EAST WEST BANCORP, INC.
Page
Overview 56
Financial Review 58
Results of Operations 59
Net Interest Income 59
Noninterest Income 63
Noninterest Expense 64
Income Taxes 65
Operating Segment Results 65
Balance Sheet Analysis 68
Debt Securities 68
Loan Portfolio 70
Foreign Outstandings 76
Capital 76
Deposits and Other Sources of Fund ing 77
Regulatory Capital and Ratios 78
Risk Management 79
Credit Risk Management 80
Liquidity Risk Management 85
Market Risk Management 87
Critical Accounting Policies and Estimates 92
Reconciliation of GAAP to Non-GAAP Financial Measures 93
Forward-Looking Statements 95
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Overview
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources ofEast West Bancorp, Inc. (referred to herein on an unconsolidated basis as "East West" and on a consolidated basis as the "Company," "we" or "EWBC"), 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 Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed withthe United States ("U.S.")Securities and Exchange Commission ("SEC") onFebruary 28, 2022 (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 business segments: Consumer and Business Banking, and Commercial Banking, with the remaining operations recorded in 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 our customers' 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 ofMarch 31, 2022 , the Company had$62.24 billion in assets and approximately 3,100 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
Coronavirus Disease Global Pandemic
The Coronavirus Disease 2019 ("COVID-19") pandemic created a historic public
health crisis and caused unprecedented disruptions to global economies. Although
U.S. economic conditions have continued to recover from the COVID-19 pandemic as
many health and safety restrictions have been lifted and vaccine rates have
increased, certain adverse consequences of the pandemic continue to impact the
macroeconomic environment and may persist for some time, including inflationary
concerns, as well as stresses in labor markets, and global supply chains. As a
result, it is difficult to predict and quantify all the specific impacts, and
the extent to which the COVID-19 pandemic may negatively affect our business,
financial condition, results of operations, regulatory capital, and liquidity
ratios. The Company has been, and may continue to be, impacted by the COVID-19
pandemic. Despite this, the Company has continued to focus on serving its
customers and communities and maintaining the well-being of its employees. The
Company continues to monitor the external environment and make changes to its
safety protocols as appropriate.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Overview in the Company's 2021 Form 10-K and
Item 2. MD&A - Balance Sheet Analysis - Loan Portfolio in this Quarterly Report
on Form 10-Q ("this Form 10-Q") for a discussion on the initiatives the Company
has undertaken to support its customers. Further discussion of the potential
impacts on the Company's business due to the COVID-19 pandemic has been provided
in Item 1A. - Risk Factors - Risks Related to the COVID-19 Pandemic in the
Company's 2021 Form 10-K.
LIBOR Transition
InMarch 2021 , theUnited Kingdom's Financial Conduct Authority formally announced the London Interbank Offered Rate ("LIBOR") cessation dates. As ofJanuary 1, 2022 , the one-week and two-monthU.S. dollar ("USD") LIBOR tenors were no longer published. The overnight, one-, three-, six- and 12-month USD LIBOR tenors will continue to be calculated using panel bank submissions for the purpose of legacy contracts but will permanently cease onJune 30, 2023 . 56 -------------------------------------------------------------------------------- In connection with the transition from LIBOR, the Adjustable Interest Rate (LIBOR) Act was signed into law as part of the Consolidated Appropriations Act, 2022, onMarch 15, 2022 . This federal legislation provides a targeted solution for financial contracts that mature after the cessation of LIBOR in mid-2023 and have no effective means to replace LIBOR upon its cessation. For contracts in which a party has the discretion to select a successor rate, the legislation provides a safe harbor to parties if they choose the benchmark replacement to be identified by theBoard of Governors of theFederal Reserve System (the "Federal Reserve") through regulations that are to be promulgated within 180 days after the legislation's enactment. AnyFederal Reserve -identified replacement benchmark will be based on the Secured Overnight Financing Rate ("SOFR"), a rate published by theFederal Reserve Bank of New York , and will include an appropriate "tenor spread adjustment" between LIBOR and SOFR. 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 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 began 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 any renewals or extensions that extend the use of LIBOR rates beginningJanuary 1, 2022 . The Company also adopted industry best practice guidelines for fallback language for new transactions and distributed communications related to the transition to certain impacted internal and external stakeholders. 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. 57 --------------------------------------------------------------------------------
Financial Review
Three Months Ended
($ and shares in thousands, except per share, and ratio data) March 31, 2022 March 31, 2021
Summary of operations:
Net interest income before provision for credit losses (1) $ 415,613 $ 353,695
Noninterest income 79,743 72,866
Total revenue 495,356 426,561
Provision for credit losses 8,000 -
Noninterest expense 189,450 191,077
Income before income taxes 297,906 235,484
Income tax expense 60,254 30,490
Net income $ 237,652 $ 204,994
Per common share:
Basic earnings $ 1.67 $ 1.45
Diluted earnings $ 1.66 $ 1.44
Dividends declared $ 0.40 $ 0.33
Weighted-average number of shares outstanding:
Basic 142,025 141,646
Diluted 143,223 142,844
Performance metrics:
Return on average assets ("ROA") 1.56 % 1.50 %
Return on average equity ("ROE") 16.50 % 15.57 %
Adjusted return on average tangible equity (2) 18.00 % 17.17 %
Common dividend payout ratio 24.23 % 23.11 %
Net interest margin 2.87 % 2.71 %
Efficiency ratio (3) 38.25 % 44.79 %
Adjusted efficiency ratio (2) 35.34 % 38.68 %
At period end: March 31, 2022 December 31, 2021
Total assets $ 62,241,456 $ 60,870,701
Total loans (4) $ 43,491,313 $ 41,694,416
Total deposits $ 54,938,361 $ 53,350,532
Common shares outstanding at period-end 142,257 141,908
Book value per common share $ 40.09 $ 41.13
Tangible equity per common share (2) $ 36.76 $ 37.79
(1)Includes $5.2 million and $15.0 million of interest income related to
Paycheck Protection Program ("PPP") loans for the first quarters of 2022 and
2021, respectively.
(2)For additional information regarding the reconciliation of these non-U.S.
Generally Accepted Accounting Principles ("GAAP") financial measures, refer to
Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this
Form 10-Q.
(3)The efficiency ratio is noninterest expense divided by total revenue.
(4)Includes $318.1 million and $534.2 million of PPP loans as of March 31, 2022
and December 31, 2021 , respectively.
The Company's first quarter 2022 net income was $237.7 million , an increase of
$32.7 million or 16%, from first quarter 2021 net income of $205.0 million . The
increase was primarily due to revenue growth, partially offset by higher income
tax expense and provision for credit losses.
Noteworthy items about the Company's first quarter 2022 performance included:
•Total assets reached $62.24 billion , growing by $1.37 billion or 2% from
December 31, 2021 , primarily driven by loan growth.
•Total loans were $43.49 billion as of March 31, 2022 , an increase of $1.80
billion or 4% from $41.69 billion as of December 31, 2021 . This was primarily
driven by well-diversified growth throughout the commercial real estate ("CRE"),
commercial and industrial ("C&I") and residential mortgage loans.
•Total deposits were $54.94 billion as of March 31, 2022 , an increase of $1.59
billion or 3% from $53.35 billion as of December 31, 2021 . Growth was primarily
driven by noninterest-bearing demand deposits, which were partially offset by a
decrease in money market accounts. Noninterest-bearing demand deposits comprised
45% of total deposits as of March 31, 2022 , up from 43% as of December 31, 2021 .
•First quarter 2022 net interest income before provision for credit losses was
$415.6 million , an increase of $61.9 million or 18%, compared with $353.7
million for the first quarter of 2021.
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•Profitability ratios in the first quarter of 2022 expanded. First quarter 2022
ROA was 1.56%, an increase of six basis points ("bps") from 1.50% for the first
quarter of 2021. First quarter 2022 ROE was 16.50%, an increase of 93 bps, from
15.57% for the first quarter of 2021. First quarter 2022 adjusted return on
average tangible equity was 18.00%, compared with 17.17% for the first quarter
of 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 efficiency ratio was 38.25% and 44.79% for the first quarters of 2022 and
2021, respectively. The adjusted efficiency ratio, which excludes the
amortization of tax credit and other investments and the amortization of core
deposit intangibles, was 35.34% for the first quarter of 2022, an improvement of
334 bps compared with 38.68% for the same period in 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 recorded a provision for credit losses of $8.0 million for the
first quarter of 2022, compared with no provision for credit losses for the
first quarter of 2021.
•Asset quality metrics were strong. As of March 31, 2022 , criticized loans
totaled $833.3 million , or 1.92% of loans-held-for-investment, compared with
$833.1 million , or 2.00% of loans held-for-investment, as of December 31, 2021 .
Nonperforming assets were $94.4 million or 0.15% of total assets as of March 31,
2022 , a decrease of $9.1 million or 9%, compared with $103.5 million or 0.17% of
total assets as of December 31, 2021 . First quarter 2022 net charge-offs were
$8.3 million , or annualized 0.08% of average loans held-for-investment, down
from $13.4 million , or annualized 0.14% of average loans held-for-investment,
for the first quarter of 2021.
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.
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First quarter 2022 net interest income before provision for credit losses was
$415.6 million , an increase of $61.9 million or 18%, compared with $353.7
million for the first quarter of 2021. First quarter 2022 net interest margin
was 2.87%, an increase of 16 bps from 2.71% for the first quarter of 2021. The
year-over-year net interest income growth and net interest margin expansion
primarily reflected strong loan growth, higher loan yields and a lower cost of
deposits.
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Average interest-earning assets were $58.69 billion for the first quarter of
2022, an increase of $5.84 billion or 11% from $52.85 billion for the first
quarter of 2021. The year-over-year increase in average interest-earning assets
primarily reflected growth in the average balances of debt securities, loans,
and resale agreements, partially offset by a decrease in average
interest-bearing cash and deposits with banks.
The yield on average interest-earning assets for the first quarter of 2022 was
2.99%, an increase of six bps from 2.93% for the first quarter of 2021. Strong
loan growth drove a favorable shift in the average interest-earning asset mix to
higher yielding assets in the first quarter of 2022.
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The average loan yield for the first quarter of 2022 was 3.63%, an increase of
five bps from 3.58% for the first quarter of 2021. 65% and 64% of loans
held-for-investment were variable-rate or hybrid loans in their adjustable-rate
period as of March 31, 2022 and 2021, respectively.
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Deposits are an important source of funds and impact both net interest income
and net interest margin. The average cost of deposits was 0.10% for the first
quarter of 2022, an eight bps decrease from 0.18% for the first quarter of 2021.
The year-over-year decrease reflected lower rates paid on interest-bearing
deposits, a higher proportion of noninterest-bearing demand deposits in the
deposit mix, and the run-off of higher-cost time deposits. The average cost of
interest-bearing deposits decreased 13 bps to 0.17% in first quarter of 2022,
from 0.30% in the first quarter of 2021. Noninterest-bearing demand deposits
comprised 43% of average total deposits in the first quarter of 2022, compared
with 38% in the first quarter of 2021. Time deposits comprised 15% of average
total deposits for the first quarter of 2022, compared with 19% for the first
quarter of 2021.
The average cost of funds was 0.12% for the first quarter of 2022, a decrease of
11 bps from 0.23% for the first quarter of 2021. The decrease in the average
cost of funds reflected the lower cost of deposits and the maturity of $175.0
million of Federal Home Loan Bank ("FHLB") advances, which had a weighted
average rate of 0.59% during the first quarter of 2021. Other sources of funding
included in the calculation of the average cost of funds are FHLB advances,
assets sold under repurchase agreements ("repurchase agreements"), long-term
debt and short-term borrowings.
The Company utilizes various tools to manage interest rate risk. Refer to the
Interest Rate Risk Management section of Item 2. MD&A - Risk Management - Market
Risk Management in this Form 10-Q.
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The following table presents the interest spread, net interest margin, average
balances, interest income and expense, and the average yield/rate by asset and
liability component for the first quarters of 2022 and 2021:
Three Months Ended March 31,
2022 2021
Average Average
Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate (1) Balance Interest Rate (1)
ASSETS
Interest-earning assets:
Interest-bearing cash and deposits with
banks $ 4,466,012 $ 3,260 0.30 % $ 6,117,799 $ 3,632 0.24 %
Resale agreements 2,097,998 8,383 1.62 % 1,461,900 6,099 1.69 %
Available-for-sale ("AFS") debt
securities (2)(3) 7,969,795 34,469 1.75 % 6,459,875 29,100 1.83 %
Held-to-maturity ("HTM") debt securities
(2)(4) 1,968,568 8,198 1.69 % - - - %
Loans (5)(6) 42,112,418 377,110 3.63 % 38,729,307 342,008 3.58 %
Restricted equity securities 77,575 609 3.18 % 83,164 547 2.67 %
Total interest-earning assets $ 58,692,366 $ 432,029 2.99 % $ 52,852,045 $ 381,386 2.93 %
Noninterest-earning assets:
Cash and due from banks 641,882 580,277
Allowance for loan losses (543,345) (618,589)
Other assets 2,967,145 2,780,550
Total assets $ 61,758,048 $ 55,594,283
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Checking deposits $ 6,648,065 $ 1,402 0.09 % $ 6,393,034 $ 4,214 0.27 %
Money market deposits 12,913,336 3,203 0.10 % 11,573,847 4,711 0.17 %
Savings deposits 2,930,309 1,704 0.24 % 2,674,476 1,741 0.26 %
Time deposits 8,100,890 6,680 0.33 % 9,112,662 11,156 0.50 %
Short-term borrowings 1,866 9 1.96 % 4,703 42 3.62 % FHLB advances 160,018 578 1.46 % 652,758 3,069 1.91 % Repurchase agreements 311,984 2,016 2.62 % 300,000 1,978 2.67 % Long-term debt and finance lease liabilities 152,011 824 2.20 % 152,088 780 2.08 % Total interest-bearing liabilities$ 31,218,479 $ 16,416 0.21 %$ 30,863,568 $ 27,691 0.36 % Noninterest-bearing liabilities and stockholders' equity: Demand deposits 23,432,746 18,093,696 Accrued expenses and other liabilities 1,264,208 1,298,921 Stockholders' equity 5,842,615 5,338,098 Total liabilities and stockholders' equity$ 61,758,048 $ 55,594,283 Interest rate spread 2.78 % 2.57 % Net interest income and net interest margin$ 415,613 2.87 %$ 353,695 2.71 % (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$23.5 million and$19.0 million for the first quarters of 2022 and 2021, respectively. (4)Includes the amortization of premiums on HTM debt securities of$134 thousand for the first quarter of 2022. (5)Average balances include nonperforming loans and loans held-for-sale. (6)Loans include the accretion of net deferred loan fees, unearned fees and amortization of premiums, which totaled$12.4 million and$13.9 million for the first quarters of 2022 and 2021, respectively. 62 -------------------------------------------------------------------------------- The following table summarizes the extent to which changes in (1) interest rates, and (2) volume of average interest-earning assets and average interest-bearing liabilities affected the Company's net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Three Months Ended March 31, 2022 vs. 2021 Total Changes Due to ($ in thousands) Change Volume Yield/Rate Interest-earning assets: Interest-bearing cash and deposits with banks$ (372) $ (1,102) $ 730 Resale agreements 2,284 2,552 (268) AFS debt securities 5,369 6,570 (1,201) HTM debt securities 8,198 8,198 - Loans 35,102 30,237 4,865 Restricted equity securities 62 (39) 101 Total interest and dividend income$ 50,643 $ 46,416 $ 4,227 Interest-bearing liabilities: Checking deposits$ (2,812) $ 162 $ (2,974) Money market deposits (1,508) 497 (2,005) Savings deposits (37) 158 (195) Time deposits (4,476) (1,136) (3,340) Short-term borrowings (33) (19) (14) FHLB advances (2,491) (1,906) (585) Repurchase agreements 38 78 (40) Long-term debt and finance lease liabilities 44 - 44 Total interest expense$ (11,275) $ (2,166) $ (9,109) Change in net interest income$ 61,918 $ 48,582 $ 13,336 Noninterest Income The following table presents the components of noninterest income for the first quarters of 2022 and 2021: Three Months Ended March 31, Change from 2021 ($ in thousands) 2022 2021 $ % Lending fees$ 19,438 $ 18,357 $ 1,081 6 % Deposit account fees 20,315 15,383 4,932 32 % Interest rate contracts and other derivative income 11,133 16,997 (5,864) (35) % Foreign exchange income 12,699 9,526 3,173 33 % Wealth management fees 6,052 6,911 (859) (12) % Net gains on sales of loans 2,922 1,781 1,141 64 % Gains on sales of AFS debt securities 1,278 192 1,086 NM Other investment income 1,627 925 702 76 % Other income 4,279 2,794 1,485 53 % Total noninterest income$ 79,743 $ 72,866 $ 6,877 9 % NM - Not meaningful. 63
-------------------------------------------------------------------------------- Noninterest income comprised 16% and 17% of total revenue for the first quarters of 2022 and 2021, respectively. First quarter 2022 noninterest income was$79.7 million , an increase of$6.9 million or 9%, compared with$72.9 million for the same period in 2021. This increase was primarily due to increases in deposit account fees, foreign exchange income, other income, net gains on sales of loans and gains on sales of AFS debt securities, partially offset by a decrease in interest rate contracts and other derivative income. Deposit account fees were$20.3 million for the first quarter of 2022, an increase of$4.9 million or 32%, compared with$15.4 million for the same period in 2021. The year-over-year growth was primarily driven by commercial deposit account and customer growth. Interest rate contracts and other derivative income was$11.1 million for the first quarter of 2022, a decrease of$5.9 million or 35%, compared with$17.0 million for the same period in 2021. This decrease was primarily due to a lower amount of favorable credit valuation adjustments in the first quarter of 2022, compared with the year-ago period. Foreign exchange income was$12.7 million for the first quarter of 2022, an increase of$3.2 million or 33%, compared with$9.5 million for the same period in 2021. This increase primarily reflected the spread earned on foreign exchange transactions. Net gains on sales of loans were$2.9 million for the first quarter of 2022, an increase of$1.1 million or 64%, compared with$1.8 million for the same period in 2021. The increase was primarily due to a higher volume ofSmall Business Administration ("SBA") loans sold. Gains on sales of AFS debt securities were$1.3 million for the first quarter of 2022, an increase of$1.1 million compared with$192 thousand for the same period in 2021. The increase was primarily due to a higher volume of AFS debt securities sold. Other income was$4.3 million for the first quarter of 2022, an increase of$1.5 million or 53%, compared with$2.8 million for the same period in 2021. The increase was primarily due to higher early termination fees received during the first quarter of 2022 related to the Company's financing lease contracts.
Noninterest Expense
The following table presents the components of noninterest expense for the first quarters of 2022 and 2021:
Three Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Compensation and employee benefits $ 116,269 $ 107,808 $ 8,461 8 %
Occupancy and equipment expense 15,464 15,922 (458) (3) %
Deposit insurance premiums and regulatory
assessments 4,717 3,876 841 22 %
Deposit account expense 4,693 3,892 801 21 %
Data processing 3,665 4,478 (813) (18) %
Computer software expense 7,294 7,159 135 2 %
Consulting expense 1,833 1,475 358 24 %
Legal expense 718 1,502 (784) (52) %
Other operating expense 20,897 19,607 1,290 7 %
Amortization of tax credit and other
investments 13,900 25,358 (11,458) (45) %
Total noninterest expense $ 189,450 $ 191,077 $ (1,627) (1) %
First quarter 2022 noninterest expense was $189.5 million , a decrease of $1.6
million or 1%, compared with $191.1 million for the same period in 2021. The
decrease was primarily due to a decrease in amortization of tax credit and other
investments, partially offset by higher compensation and employee benefits.
Compensation and employee benefits was $116.3 million for the first quarter of
2022, an increase of $8.5 million or 8%, compared with $107.8 million for the
same period in 2021. This increase was primarily due to higher deferred loan
costs related to PPP loan originations during the first quarter of 2021.
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Amortization of tax credit and other investments were $13.9 million for the
first quarter of 2022, a decrease of $11.5 million or 45%, compared with $25.4
million for the same period in 2021. This year-over-year decrease was primarily
due to the expiration of production tax credit contracts during the second half
of 2021. In addition, the year-over-year variability in the amortization of tax
credit and other investments reflected the impact of investments that closed in
a given period.
Income Taxes
Three Months Ended March 31,
($ in thousands) 2022 2021 % Change
Income before income taxes $ 297,906 $ 235,484 27 %
Income tax expense $ 60,254 $ 30,490 98 %
Effective tax rate 20.2 % 12.9 %
First quarter 2022 income tax expense was $60.3 million , an increase of $29.8
million , compared with first quarter 2021 income tax expense of $30.5 million .
First quarter 2022 effective tax rate was 20.2%, compared with first quarter
2021 effective tax rate of 12.9%. The increase in income tax expense was
primarily driven by a higher level of income before income tax expense and an
increase in the effective tax rate. First quarter 2022 effective tax rate was
20.2%, compared with first quarter 2021 effective tax rate of 12.9%. The
year-over-year increase in the effective tax rate was primarily due to higher
income before income taxes and a decrease in tax credits recognized in 2022.
Operating Segment Results
The Company organizes its operations into three reportable operating segments:
(1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These
segments are defined by the type of customers served and the related products
and services provided. The segments reflect how financial information is
currently evaluated by management. For additional description of the Company's
internal management reporting process, including the segment cost allocation
methodology, see Note 14 - Business Segments to the Consolidated Financial
Statements in this Form 10-Q.
Segment net interest income represents the difference between actual interest
earned on assets and interest incurred on liabilities of the segment, adjusted
for funding charges or credits through the Company's internal funds transfer
pricing ("FTP") process.
The following table presents the results by operating segment for the periods
indicated:
Three Months Ended March 31,
Consumer and Business Banking Commercial Banking Other
($ in thousands) 2022 2021 2022 2021 2022 2021
Total revenue (loss) (1) $ 238,413 $ 173,341 $ 257,154 $ 224,488 $ (211) $ 28,732
Provision for (reversal
of) credit losses 3,104 (4,249) 4,896 4,249 - -
Noninterest expense 96,095 89,286 73,395 69,257 19,960 32,534
Segment income (loss)
before income taxes (1) 139,214 88,304 178,863 150,982 (20,171) (3,802)
Segment net income (1) $ 99,164 $ 63,251 $ 127,507 $ 108,207 $ 10,981 $ 33,536
(1)During the fourth quarter of 2021, the Company enhanced its segment
allocation methodology related to the fair values of interest rate and commodity
derivative contracts, which are included in noninterest income. These fair
values, which were previously allocated to the "Commercial Banking" segment
prior to the fourth quarter of 2021, have since been reclassified between
"Consumer and Business Banking" and "Commercial Banking." Balances for the first
quarter of 2021 have been reclassified to reflect these allocation changes for
comparability.
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.
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Three Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest income before provision for
(reversal of) credit losses $ 213,214 $ 149,899 $ 63,315 42 %
Noninterest income (1) 25,199 23,442 1,757 7 %
Total revenue (1) 238,413 173,341 65,072 38 %
Provision for (reversal of) credit losses 3,104 (4,249) 7,353 (173) %
Noninterest expense 96,095 89,286 6,809 8 %
Segment income before income taxes (1) 139,214 88,304 50,910 58 %
Income tax expense 40,050 25,053 14,997 60 %
Segment net income (1) $ 99,164 $ 63,251 $ 35,913 57 %
Average loans $ 14,606,446 $ 13,300,153 $ 1,306,293 10 %
Average deposits $ 33,113,820 $ 30,224,844 $ 2,888,976 10 %
(1)During the fourth quarter of 2021, the Company enhanced its segment
allocation methodology related to the fair values of interest rate and commodity
derivative contracts, which are included in noninterest income. These fair
values, which were previously allocated to the "Commercial Banking" segment
prior to the fourth quarter of 2021, have since been reclassified between
"Consumer and Business Banking" and "Commercial Banking." Balances for the first
quarter of 2021 have been reclassified to reflect these allocation changes for
comparability.
Consumer and Business Banking segment net income was $99.2 million for the first
quarter of 2022, an increase of $35.9 million or 57% year-over-year. This
increase reflected revenue growth, partially offset by higher income tax
expense, provision for credit losses and noninterest expense. Net interest
income before provision for (reversal of) credit losses was $213.2 million for
the first quarter of 2022, an increase of $63.3 million or 42% year-over-year.
The growth in net interest income before provision for (reversal of) credit
losses was driven by lower interest expense, primarily due to lower interest
rates and a larger proportion of noninterest-bearing deposits, and higher
interest income, primarily due to growth in residential mortgage loans.
Commercial Banking
The Commercial Banking segment primarily generates commercial loan and deposit
products. Commercial loan products include CRE lending, construction finance,
working capital lines of credit, trade finance, letters of credit, commercial
business lending, affordable housing lending, asset-based lending, asset-backed
finance, project finance and equipment financing. Commercial deposit products
and other financial services include treasury management, foreign exchange
services, and interest rate and commodity risk hedging.
66
--------------------------------------------------------------------------------The following table presents additional financial information for the Commercial Banking segment for the periods indicated:
Three Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest income before provision for
credit losses $ 208,077 $ 177,092 $ 30,985 17 %
Noninterest income (1) 49,077 47,396 1,681 4 %
Total revenue (1) 257,154 224,488 32,666 15 %
Provision for credit losses 4,896 4,249 647 15 %
Noninterest expense 73,395 69,257 4,138 6 %
Segment income before income taxes (1) 178,863 150,982 27,881 18 %
Income tax expense 51,356 42,775 8,581 20 %
Segment net income (1) $ 127,507 $ 108,207 $ 19,300 18 %
Average loans $ 27,505,972 $ 25,429,154 $ 2,076,818 8 %
Average deposits $ 17,736,525 $ 15,095,700 $ 2,640,825 17 %
(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 first quarter
of 2021 have been reclassified to reflect these allocation changes for
comparability.
Commercial Banking segment net income was $127.5 million for the first quarter
of 2022, an increase of $19.3 million or 18% year-over-year. This increase
reflected revenue growth, partially offset by higher income tax expense and
noninterest expense. Net interest income before provision for credit losses was
$208.1 million for the first quarter of 2022, an increase of $31.0 million or
17% year-over-year. The growth in net interest income before provision for
credit losses was driven by lower interest expense, primarily due to lower
interest rates and a larger proportion of noninterest-bearing deposits, and
higher interest income, primarily due to growth in commercial loans.
Other
Centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, namely the Consumer and Business Banking, and the Commercial Banking segments.
The following table presents additional financial information for the Other segment for the periods indicated:
Three Months Ended
Change from 2021
($ in thousands) 2022 2021 $ %
Net interest (loss) income before provision
for credit losses $ (5,678) $ 26,704 $ (32,382) (121) %
Noninterest income 5,467 2,028 3,439 170 %
Total (loss) revenue (211) 28,732 (28,943) (101) %
Noninterest expense 19,960 32,534 (12,574) (39) %
Segment loss before income taxes (20,171) (3,802) (16,369) 431 %
Income tax benefit 31,152 37,338 (6,186) (17) %
Segment net income $ 10,981 $ 33,536 $ (22,555) (67) %
Average deposits $ 3,175,001 $ 2,527,171 $ 647,830 26 %
67-------------------------------------------------------------------------------- Other segment net income was$11.0 million for the first quarter of 2022, a decrease of$22.6 million or 67% year-over-year. This decrease was primarily driven by lower revenue and income tax benefit, partially offset by lower noninterest expense. Other segment recorded a net interest loss before provision for credit losses of$5.7 million for the first quarter of 2022, a$32.4 million or 121% decrease, from$26.7 million of net interest income before provision for credit losses in the first quarter of 2021. The decrease was 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 volume of debt securities. Noninterest expense of$20.0 million decreased by$12.6 million or 39% year-over-year, primarily due to lower amortization of tax credits and other investments. Balance Sheet AnalysisDebt Securities
The Company maintains a portfolio of high quality and liquid debt securities with a moderate duration profile. It closely manages the overall portfolio interest rate and liquidity risks. The Company's debt securities provide:
•interest income for earnings and yield enhancement;
•availability for funding needs arising during the normal course of business;
•the ability to execute interest rate risk management strategies in response to
changes in economic or market conditions; and
•collateral to support pledging agreements as required and/or to enhance the
Company's borrowing capacity.
While the Company intends to hold its debt securities indefinitely, it may sell
AFS securities in response to changes in the balance sheet and related interest
rate risk to meet liquidity, regulatory, and strategic requirements.
68
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The following table presents the distribution of the Company's AFS and HTM debt
securities portfolio as of March 31, 2022 and December 31, 2021 , and by credit
ratings as of March 31, 2022 :
March 31, 2022 December 31, 2021 Ratings as of March 31, 2022 (1)
Fair % of Fair Fair % of Fair
($ in thousands) Amortized Cost Value Value Amortized Cost Value Value AAA /AA A BBB No Rating
AFS debt securities:
U.S. Treasury securities $ 676,330 $ 637,974 9 % $ 1,049,238 $ 1,032,681 10 % 100 % - % - % - %
U.S. government agency and
U.S. government-sponsored
enterprise debt securities 326,555 304,395 5 % 1,333,984 1,301,971 13 % 100 % - % - % - %
U.S. government agency and
U.S. government-sponsored
enterprise mortgage-backed
securities 2,813,281 2,668,808 40 % 4,210,832 4,157,263 42 % 100 % - % - % - %
Municipal securities 317,952 298,659 4 % 519,381 523,158 5 % 92 % 5 % - % 3 %
Non-agency mortgage-backed
securities 1,323,705 1,252,107 19 % 1,388,857 1,378,374 14 % 84 % - % - % 16 %
Corporate debt securities 683,502 630,512 9 % 657,516 649,665 6 % - % 21 % 79 % - %
Foreign government bonds 260,846 253,811 4 % 260,447 257,733 3 % 44 % 56 % - % - %
Asset-backed securities 72,160 71,362 1 % 74,674 74,558 1 % 100 % - % - % - %
Collateralized loan
obligations ("CLOs") 617,250 611,803 9 % 592,250 589,950 6 % 96 % 4 % - % - %
Total AFS debt securities $ 7,091,581 $ 6,729,431 100 % $ 10,087,179 $ 9,965,353 100 % 85 % 5 % 7 % 3 %
HTM debt securities:
U.S. Treasury securities $ 519,989 $ 499,275 18 % $ - $ - - % 100 % - % - % - %
U.S. government agency and
U.S. government-sponsored
enterprise debt securities 946,763 879,286 31 % - - - % 100 % - % - % - %
U.S. government agency and
U.S. government-sponsored
enterprise mortgage-backed
securities 1,340,679 1,264,311 45 % - - - % 100 % - % - % - %
Municipal securities 190,271 173,096 6 % - - - % 100 % - % - % - %
Total HTM debt securities $ 2,997,702 $ 2,815,968 100 % $ - $ - - % 100 % - % - % - %
Total debt securities $ 10,089,283 $ 9,545,399 $ 10,087,179 $ 9,965,353
(1)Primarily based upon the credit ratings issued by S&P Global Ratings ("S&P"),
Moody's Investors Service ("Moody's") or Fitch Ratings ("Fitch"), applying the
lowest rating, if split rated. Rating percentages are allocated based on fair
value.
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 of March 31, 2022 . This increased from 5.0 as of December 31,
2021 , primarily due to both the upshifting and steepening of the yield curve.
The fair value of the AFS debt securities portfolio totaled$6.73 billion as ofMarch 31, 2022 , a decrease of$3.24 billion or 32% 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. For further discussion, see 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$362.2 million as ofMarch 31, 2022 , compared with pre-tax net unrealized losses on AFS debt securities of$121.8 million as ofDecember 31, 2021 . 69 -------------------------------------------------------------------------------- As ofMarch 31, 2022 , 85% of the carrying value of the AFS debt securities portfolio was rated "AA-" or "Aa3" or higher by nationally recognized credit rating agencies, compared with 90% as ofDecember 31, 2021 . Of the AFS debt securities with gross unrealized losses, substantially all were rated investment grade as ofMarch 31, 2022 andDecember 31, 2021 . The Company believes that the gross unrealized losses were due to non-credit related factors and were primarily attributable to interest rate movement and widened spreads for certain securities during the first quarter of 2022. The Company believes that the credit support levels of the AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received. As ofMarch 31, 2022 , the Company had no intention to sell securities with unrealized losses and believed it was more-likely-than-not that it would not be required to sell such securities before recovery of their amortized costs.
The Company assesses individual securities for credit losses for each reporting period. If a credit loss is identified, the Company records an impairment through the allowance for credit losses with a corresponding Provision for credit losses on the Consolidated Statement of Income. There were no credit losses recognized in earnings for both the first quarter of 2022 and 2021.
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. For HTM debt securities, the allowance for credit losses is measured using an expected loss model, similar to the methodology used for loans. Any expected credit loss is provided through the allowance for credit losses and is deducted from the amortized cost basis reflecting on the Consolidated Balance Sheet the net amount the Company expects to collect. As ofMarch 31, 2022 , all HTM securities were rated "AA-" or "Aa3" or higher by nationally recognized credit rating agencies. 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 ofMarch 31, 2022 . 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 $42.95 billion as of March 31, 2022 , an increase of $1.79
billion or 4% from $41.15 billion as of December 31, 2021 . This was primarily
driven by well-diversified growth throughout our major loan categories including
$797.9 million or 5% in total CRE loans, $687.5 million or 5% in C&I loans, and
$311.5 million or 3% in residential mortgage loans. Excluding PPP loans, total
loans grew $2.01 billion or 5% and C&I loans grew $903.6 million or 7% from
December 31, 2021 . The composition of the loan portfolio as of March 31, 2022
was similar to the composition as of December 31, 2021 .
70
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The following table presents the composition of the Company's total loan
portfolio by loan type as of
March 31, 2022 December 31, 2021
($ in thousands) Amount % Amount %
Commercial:
C&I (1) $ 14,838,134 34 % $ 14,150,608 34 %
CRE:
CRE 12,636,787 29 % 12,155,047 29 %
Multifamily residential 3,894,463 9 % 3,675,605 9 %
Construction and land 443,836 1 % 346,486 1 %
Total CRE 16,975,086 39 % 16,177,138 39 %
Total commercial 31,813,220 73 % 30,327,746 73 %
Consumer:
Residential mortgage:
Single-family residential 9,283,429 22 % 9,093,702 22 %
HELOCs 2,266,634 5 % 2,144,821 5 %
Total residential mortgage 11,550,063 27 % 11,238,523 27 %
Other consumer 127,399 0 % 127,512 0 %
Total consumer 11,677,462 27 % 11,366,035 27 %
Total loans held-for-investment (2) 43,490,682 100 % 41,693,781 100 %
Allowance for loan losses (545,685) (541,579)
Loans held-for-sale (3) 631 635
Total loans, net $ 42,945,628 $ 41,152,837
(1)Includes $318.1 million and $534.2 million of PPP loans as of March 31, 2022
and December 31, 2021 , respectively.
(2)Includes net deferred loan fees, unearned fees, unamortized premiums and
unaccreted discounts of $(42.7) million and $(50.7) million as of March 31, 2022
and December 31, 2021 , respectively.
(3)Consists of single-family residential loans as of both March 31, 2022 and
December 31, 2021 .
Actions to Support Customers during the COVID-19 Pandemic
In response to the COVID-19 pandemic, the Company assisted customers by offering SBA PPP loans to help struggling businesses in our communities pay their employees and sustain their businesses. The SBA stopped accepting new loan applications onMay 31, 2021 . As ofMarch 31, 2022 , the Company had about 1,000 PPP loans outstanding with balances totaling$318.1 million , which were recorded in the C&I portfolio. During the first quarter of 2022, the Company submitted and received SBA approval for the forgiveness of about 800 PPP loans, totaling$202.2 million . For more information on PPP loans, refer to Note 1 - Summary of Significant Accounting Policies - Significant Accounting Policies - Paycheck Protection Program to the Consolidated Financial Statements in the Company's 2021 Form 10-K.
In addition, the Company provided payment relief through various loan
modification programs, which expired on
Commercial
The commercial loan portfolio comprised 73% of total loans as of both
71
--------------------------------------------------------------------------------
Commercial - Commercial and Industrial Loans. Total C&I loan commitments (loans
outstanding plus unfunded credit commitments, excluding issued letters of
credit) were $21.02 billion as of March 31, 2022 , an increase of $727.3 million
or 4% from $20.29 billion as of December 31, 2021 . Total C&I loans were $14.84
billion as of March 31, 2022 , an increase of $687.5 million or 5% from $14.15
billion . Total C&I loans made up 34% of total loans held-for-investment as of
both March 31, 2022 and December 31, 2021 . 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 $1.00 billion and $939.4
million as of March 31, 2022 and December 31, 2021 , respectively. The majority
of the C&I loans had variable interest rates as of both March 31, 2022 and
December 31, 2021 .
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 of March 31, 2022 and December 31, 2021 .
[[Image Removed: ewbc-20220331_g6.jpg]][[Image Removed: ewbc-20220331_g7.jpg]]
Commercial - Total Commercial Real Estate Loans. Total CRE loans outstanding were$16.98 billion as ofMarch 31, 2022 , which grew by$797.9 million or 5%, from$16.18 billion as ofDecember 31, 2021 , and accounted for 39% of total loans held-for-investment as of both dates. The total CRE loan portfolio consists of CRE, multifamily residential, and construction and land loans. CRE consists of customers with diversified property types listed in the table below. The year-to-date growth in total CRE loans was primarily driven by industrial and multifamily property types. The Company's total CRE portfolio is diversified by property type with an average CRE loan size of$2.5 million as of bothMarch 31, 2022 andDecember 31, 2021 . The following table summarizes the Company's total CRE loans by property type as ofMarch 31, 2022 andDecember 31, 2021 : March 31, 2022 December 31, 2021 ($ in thousands) Amount % Amount % Property types: Retail (1)$ 3,759,210 22 %$ 3,685,900 23 % Multifamily 3,894,463 23 % 3,675,605 23 % Office (1) 2,905,623 17 % 2,804,006 17 % Industrial (1) 3,099,131 18 % 2,807,325 18 % Hospitality (1) 2,036,571 12 % 1,993,995 12 % Construction and land 443,836 3 % 346,486 2 % Other (1) 836,252 5 % 863,821 5 % Total CRE loans$ 16,975,086 100 %$ 16,177,138 100 %
(1)Included in CRE loans.
72
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The weighted-average loan-to-value ("LTV") ratio of the total CRE portfolio was
51% as of both March 31, 2022 and December 31, 2021 . The low weighted-average
LTV ratio was consistent by CRE property type. Approximately 89% of total CRE
loans had an LTV ratio of 65% or lower as of both March 31, 2022 and
December 31, 2021 . The consistency of the Company's low LTV underwriting
standards has historically resulted in lower credit losses for CRE and
multifamily residential loans.
The following tables provide a summary of the Company's CRE, multifamily
residential, and construction and land loans by geography as of March 31, 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 :
March 31, 2022
Multifamily Construction
($ in thousands) CRE % Residential % and Land % Total CRE %
Geographic markets:
Southern California $ 6,673,427 $ 2,093,728 $ 184,061 $ 8,951,216
Northern California 2,639,700 767,891 144,214 3,551,805 California 9,313,127 74 % 2,861,619 73 % 328,275 75 % 12,503,021 73 % Texas 1,089,421 9 % 295,875 8 % 4,528 1 % 1,389,824 8 % New York 677,511 5 % 187,260 5 % 81,760 18 % 946,531 6 % Washington 405,585 3 % 148,003 4 % 10,058 2 % 563,646 3 % Nevada 139,303 1 % 114,581 3 % 13,479 3 % 267,363 2 % Arizona 120,849 1 % 67,895 2 % - - % 188,744 1 % Other markets 890,991 7 % 219,230 5 % 5,736 1 % 1,115,957 7 % Total loans$ 12,636,787 100 %$ 3,894,463 100 %$ 443,836 100 %$ 16,975,086 100 % 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 73% and 75% of total CRE loans were concentrated inCalifornia as ofMarch 31, 2022 andDecember 31, 2021 , respectively, changes inCalifornia'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 theCalifornia 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$12.64 billion as ofMarch 31, 2022 , compared with$12.16 billion as ofDecember 31, 2021 , and accounted for 29% of total loans held-for-investment as of both dates. Interest rates on CRE loans may be fixed, variable or hybrid. As of bothMarch 31, 2022 andDecember 31, 2021 , the majority of CRE loans were variable rate loans. Loans are underwritten with conservative standards for cash flows, debt service coverage and LTV. 73 -------------------------------------------------------------------------------- Owner-occupied properties comprised 20% of the CRE loans as of bothMarch 31, 2022 andDecember 31, 2021 . The remainder were non-owner-occupied properties, where 50% or more of the debt service for the loan is typically provided by rental income from an unaffiliated third party. 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$3.89 billion as ofMarch 31, 2022 , compared with and$3.68 billion as ofDecember 31, 2021 , and accounted for 9% of total loans held-for-investment as of both dates. 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. 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$443.8 million as ofMarch 31, 2022 , compared with$346.5 million as ofDecember 31, 2021 , and accounted for 1% of total loans held-for-investment as of both dates. Construction loans exposure was made up of$354.4 million in loans outstanding, plus$335.0 million in unfunded commitments as ofMarch 31, 2022 , compared with$297.9 million in loans outstanding, plus$361.2 million in unfunded commitments as ofDecember 31, 2021 . Land loans totaled$89.5 million as ofMarch 31, 2022 , compared with$48.6 million as ofDecember 31, 2021 .
Consumer
The following tables summarize the Company's single-family residential and HELOC
loan portfolios by geography as of
March 31 ,
2022
Single-Family Total Residential
($ in thousands) Residential % HELOCs % Mortgage %
Geographic markets:
Southern California $ 3,562,505 $ 1,029,843 $ 4,592,348
Northern California 1,041,515 520,439 1,561,954
California 4,604,020 48 % 1,550,282 69 % 6,154,302 53 %
New York 3,215,122 35 % 299,484 13 % 3,514,606 30 %
Washington 515,752 6 % 255,518 11 % 771,270 7 %
Massachusetts 260,701 3 % 89,209 4 % 349,910 3 %
Georgia 272,576 3 % 26,560 1 % 299,136 3 %
Texas 250,222 3 % - - % 250,222 2 %
Other markets 165,036 2 % 45,581 2 % 210,617 2 %
Total $ 9,283,429 100 % $ 2,266,634 100 % $ 11,550,063 100 %
Lien priority:
First mortgage $ 9,283,429 100 % $ 1,968,945 87 % $ 11,252,374 97 %
Junior lien mortgage - - % 297,689 13 % 297,689 3 %
Total $ 9,283,429 100 % $ 2,266,634 100 % $ 11,550,063 100 %
74
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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 $9.28 billion as of March 31, 2022 , compared with $9.09 billion as of
December 31, 2021 , and accounted for 22% of total loans held-for-investment as
of both dates. Year-to-date, single-family residential mortgages increased
$189.7 million or 2%, primarily driven by net growth in New York and California .
The Company was in a first lien position for all of its single-family
residential loans as of both March 31, 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 $2.74
billion as of March 31, 2022 , which grew by $247.5 million or 10% from $2.49
billion as of December 31, 2021 . Unfunded HELOC commitments are unconditionally
cancellable. HELOCs outstanding totaled $2.27 billion as of March 31, 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
$121.8 million or 6%, primarily driven by growth in California . The Company was
in a first lien position for 87% of total HELOCs as of both March 31, 2022 and
December 31, 2021 . Many of these loans are reduced documentation loans, for
which a substantial down payment is required, resulting in a low LTV ratio at
origination, typically 65% or less. These loans have historically experienced
low delinquency and loss rates. Substantially all of the Company's HELOCs were
variable-rate loans as of both March 31, 2022 and December 31, 2021 .
All originated commercial and consumer loans are subject to the Company's
underwriting guidelines and loan origination standards. Management believes that
the Company's underwriting criteria and procedures adequately consider the
unique risks associated with these products. The Company conducts a variety of
quality control procedures and periodic audits, including the review of lending
and legal requirements, to ensure that the Company is in compliance with these
requirements.
75
--------------------------------------------------------------------------------Foreign Outstandings
The Company's overseas offices, which include the branch inHong Kong and the subsidiary bank inChina , are subject to the general risks inherent in conducting business in foreign countries, such as regulatory, economic and political uncertainties. As such, the Company's international operation risk exposure is largely concentrated inChina andHong Kong . In addition, the Company's financial assets held in theHong Kong branch and the subsidiary bank inChina may be affected by fluctuations in currency exchange rates or other factors. The following table presents the major financial assets held in the Company's overseas offices as ofMarch 31, 2022 andDecember 31, 2021 :March 31, 2022 December 31, 2021 % of Total % of Total Consolidated
Consolidated ($ in thousands) Amount Assets Amount AssetsHong Kong Branch: Cash and cash equivalents$ 936,242 2 % $ 831,283 1 % AFS debt securities (1)$ 298,287 0 % $ 242,926 0 % Loans held-for-investment (2)$ 1,061,999 2 % $ 849,573 1 % Total assets$ 2,157,324 3 %$ 1,933,164 3 %Subsidiary Bank inChina : Cash and cash equivalents$ 562,610 1 % $ 543,134 1 % Interest-bearing deposits with banks$ 30,876 0 % $ 51,243 0 % AFS debt securities (3)$ 142,156 0 % $ 141,404 0 % Loans held-for-investment (2)$ 1,065,054 2 % $ 984,591 2 % Total assets$ 1,787,347 3 %$ 1,709,640 3 % (1)Primarily comprised ofU.S. Treasury securities and foreign government bonds as of bothMarch 31, 2022 andDecember 31, 2021 . (2)Primarily comprised of C&I loans as of bothMarch 31, 2022 andDecember 31, 2021 . (3)Comprised of foreign government bonds as of bothMarch 31, 2022 andDecember 31, 2021 .
The following table presents the total revenue generated by the Company's overseas offices for the first quarters of 2022 and 2021:
Three Months Ended March 31,
2022 2021
% of Total % of Total
Consolidated Consolidated
($ in thousands) Amount Revenue Amount Revenue
Hong Kong Branch:
Total revenue $ 7,341 1 % $ 5,467 1 %
Subsidiary Bank in China :
Total revenue $ 7,866 2 % $ 6,521 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.
The Company's stockholders' equity was $5.70 billion as of March 31, 2022 , a
decrease of $133.8 million or 2% 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 $304.5 million and cash dividends declared of $57.6
million , partially offset by net income of $237.7 million . 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.
76
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Book value was $40.09 per common share as of March 31, 2022 , a decrease of 3%
from $41.13 per common share as of December 31, 2021 . Tangible equity per common
share was $36.76 as of March 31, 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 for the first quarters of 2022 and 2021,
respectively. In April 2022 , the Company's Board of Directors declared second
quarter 2022 cash dividend of $0.40 per common share. The dividend is payable on
May 16, 2022 to stockholders of record as of May 2, 2022 .
Deposits and Other Sources of Funding
Deposits are the Company's primary source of funding, the cost of which has a significant impact on the Company's net interest income and net interest margin. Additional funding is provided by short- and long-term borrowings, and long-term debt. See Item 2. MD&A - Risk Management - Liquidity Risk Management - Liquidity in this Form 10-Q for a discussion of the Company's liquidity management. The following table summarizes the Company's sources of funds as ofMarch 31, 2022 andDecember 31, 2021 : March 31, 2022 December 31, 2021 Change ($ in thousands) Amount % Amount % $ % Deposits Noninterest-bearing demand$ 24,927,768 45 %$ 22,845,464 43 %$ 2,082,304 9 % Interest-bearing checking 6,774,826 13 % 6,524,721 12 % 250,105 4 % Money market 12,108,432 22 % 13,130,300 25 % (1,021,868) (8) % Savings 2,897,248 5 % 2,888,065 5 % 9,183 - % Time deposits 8,230,087 15 % 7,961,982 15 % 268,105 3 % Total deposits$ 54,938,361 100 %$ 53,350,532 100 %$ 1,587,829 3 % Other Funds FHLB advances$ 74,619 $ 249,331$ (174,712) (70) % Repurchase agreements 300,000 300,000 - - % Long-term debt 147,729 147,658 71 0 % Total other funds$ 522,348 $ 696,989$ (174,641) (25) % Total sources of funds$ 55,460,709 $ 54,047,521 $ 1,413,188 3 % 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$54.94 billion as ofMarch 31, 2022 , an increase of$1.59 billion or 3% from$53.35 billion as ofDecember 31, 2021 . The increase in deposits was attributable to strong growth in noninterest-bearing demand deposits, partially offset by a decrease in money market deposits. Noninterest-bearing demand deposits were$24.93 billion as ofMarch 31, 2022 , an increase of$2.08 billion or 9%, compared with$22.85 billion as ofDecember 31, 2021 . Noninterest-bearing demand deposits comprised 45% of total deposits as ofMarch 31, 2022 , up from 43% as ofDecember 31, 2021 . 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.
Other Sources of Funding
As ofMarch 31, 2022 the Company had one FHLB advance of$74.6 million compared with advances totaling$249.3 million as ofDecember 31, 2021 . During the first quarter of 2022, advances totaling$175.0 million matured. As ofMarch 31, 2022 , the remaining FHLB advance had a floating interest rate of 0.73% with a maturity in seven months. 77 -------------------------------------------------------------------------------- Gross repurchase agreements totaled$300.0 million as of bothMarch 31, 2022 andDecember 31, 2021 . 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 bothMarch 31, 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. As ofMarch 31, 2022 , gross repurchase agreements had interest rates ranging from 2.39% to 2.42%. Repurchase agreements of$200.0 million have an original maturity of 10.0 years and mature in 1.3 years, whereas repurchase agreements of$100.0 million have an original maturity of 8.5 years and mature in 1.4 years. Repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the assets are sold. As ofMarch 31, 2022 , the collateral for the repurchase agreements was comprised ofU.S. Treasury securities, andU.S. government agency andU.S. government-sponsored enterprise mortgage-backed 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$147.7 million as of bothMarch 31, 2022 andDecember 31, 2021 . 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 a weighted-average interest rate of 1.98% and 1.78% for the first quarters of 2022 and 2021, respectively, with remaining maturities ranging between 12.7 years and 15.5 years as ofMarch 31, 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 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. Under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), loans originated by a banking organization under the PPP will be risk-weighted at zero percent for regulatory capital purposes. Accordingly, the capital ratios as ofMarch 31, 2022 delayed 75% of the estimated impact of CECL on regulatory capital through the year 2021, and PPP loans are risk-weighted at 0%. 78 -------------------------------------------------------------------------------- The following table presents the Company's and the Bank's capital ratios as ofMarch 31, 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 March 31, 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 12.6 % 12.1 % 12.8 % 12.3 % 4.5 % 7.0 % 6.5 % Tier 1 capital (1) 12.6 % 12.1 % 12.8 % 12.3 % 6.0 % 8.5 % 8.0 % Total capital 13.9 % 13.1 % 14.1 % 13.2 % 8.0 % 10.5 % 10.0 % Tier 1 leverage (1) 9.3 % 9.0 % 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. In addition, 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 bothMarch 31, 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$45.43 billion as ofMarch 31, 2022 , an increase of$1.85 billion or 4%, 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 stated 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 the Risk 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. Internal Audit provides assurance and
evaluates the effectiveness of risk management, control and governance processes
as established by the Company. Internal Audit has organizational independence
and objectivity, reporting directly to the Board's Audit Committee. Further
discussion and analysis of some major risk areas are detailed in the following
subsections of Risk Management.
79
--------------------------------------------------------------------------------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 . The Independent Asset Review function supports a strong credit risk management culture by providing an independent and objective assessment of underwriting and documentation quality, reporting directly to the Board'sRisk Oversight Committee . A key focus of our credit risk management is adherence to a well-controlled underwriting process.
The Company assesses overall credit quality performance of the loan 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 ofMarch 31, 2022 andDecember 31, 2021 : Change ($ in thousands) March 31, 2022 December 31, 2021 $ % Criticized loans Special mention loans$ 402,704 $ 384,694 $ 18,010 4 % Classified loans 430,633 448,362 (17,729) (4) % Total criticized loans$ 833,337 $ 833,056 $ 281 0 % Special mention loans to loans held-for-investment 0.93 % 0.92 % Classified loans to loans held-for-investment 0.99 % 1.08 % Criticized loans to loans held-for-investment 1.92 % 2.00 % 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. 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. 80 --------------------------------------------------------------------------------
The following table presents information regarding nonperforming assets as of
Change
($ in thousands) March 31, 2022 December 31, 2021 $ %
Commercial:
C&I $ 51,773 $ 59,023 $ (7,250) (12) %
CRE:
CRE 9,404 9,498 (94) (1) %
Multifamily residential 423 444 (21) (5) %
Total CRE 9,827 9,942 (115) (1) %
Consumer:
Residential mortgage:
Single-family residential 16,385 15,720 665 4 %
HELOCs 6,812 8,444 (1,632) (19) %
Total residential mortgage 23,197 24,164 (967) (4) %
Other consumer 37 52 (15) (29) %
Total nonaccrual loans 84,834 93,181 (8,347) (9) %
OREO, net - 363 (363) (100) %
Other nonperforming assets 9,548 9,938 (390) (4) %
Total nonperforming assets $ 94,382 $ 103,482 $ (9,100) (9) %
Nonperforming assets to total assets 0.15 % 0.17 %
Nonaccrual loans to loans
held-for-investment 0.20 % 0.22 %
Allowance for loan losses to nonaccrual
loans 643.24 % 581.21 %
TDRs included in nonperforming loans$ 26,306 $
30,383
Nonaccrual loans were$84.8 million as ofMarch 31, 2022 , a decrease of$8.3 million or 9% from$93.2 million as ofDecember 31, 2021 . This decrease was predominantly the result of paydowns and charge-offs of C&I oil and gas, and other commercial loans, partially offset by an addition of a C&I entertainment loan. As ofMarch 31, 2022 ,$44.2 million or 52% of nonaccrual loans were less than 90 days delinquent. In comparison,$54.2 million or 58% of nonaccrual loans were less than 90 days delinquent as ofDecember 31, 2021 .
The following table presents the accruing loans past due by portfolio segment as
of
Percentage of
Total Accruing Past Due Loans (1) Change Total Loans Outstanding
March 31, December 31, March 31, December 31,
($ in thousands) 2022 2021 $ % 2022 2021
Commercial:
C&I $ 26,514 $ 11,069 $ 15,445 140 % 0.18 % 0.08 %
CRE:
CRE 3,037 3,722 (685) (18) % 0.02 % 0.03 %
Multifamily residential 2,203 5,342 (3,139) (59) % 0.06 % 0.15 %
Total CRE 5,240 9,064 (3,824) (42) % 0.03 % 0.06 %
Total commercial 31,754 20,133 11,621 58 % 0.10 % 0.07 %
Consumer:
Residential mortgage:
Single-family residential 26,669 18,760 7,909 42 % 0.29 % 0.21 %
HELOCs 6,072 5,854 218 4 % 0.27 % 0.27 %
Total residential mortgage 32,741 24,614 8,127 33 % 0.28 % 0.22 %
Other consumer 794 108 686 NM 0.62 % 0.08 %
Total consumer 33,535 24,722 8,813 36 % 0.29 % 0.22 %
Total $ 65,289 $ 44,855 $ 20,434 46 % 0.15 % 0.11 %
NM - Not meaningful.
(1)There were no accruing loans past due 90 days or more as of both March 31,
2022 and December 31, 2021 .
81
--------------------------------------------------------------------------------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 ofMarch 31, 2022 andDecember 31, 2021 . The allowance for loan losses for TDRs was$896 thousand as ofMarch 31, 2022 and$4.8 million as ofDecember 31, 2021 . March 31, 2022 December 31, 2021 Performing Nonperforming Performing Nonperforming ($ in thousands) TDRs TDRs Total TDRs TDRs Total Commercial: C&I$ 77,038 $ 24,544 $ 101,582 $ 77,256 $ 28,239 $ 105,495 CRE: CRE 23,107 - 23,107 23,379 - 23,379 Multifamily residential 4,006 190 4,196 4,042 197 4,239 Total CRE 27,113 190 27,303 27,421 197 27,618 Consumer: Residential mortgage: Single-family residential 5,564 1,108 6,672 6,585 1,102 7,687 HELOCs 2,080 464 2,544 2,553 845 3,398 Total residential mortgage 7,644 1,572 9,216 9,138 1,947 11,085 Total TDRs$ 111,795 $ 26,306 $ 138,101 $ 113,815 $ 30,383 $ 144,198 Performing TDRs were$111.8 million as ofMarch 31, 2022 , a decrease of$2.0 million or 2% from$113.8 million as ofDecember 31, 2021 . Approximately 94% of the performing TDRs were current as of bothMarch 31, 2022 andDecember 31, 2021 . Nonperforming TDRs were$26.3 million as ofMarch 31, 2022 , a decrease of$4.1 million or 13% from$30.4 million as ofDecember 31, 2021 . This decrease primarily reflected the paydowns and payoffs of C&I TDRs, partially offset by newly designated nonperforming C&I TDRs. Existing TDRs that were subsequently modified in response to the COVID-19 pandemic continue to be classified as TDRs. As ofMarch 31, 2022 , there were no TDRs that were provided modifications related to the COVID-19 pandemic. 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 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 the criteria specified under the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued onApril 7, 2020 , the Company elected to temporarily suspend TDR accounting under ASC Subtopic 310-40. The delinquency aging of loans modified related to the COVID-19 pandemic were frozen at the time of the modification. Interest income continues to be recognized over the accommodation periods. See additional information in Note 1 - Summary of Significant Accounting Policies - Significant Accounting Policies - Troubled Debt Restructurings to the Consolidated Financial Statements in the Company's 2021 Form 10-K. As ofMarch 31, 2022 , COVID-19 loans under payment deferral and forbearance programs totaled$73.6 million , or 0.2% of total loans, compared to$363.1 million , or 0.9% of total loans as ofDecember 31, 2021 . Loans that have exited the modification program were predominantly current as ofMarch 31, 2022 . 82 --------------------------------------------------------------------------------
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 maintain 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 ofMarch 31, 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 in the Company's 2021 Form 10-K 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. 83 -------------------------------------------------------------------------------- The following table presents an allocation of the allowance for loan losses by loan portfolio segments and unfunded credit commitments as ofMarch 31, 2022 andDecember 31, 2021 : March 31, 2022 December 31, 2021 Allowance % of Loan Type Allowance % of Loan Type ($ in thousands) Allocation to Total Loans Allocation to Total Loans
Allowance for loan losses Commercial: C&I$ 339,446 34 %$ 338,252 34 % CRE: CRE 147,104 29 % 150,940 29 % Multifamily residential 24,176 9 % 14,400 9 % Construction and land 11,016 1 % 15,468 1 % Total CRE 182,296 39 % 180,808 39 % Total commercial 521,742 73 % 519,060 73 % Consumer: Residential mortgage: Single-family residential 18,210 22 % 17,160 22 % HELOCs 3,748 5 % 3,435 5 % Total residential mortgage 21,958 27 % 20,595 27 % Other consumer 1,985 0 % 1,924 0 % Total consumer 23,943 27 % 22,519 27 % Total allowance for loan losses$ 545,685 100 %$ 541,579 100 % Allowance for unfunded credit commitments$ 23,262 $ 27,514 Total allowance for credit losses$ 568,947 $ 569,093 Loans held-for-investment$ 43,490,682 $ 41,693,781 Allowance for loan losses to loans held-for-investment 1.25 % 1.30 % Three Months Ended March 31, 2022 2021 Average loans held-for-investment $ 42,111,786 $ 38,728,635 Annualized net charge-offs to average loans held-for-investment 0.08 % 0.14 %
The allowance for loan losses was
The Company considers multiple economic scenarios to develop the estimate of the allowance for loan losses. The scenarios may consist of a base forecast representing management's view of the most likely outcome, and downside or upside scenarios reflecting possible worsening or improving economic conditions. As ofMarch 31, 2022 , the Company assigned a slightly higher weighting to its downside scenario, compared with the weighting placed as ofDecember 31, 2021 in order to reflect the potential for higher inflation, supply chain constraints and the possibility of additional COVID-19 variants. Macroeconomic assumptions underlying the base forecast include: (1) annual Gross Domestic Product ("GDP") growth of 3.5% for 2022; (2) 3.5% unemployment rate by the end of 2022; and (3) rising interest rates. The downside scenario assumed GDP growth at 0.9% in 2022 and an unemployment rate that was expected to rise from 3.9% to 7.2% by the end of 2022. As ofMarch 31, 2022 andDecember 31, 2021 , PPP loans outstanding were$318.1 million and$534.2 million , respectively. Because these loans are fully guaranteed by the SBA, there was no allowance for loan losses established for these loans as ofMarch 31, 2022 andDecember 31, 2021 .
First quarter 2022 net charge-offs were
84
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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 for 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$54.94 billion as ofMarch 31, 2022 , compared with$53.35 billion as ofDecember 31, 2021 . The Company's loan-to-deposit ratio was 79% as ofMarch 31, 2022 , compared with 78% as ofDecember 31, 2021 . 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 ofMarch 31, 2022 , the Company had available borrowing capacity of$25.91 billion , including$12.13 billion with the FHLB and$4.60 billion with the FRBSF. The Company believes that its liquidity sources are sufficient to meet all reasonably foreseeable short-term needs. 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 Bank's unsecured federal funds lines of credit with correspondent banks, subject to availability, totaled$1.04 billion as ofMarch 31, 2022 . Estimated borrowing capacity from unpledged debt securities totaled$8.14 billion as ofMarch 31, 2022 . 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. 85
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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 ofMarch 31, 2022 andDecember 31, 2021 :
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