLB and the FRBSF discount window as collateral. The Company has established operational procedures to enable borrowing against these assets, including regular monitoring of the total pool of loans and debt securities eligible as collateral. Eligibility of collateral is defined in guidelines from the FHLB and FRBSF and is subject to change at their discretion. The Company believes that its liquidity sources are sufficient to meet all reasonably foreseeable short-term needs. See Item 2 - MD&A - Balance Sheet Analysis - Deposits and Other Sources of Funding in this Form 10-Q for further detail related to the Company's funding sources. The Company maintains a certain level of liquid assets in the form of cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements and unencumbered high-quality and liquid AFS debt securities. The following table presents the Company's liquid assets as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 ($ in thousands) Encumbered Unencumbered Total Encumbered Unencumbered Total Cash and cash equivalents $ -$ 2,163,353 $ 2,163,353 $ -$ 3,912,935 $ 3,912,935 Interest-bearing deposits with banks - 630,543 630,543 - 736,492
736,492
Resale agreements due to mature in one year - 407,986 407,986 - 1,818,503
1,818,503
AFS debt securities:U.S. Treasury , andU.S. government agency andU.S. government-sponsored enterprise debt securities 273,735 587,366 861,101 384,895 1,949,757
2,334,652
U.S. government agency andU.S. government-sponsored enterprise mortgage-backed securities 189,722 2,125,592 2,315,314 418,761 3,738,502 4,157,263 Foreign government bonds - 225,810 225,810 - 257,733 257,733 Municipal securities - 249,502 249,502 - 523,158 523,158 Non-agency mortgage-backed securities, asset-backed securities and CLOs 181 1,724,617 1,724,798 240 2,042,642 2,042,882 Corporate debt securities - 529,565 529,565 - 649,665 649,665 Total$ 463,638 $ 8,644,334 $ 9,107,972 $ 803,896 $ 15,629,387 $ 16,433,283 Unencumbered liquid assets totaled$8.64 billion as ofSeptember 30, 2022 , compared with$15.63 billion as ofDecember 31, 2021 . AFS debt securities, included as part of liquidity sources, consist of high quality and liquid securities with moderate durations to minimize overall interest rate and liquidity risks. The Company believes these AFS debt securities provide quick sources of liquidity to obtain financing, regardless of market conditions, through sale or pledging. The decrease in liquid assets was primarily related to the transfer of$3.01 billion of debt securities from AFS to HTM during the first quarter of 2022, a decrease in cash and cash equivalents driven by loan funding activities, a decrease in resale agreements primarily due to repayments, and a decrease in fair value of AFS debt securities primarily due to interest rate increases. Management believes that the Company's excess cash, unencumbered AFS debt securities, borrowing capacity and access to sufficient sources of capital are adequate to meet its short- and long-term liquidity needs in the foreseeable future. In addition, the Company may use debt and equity issuances when costs are deemed attractive, should longer term needs arise. 97 -------------------------------------------------------------------------------- Liquidity Risk - Cash Requirements. In the ordinary course of the Company's business, the Company enters into contractual obligations that require future cash payments, including funding for customer deposit withdrawals, repayments for short- and long-term borrowings, leases obligations and other cash commitments. The Company also has off-balance sheet arrangements which represent transactions that are not recorded on the Consolidated Balance Sheet. The Company's off-balance sheet arrangements include (1) commitments to extend credit, such as loan commitments, commercial letters of credit for foreign and domestic trade, standby letters of credit ("SBLCs"), and financial guarantees, to meet the financing needs of its customers, (2) future interest obligations related to customer deposits and the Company's borrowings, and (3) transactions with unconsolidated entities that provide financing, liquidity, market risk or credit risk support to the Company, or engage in leasing, hedging or research and development services with the Company. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Information about the Company's loan commitments, commercial letters of credit and SBLCs is provided in Note 10 - Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q. The Company's liquidity sources have been, and are expected to be, sufficient to meet all such cash requirements. The Consolidated Statement of Cash Flows summarizes the Company's sources and uses of cash by type of activities for the first nine months of 2022 and 2021. Excess cash generated by operating and investing activities may be used to repay outstanding debt or invest in liquid assets. Liquidity Risk - Liquidity for East West. In addition to bank level liquidity management, the Company manages liquidity at the parent company level for various operating needs including payment of dividends, repurchases of common stock, principal and interest payments on its borrowings, acquisitions and additional investments in its subsidiaries. East West's primary source of liquidity is from cash dividends distributed by its subsidiary,East West Bank . The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends as discussed in Item 1. Business - Supervision and Regulation - Dividends and Other Transfers of Funds of the Company's 2021 Form 10-K. East West held$226.5 million and$345.0 million in cash and cash equivalents as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Management believes that East West has sufficient cash and cash equivalents to meet the projected cash obligations for the current year. Liquidity Risk - Liquidity Stress Testing. The Company utilizes liquidity stress analysis to determine the appropriate amounts of liquidity to maintain at the Company, foreign subsidiary and foreign branch levels needed to meet contractual and contingent cash outflows under a range of scenarios. Scenario analyses include assumptions about significant changes in key funding sources, market triggers, potential uses of funding and economic conditions in certain countries. In addition, Company specific events are incorporated into the stress testing. Liquidity stress tests are conducted to ascertain potential mismatches between liquidity sources and uses over a variety of time horizons, both immediate and longer term, and over a variety of stressed conditions. Given the range of potential stresses, the Company maintains contingency funding plans on a consolidated basis and for individual entities. As ofSeptember 30, 2022 , the Company was not aware of any material commitments for capital expenditures in the foreseeable future and believes it has adequate liquidity resources to conduct operations and meet other needs in the ordinary course of business. Given the uncertainty and the rapidly changing market and economic conditions, the Company will continue to actively evaluate the impact on its business and financial position. For more information on how economic conditions may impact our liquidity, see Item 1A. Risk Factors of the Company's 2021 Form 10-K. Market Risk Management Market risk is the risk that the Company's financial condition may change resulting from adverse movements in market rates or prices, including interest rates, foreign exchange rates, interest rate contracts prices, investment securities prices, credit spreads, and related risk due to mismatches in rate sensitive assets and liabilities. In the event of market stress, the risk could have a material impact on the Company's results of operations and financial condition. The Board'sRisk Oversight Committee has primary oversight responsibility over market risk management. At the management level, the ALCO establishes and monitors compliance with the policies and risk limits pertaining to market risk management activities. CorporateTreasury supports the ALCO in measuring, monitoring, and managing interest rate risk as well as all other market risks. 98 --------------------------------------------------------------------------------
Interest Rate Risk Management
Interest rate risk results primarily from the Company's traditional banking
activities of gathering deposits and extending loans, which are the primary
areas of market risk for the Company. Economic and financial conditions,
movements in interest rates, and consumer preferences impact the level of
noninterest-bearing funding sources at the Company, as well as affect the
difference between the interest the Company earns on interest-earning assets and
pays on interest-bearing liabilities. In addition, changes in interest rates can
influence the rate of principal prepayments on loans and the speed of deposit
withdrawals. Due to the pricing term mismatches and the embedded options
inherent in certain products, changes in market interest rates affect not only
the expected near-term earnings, but also the economic value of these
interest-earning assets and interest-bearing liabilities. Other market risks
include foreign currency exchange risk and equity price risk. These risks are
not considered significant to the Company and no separate quantitative
information concerning these risks is presented herein.
Under the oversight of the Company's Board of Directors, the ALCO coordinates
the overall management of the Company's interest rate risk. The ALCO meets
regularly and is responsible for reviewing the Company's open market positions
and establishing policies to monitor and limit exposures to market risk.
Management of interest rate risk is carried out primarily through strategies
involving the Company's debt securities portfolio, loan portfolio, available
funding channels, and capital market activities. In addition, the Company's
policies permit the use of derivative instruments to assist in managing interest
rate risk.
The interest rate risk exposure is measured and monitored through various risk
management tools, which include a simulation model that performs interest rate
sensitivity analyses under various interest rate scenarios. The model
incorporates the Company's cash instruments, loans, debt securities, resale
agreements, deposits, borrowings and repurchase agreements, as well as financial
instruments from the Company's foreign operations. The Company uses both a
static balance sheet and a forward growth balance sheet to perform the interest
rate sensitivity analyses. The simulated interest rate scenarios include an
instantaneous non-parallel shift in the yield curve and a gradual non-parallel
shift in the yield curve ("rate ramp") over a static balance sheet. In addition,
the Company also performs simulations using other alternative interest rate
scenarios, including various permutations of the yield curve flattening,
steepening or inverting. Results of these various simulations are used to
formulate and gauge strategies to achieve a desired risk profile within the
Company's capital and liquidity guidelines.
The net interest income simulation model is based on the actual maturity and
repricing characteristics of the Company's interest-rate sensitive assets,
liabilities, and related derivative contracts. It also incorporates various
assumptions, which management believes to be reasonable but may have a
significant impact on the results. These assumptions include, but are not
limited to, the timing and magnitude of changes in interest rates, the yield
curve evolution and shape, the correlation between various interest rate
indices, financial instruments' future repricing characteristics and spread
relative to benchmark rates, and the effect of interest rate floors and caps.
The modeled results are highly sensitive to deposit decay and deposit beta
assumptions, which are derived from a regression analysis of the Company's
historical deposit data. The Company used full- through-the-economic-cycle betas
with each incremental rate increase in the rate ramp scenarios, and did not
assume lags in repricing. Deposit beta commonly refers to the correlation of the
changes in interest rates paid on deposits to changes in the benchmark interest
rates. The model is also sensitive to the loan and investment prepayment
assumptions that are based on an independent model and the Company's historical
prepayment data, which consider anticipated prepayments under different interest
rate environments.
Simulation results are highly dependent on input assumptions. To the extent the
actual behavior is different from the assumptions used in the models, there
could be material changes in interest rate sensitivity results. The assumptions
applied in the model are documented, supported, and periodically back-tested to
assess the reasonableness and effectiveness. The Company makes appropriate
calibrations to the model as needed and continually validates the model,
methodology and results. Changes to key model assumptions are reviewed by the
ALCO. Scenario results do not reflect strategies that the management could
employ to limit the impact of changing interest rate expectations.
In March 2022 , the Federal Reserve raised the target range for the fed funds
rate to 0.25% to 0.50% to address concerns about inflation, which reflected
supply and demand imbalances due to the pandemic, higher energy prices, and
broader price pressures. The Federal Reserve has continued its aggressive
approach in responding to inflation and raised the target range for the fed
funds rate to 3.75% to 4.00% on November 2, 2022 . The market estimates that
interest rates are likely to continue to rise, potentially reaching 4.25% to
4.5% by the end of 2022.
99
--------------------------------------------------------------------------------Twelve-Month Net Interest Income Simulation
Net interest income simulation modeling measures interest rate risk through earnings volatility. The simulation projects the cash flow changes in interest rate sensitive assets and liabilities, expressed in terms of net interest income, over a specified time horizon for defined interest rate scenarios. Net interest income simulations provide insight into the impact of market rates changes on earnings, which help guide risk management decisions. The Company assesses interest rate risk by comparing the changes of net interest income in different interest rate scenarios. The following table presents the Company's net interest income sensitivity related to an instantaneous and sustained non-parallel shift in market interest rates by 100 and 200 bps as ofSeptember 30, 2022 andDecember 31, 2021 , based on a static balance sheet as of the date of the analysis. Change in Interest Rates Net Interest Income Volatility (1) (in bps) September 30, 2022 December 31, 2021 +200 11.7 % 19.5 % +100 6.0 % 9.4 % -100 (5.2) % NM -200 (10.2) % NM NM - Not meaningful. (1)The percentage change represents net interest income change over 12 month period in a stable interest rate environment versus in the various interest rate scenarios. The composition of the Company's loan portfolio creates sensitivity to interest rate movements due to the faster repricing of the floating-rate loan portfolio than the deposit products. Growth and/or contraction in the Company's loans, other earning assets, deposits, and borrowings may lead to changes in the sensitivity to interest rate movements. Year-to-date decreases in cash and cash equivalents, resale agreements, and short-term investments, together with growth in fixed-rate loans, as well as the interest rate hedging activities and changes in the funding mix have decreased the Company's asset sensitivity. In the table above, net interest income volatility is expressed in relation to the base-case net interest income, which increased betweenSeptember 30, 2022 andDecember 31, 2021 , due to balance sheet growth and an expanded base-case net interest margin. While an instantaneous and sustained non-parallel shift in market interest rates was used in the simulation model described in the preceding paragraph, the Company also models scenarios based on gradual shifts in interest rates and assesses the corresponding impacts. These interest rate scenarios provide additional information to estimate the Company's underlying interest rate risk. The rate ramp table below shows the net interest income volatility under a gradual non-parallel shift of the yield curve, in even monthly increments over the first 12 months, followed by rates held constant thereafter based on a static balance sheet as of the date of the analysis. Actual results will vary based on the timing and pace of interest rate changes, as well as changes in the balance sheet. Change in Interest Rates Net Interest Income Volatility (in bps) September 30, 2022 December 31, 2021 +200 Rate Ramp 5.2 % 9.2 % +100 Rate Ramp 2.6 % 4.1 % -100 Rate Ramp (2.2) % NM -200 Rate Ramp (4.9) % NM NM - Not meaningful. As ofSeptember 30, 2022 , the Company's net interest income profile reflects an asset sensitive position. Net interest income is expected to increase when interest rates rise, as the Company has a large share of variable rate loans in its loan portfolio, primarily linked to Prime or LIBOR indices. The Company's interest income is sensitive to changes in short-term interest rates. The Company's deposit portfolio is primarily composed of non-maturity deposits, which are not directly tied to short-term interest rate indices, but are, nevertheless, sensitive to changes in short-term interest rates. The modeled results are highly sensitive to reinvestment yield and deposit beta assumptions. Actual results in terms of net interest income growth during a period of rising interest rates will also reflect earning asset growth and deposit mix changes based on customer preferences relative to the interest rate environment. 100 --------------------------------------------------------------------------------
Economic Value of Equity at Risk
Economic value of equity ("EVE") is a cash flow calculation that takes the
present value of all asset cash flows and subtracts the present value of all
liability cash flows. This calculation is used for asset/liability management
and measures changes in the economic value of the bank. The economic value
approach provides a comparatively broader scope than the net interest income
volatility approach since it captures all anticipated cash flows.
The EVE simulation reflects the sensitivity of the EVE to interest rate changes
across the full maturity spectrum of the Company's assets and liabilities. It
identifies risks arising from repricing, prepayment and maturity gaps between
assets and liabilities on the balance sheet, as well as from derivative
exposures that are off-balance sheet. The simulation provides long-term economic
perspective into the Bank's interest rate risk profile, which allows the Bank to
manage anticipated negative effects of interest rate fluctuations.
The following table presents the Company's EVE sensitivity related to an
instantaneous and sustained non-parallel shift in market interest rates by 100
and 200 bps as of
Change in Interest Rates EVE Volatility (1)
(in bps) September 30, 2022 December 31, 2021
+200 1.0 % 7.1 %
+100 1.0 % 3.5 %
-100 0.0 % NM
-200 (0.3) % NM
NM - Not meaningful.
(1)The percentage change represents net portfolio value change of the Company in
a stable interest rate environment versus in the various interest rate
scenarios.
The Company's EVE sensitivity for the upward interest rate scenarios decreased
as of September 30, 2022 , compared with the results as of December 31, 2021 . The
changes in EVE sensitivity were primarily due to faster deposit decay and higher
deposit beta assumptions used in the model, changes in the level and shape of
the yield curve, and lower cash balances as of September 30, 2022 .
The Company's EVE profile as of September 30, 2022 reflects an asset sensitive
EVE position under the higher interest rate scenarios. Given the uncertainty of
the magnitude, timing and direction of future interest rate movements, as well
as the shape of the yield curve, actual results may vary from those predicted by
the Company's model.
Derivatives
It is the Company's policy not to speculate on the future direction of interest
rates, foreign currency exchange rates and energy commodity prices. However, the
Company periodically enters into derivative transactions in order to reduce its
exposure to market risks, primarily interest rate risk and foreign currency
risk. The Company believes that these derivative transactions, when properly
structured and managed, provides a hedge against inherent risk in certain assets
and liabilities or against risk in specific transactions. Hedging transactions
may be implemented using a variety of derivative instruments such as swaps,
forwards, options, and collars. Prior to entering into any hedging activities,
the Company analyzes the costs and benefits of the hedge in comparison to
alternative strategies. In addition, the Company enters into derivative
transactions in order to assist customers with their risk management objectives,
such as managing exposure to fluctuations in interest rates, foreign currencies
and energy commodity prices. To economically hedge against the derivative
contracts entered with the Company's customers, the Company enters into mirrored
derivative contracts with third-party financial institutions. The exposures from
derivative transactions are collateralized by cash and/or eligible securities
based on limits as set forth in the respective agreements entered between the
Company and counterparty financial institutions.
101
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The Company is subject to credit risk associated with the counterparties to the
derivative contracts. This counterparty credit risk is a multi-dimensional form
of risk, affected by both the exposure and credit quality of the counterparty,
both of which are sensitive to market-induced changes. The Company's Credit Risk
Management Committee provides oversight of credit risks and the Company has
guidelines in place to manage counterparty concentration, tenor limits, and
collateral. The Company manages the credit risk of its derivative exposures by
diversifying its positions among various counterparties, by entering into
legally enforceable master netting arrangements, and by requiring collateral
arrangements, where possible. The Company may also transfer counterparty credit
risk related to interest rate swaps to third-party financial institutions
through the use of credit risk participation agreements. Certain derivative
contracts are required to be centrally cleared through clearinghouses, which
further mitigates credit risk. The Company incorporates credit value adjustments
and other market standard methodologies to appropriately reflect its own
nonperformance risk and the respective counterparty's nonperformance risk in the
fair value measurements of its derivatives.
The following table summarizes certain information about derivative financial
instruments utilized by the Company in its management of interest rate risk and
foreign currency risk as of September 30, 2022 and December 31, 2021 :
September 30, 2022 December 31, 2021
Interest Rate Foreign Exchange Interest Rate Foreign Exchange ($ in thousands)
Contracts Contracts Contracts Contracts
Derivatives designated as Cash Flow Net Investment Cash Flow Net Investment
hedging instruments: Hedges Hedges Hedges Hedges
Notional amounts $ 2,525,000 $ 84,832 $ 275,000 $ 86,531
Fair value:
Recognized as an asset 533 7,107 - -
Recognized as a liability 24,679 - 57 225
Net fair value $ (24,146) $ 7,107 $ (57) $ (225)
Weighted-average interest rates:
0.483% 0.483%
Variable-rate borrowings - Pay (3-month (3-month
fixed (receive floating) USD-LIBOR) NA USD-LIBOR) NA
1.09%
Variable-rate loans - Receive (1-month
fixed (pay floating) USD-LIBOR) NA NA NA
Variable-rate loans - Receive 6.475%
fixed (pay floating) (USD-PRIME) NA NA NA
4.575%-1.500%
Variable-rate loans - Sell (1-month
cap-buy floor (floating rate ) USD-SOFR) NA NA NA
Weighted-average remaining term
to maturity (in months): 39.6 5.7 13.9 2.7
Derivatives not designated as Interest Rate Foreign Exchange Interest Rate Foreign Exchange
hedging instruments: Contracts Contracts Contracts Contracts
Notional amounts $ 17,261,862 $ 2,762,150 $ 17,575,420 $ 1,874,681
Fair value:
Recognized as an asset 429,505 74,767 240,222 21,033
Recognized as a liability 590,648 64,049 179,905 15,276
Net fair value $ (161,143) $ 10,718 $ 60,317 $ 5,757
NA - Not applicable.
Derivatives Designated as Hedging Instruments - Interest rate and foreign
exchange derivative contracts are utilized in the Company's asset and liability
management activities and serve as an efficient tool to manage the Company's
interest rate risk and foreign exchange risk. The Company uses interest rate
derivatives to hedge the risk of variable cash flows in its variable interest
rate borrowings, which includes repurchase agreements and FHLB advances, as well
as a portion of its variable interest rate CRE loans. The Company also uses
foreign exchange derivatives to hedge the risk of changes in the USD equivalent
value of a designated monetary amount of the Company's net investment in East
West Bank (China) Limited . For both the cash flow and the net investment hedges,
the changes in the fair value of the hedging instruments are recognized in AOCI,
net of tax, on the Consolidated Balance Sheet.
The fluctuation in foreign currency translation of the hedged exposure is
expected to be offset by changes in the fair value of the forward contracts. As
of September 30, 2022 , the outstanding foreign currency forwards effectively
hedged approximately 44% of the net Chinese Renminbi exposure from East West
Bank (China) Limited .
102
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Changes to the composition of the Company's derivatives designated as hedging
instruments during the first nine months of 2022 reflect actions taken for
interest rate risk and foreign exchange rate risk management. The Company
repositions its hedging derivatives portfolio based on the current assessment of
economic and financial conditions, including the interest rate and foreign
currency environments, balance sheet composition and trends, and the relative
mix of its cash and derivative positions.
Derivatives Not Designated as Hedging Instruments - The Company enters into
interest rate, foreign exchange and energy commodity contracts to support the
business needs of its customers. When derivative transactions are executed with
its customers, the derivative contracts are offset by paired trades with
third-party financial institutions. The Company may enter into derivative
contracts that are either exchange-traded, centrally cleared through a
clearinghouse or over-the-counter. Derivative contracts entered with central
clearing organizations are settled-to-market daily to the extent the central
clearing organizations' rulebook legally characterize daily payments of
variation margin as a settlement.
The Company offers various interest rate derivative contracts to its customers
and enters into offsetting contracts with third-party financial institutions,
including central clearing organizations, to manage its interest risk. Interest
rate derivative contracts allow borrowers to lock in attractive intermediate and
long-term fixed rate financing while not increasing the interest rate risk to
the Company. These transactions are not linked to any specific Company assets or
liabilities on the Consolidated Balance Sheet, or to forecasted transactions in
a hedging relationship, and are therefore classified as economic hedges. The
contracts are marked-to-market at each reporting period. The changes in fair
values of the derivative contracts traded with third-party financial
institutions are expected to be largely comparable to the changes in fair values
of the derivative transactions executed with customers throughout the terms of
these contracts, except for the credit valuation adjustment component. The
Company records credit valuation adjustments on derivatives to properly reflect
the variances of credit worthiness between the Company and the counterparties,
considering the effects of enforceable master netting agreements and collateral
arrangements.
The Company enters into foreign exchange contracts with its customers to
accommodate their business needs. The foreign exchange contracts include forward
and spot contracts, swaps and options. To manage the foreign exchange risk and
credit exposures from the contracts with its customers, the Company enters into
offsetting foreign exchange contracts with third-party financial institutions
and/or enters into bilateral collateral and master netting agreements with
certain customer counterparties. The changes in the fair values of contracts
entered with third-party financial institutions are expected to be largely
comparable to the changes in fair values of the foreign exchange transactions
executed with the customers throughout the terms of these contracts. As of
September 30, 2022 , the Company anticipates performance by all counterparties
and has not experienced nonperformance by any of its counterparties, and
therefore did not incur any related losses. 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-denominated
on-balance sheet assets and liabilities, primarily foreign currency-denominated
deposits offered to its customers. The Company's policies permit taking
proprietary currency positions within approved limits, in compliance with
exemptions to proprietary trading restrictions provided under Section 619 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Volcker Rule.
The Company does not speculate in the foreign exchange markets, and actively
manages its foreign exchange exposures within prescribed risk limits and defined
controls.
The Company enters into energy commodity contracts with its customers to allow
them to hedge against the risk of energy commodity price fluctuations. To
economically hedge against the risk of fluctuation in energy commodity prices in
the products offered to its customers, the Company enters into offsetting energy
commodity contracts with third-party financial institutions, including central
clearing organizations. The changes in fair values of the energy commodity
contracts traded with third-party financial institutions are expected to be
largely comparable to the changes in fair values of the energy commodity
transactions executed with customers throughout the terms of these contracts.
Additional information on the Company's derivatives is presented in Note 1 -
Summary of Significant Accounting Policies - Significant Accounting Policies -
Derivatives to the Consolidated Financial Statements in the Company's 2021 Form
10-K, and Note 3 - Fair Value Measurement and Fair Value of Financial
Instruments and Note 6 - Derivatives to the Consolidated Financial Statements in
this Form 10-Q.
103
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements in the Company's 2021 Form 10-K. Certain of these policies include critical accounting estimates, which are subject to valuation assumptions, subjective or complex judgments about matters that are inherently uncertain, and it is likely that materially different amounts could be reported under different assumptions and conditions. The Company has procedures and processes in place to facilitate making these judgments. The following accounting policies are critical to the Company's Consolidated Financial Statements:
•allowance for credit losses;
•fair value estimates; •goodwill impairment; and •income taxes.
For additional information on the Company's critical accounting estimates involving significant judgments, see Item 7. MD&A - Critical Accounting Estimates in the Company's 2021 Form 10-K.
Reconciliation of GAAP to Non-GAAP Financial Measures
To supplement the Company's unaudited interim Consolidated Financial Statements presented in accordance withU.S. GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not prepared in accordance with, or as an alternative toU.S. GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company's performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance withU.S. GAAP. A non-GAAP financial measure may also be a financial metric that is not required byU.S. GAAP or other applicable requirements. The Company believes these non-GAAP financial measures, when taken together with the correspondingU.S. GAAP financial measures, provide meaningful supplemental information regarding its performance, and allow comparability to prior periods. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes.
The following tables present the reconciliations of
Three Months Ended
September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Net income (a) $ 295,339 $ 225,449 $ 791,320 $ 655,185
Add: Amortization of core deposit
intangibles 485 705 1,484 2,147
Amortization of mortgage servicing
assets 340 430 1,096 1,264
Tax effect of amortization
adjustments (1) (237) (322) (742) (968)
Tangible net income (b) $ 295,927 $ 226,262 $ 793,158 $ 657,628
Average stockholders' equity (c) $ 5,772,638 $ 5,680,306 $ 5,765,637 $ 5,482,705
Less: Average goodwill (465,697) (465,697) (465,697) (465,697)
Average other intangible assets
(2) (8,379) (10,135) (8,801) (10,847)
Average tangible equity (d) $ 5,298,562 $ 5,204,474 $ 5,291,139 $ 5,006,161
Return on average equity (3) (a)/(c) 20.30 % 15.75 % 18.35 % 15.98 %
Tangible return on average tangible
equity (3) (b)/(d) 22.16 % 17.25 % 20.04 % 17.56 %
(1)Applied statutory tax rate of 28.77% for the third quarter and first nine
months of 2022. Applied statutory tax rate of 28.37% for the third quarter and
first nine months of 2021.
(2)Includes core deposit intangibles and mortgage servicing assets.
(3)Annualized.
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Three Months Ended September
30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Net interest income before
provision for (reversal of) credit
losses $ 551,809 $ 395,706 $ 1,440,374 $ 1,125,874
Total noninterest income 75,552 73,109 233,739 214,406
Total revenue (a) $ 627,361 $ 468,815 $ 1,674,113 $ 1,340,280
Total noninterest expense (b) $ 215,973 $ 205,384 $ 602,283 $ 585,984
Less: Amortization of tax credit
and other investments (19,874) (38,008) (48,753) (90,657)
Amortization of core deposit
intangibles (485) (705) (1,484) (2,147)
Adjusted noninterest expense (c) $ 195,614 $ 166,671 $ 552,046 $ 493,180
Efficiency ratio (b)/(a) 34.43 % 43.81 % 35.98 % 43.72 %
Adjusted efficiency ratio (c)/(a) 31.18 % 35.55 % 32.98 % 36.80 %
September 30, December 31, 2021
($ and shares in thousands, except per share data) 2022
Stockholders' equity (a) $ 5,660,668 $ 5,837,218
Less: Goodwill (465,697) (465,697)
Other intangible assets (1) (8,667) (9,334)
Tangible equity (b) $
5,186,304
Number of common shares at period-end (c) 140,918 141,908 Book value per common share (a)/(c)$ 40.17 $ 41.13 Tangible equity per common share (b)/(c) $ 36.80 $ 37.79
(1)Includes core deposit intangibles and mortgage servicing assets.
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