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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,June 30, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-24939
000-24939

EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

95-4703316
(I.R.S. Employer Identification No.)

135 North Los Robles Ave., 7th Floor,, Pasadena,, California91101
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:
(626) (626) 768-6000

Securities registered pursuant to Section 12(b) of the Act: 
Title of each class
Trading
Symbol(s)
Trading
Symbol(s)
Name of each exchange

on which registered
Common Stock, $0.001 Par ValueEWBCEWBCThe Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 141,486,290141,486,780 shares as of April 30,July 31, 2020.




TABLE OF CONTENTS
Page
3
Page
3
Item 1.
Consolidated Financial Statements
3
Consolidated Balance Sheet (Unaudited)
3
Consolidated Statement of Income (Unaudited)
4
Consolidated Statement of Comprehensive Income (Unaudited)
5
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
6
Consolidated Statement of Cash Flows (Unaudited)
7
9
1 — Basis of Presentation
9
2 — Current Accounting Developments and Summary of Significant Accounting Policies
10
3 — Fair Value Measurement and Fair Value of Financial Instruments
14
4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements
24
5 — Securities
25
6 — Derivatives
2829
7 — Loans Receivable and Allowance for Credit Losses
35
8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities
4950
9 — Goodwill and Other Intangible Assets
5152
10 — Commitments and Contingencies
5253
11 — Revenue from Contracts with Customers
54
12 — Stock Compensation Plans
5557
13 — Stockholders’ Equity and Earnings Per Share
5758
14 — Accumulated Other Comprehensive Income (Loss)
5859
15 — Business Segments
5860
16 — Subsequent Events
6062
6163
107119
107119
108120
108120
108120
109121
110122
111123
112124

2



PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in thousands, except shares)
(Unaudited)
June 30,
2020		December 31,
2019
(Unaudited)
ASSETS
Cash and due from banks$602,974  $536,221  
Interest-bearing cash with banks3,930,528  2,724,928  
Cash and cash equivalents4,533,502  3,261,149  
Interest-bearing deposits with banks531,591  196,161  
Securities purchased under resale agreements (“resale agreements”)1,260,000  860,000  
Securities:
Available-for-sale (''AFS'') debt securities, at fair value (amortized cost of $3,823,714 in 2020; includes assets pledged as collateral of $745,163 in 2020 and $479,432 in 2019)3,884,574  3,317,214  
Restricted equity securities, at cost78,963  78,580  
Loans held-for-sale3,875  434  
Loans held-for-investment (net of allowance for loan losses of $632,071 in 2020 and $358,287 in 2019; includes assets pledged as collateral of $27,408,027 in 2020 and $22,431,092 in 2019)36,597,341  34,420,252  
Investments in qualified affordable housing partnerships, net201,888  207,037  
Investments in tax credit and other investments, net251,318  254,140  
Premises and equipment (net of accumulated depreciation of $122,372 in 2020 and $116,790 in 2019)110,709  118,364  
Goodwill465,697  465,697  
Operating lease right-of-use assets94,898  99,973  
Other assets1,393,237  917,095  
TOTAL$49,407,593  $44,196,096  
LIABILITIES
Deposits:
Noninterest-bearing$13,940,420  $11,080,036  
Interest-bearing26,732,258  26,244,223  
Total deposits40,672,678  37,324,259  
Short-term borrowings252,851  28,669  
Federal Home Loan Bank (“FHLB”) advances656,759  745,915  
Securities sold under repurchase agreements (“repurchase agreements”)300,000  200,000  
Long-term debt and finance lease liabilities1,580,442  152,270  
Operating lease liabilities102,708  108,083  
Accrued expenses and other liabilities854,912  619,283  
Total liabilities44,420,350  39,178,479  
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 200,000,000 shares authorized; 167,143,278 and 166,621,959 shares issued in 2020 and 2019, respectively167  167  
Additional paid-in capital1,841,748  1,826,345  
Retained earnings3,755,649  3,689,377  
Treasury stock, at cost — 25,656,881 shares in 2020 and 20,996,574 shares in 2019(633,455) (479,864) 
Accumulated other comprehensive income (loss) (“AOCI”), net of tax23,134  (18,408) 
Total stockholders’ equity4,987,243  5,017,617  
TOTAL$49,407,593  $44,196,096  
 
  March 31,
2020		 December 31,
2019
  (Unaudited)  
ASSETS    
Cash and due from banks $427,415
 $536,221
Interest-bearing cash with banks 2,652,627
 2,724,928
Cash and cash equivalents 3,080,042
 3,261,149
Interest-bearing deposits with banks 293,509
 196,161
Securities purchased under resale agreements (“resale agreements”) 860,000
 860,000
Securities:    
Available-for-sale (''AFS'') debt securities, at fair value (amortized cost of $3,660,413 in 2020; includes assets pledged as collateral of $742,410 in 2020 and $479,432 in 2019) 3,695,943
 3,317,214
Restricted equity securities, at cost 78,745
 78,580
Loans held-for-sale 1,594
 434
Loans held-for-investment (net of allowance for loan losses of $557,003 in 2020 and $358,287 in 2019; includes assets pledged as collateral of $23,107,287 in 2020 and $22,431,092 in 2019) 35,336,390
 34,420,252
Investments in qualified affordable housing partnerships, net 198,653
 207,037
Investments in tax credit and other investments, net 268,330
 254,140
Premises and equipment (net of accumulated depreciation of $120,156 in 2020 and $116,790 in 2019) 115,393
 118,364
Goodwill 465,697
 465,697
Operating lease right-of-use assets 101,381
 99,973
Other assets 1,452,868
 917,095
TOTAL $45,948,545
 $44,196,096
LIABILITIES    
Deposits:    
Noninterest-bearing $11,833,397
 $11,080,036
Interest-bearing 26,853,561
 26,244,223
Total deposits 38,686,958
 37,324,259
Short-term borrowings 66,924
 28,669
Federal Home Loan Bank (“FHLB”) advances 646,336
 745,915
Securities sold under repurchase agreements (“repurchase agreements”) 450,000
 200,000
Long-term debt and finance lease liabilities 152,162
 152,270
Operating lease liabilities 109,356
 108,083
Accrued expenses and other liabilities 933,824
 619,283
Total liabilities 41,045,560
 39,178,479
COMMITMENTS AND CONTINGENCIES (Note 10) 


 


STOCKHOLDERS’ EQUITY    
Common stock, $0.001 par value, 200,000,000 shares authorized; 167,091,420 and 166,621,959 shares issued in 2020 and 2019, respectively 167
 167
Additional paid-in capital 1,833,617
 1,826,345
Retained earnings 3,695,759
 3,689,377
Treasury stock, at cost — 25,656,321 shares in 2020 and 20,996,574 shares in 2019 (633,439) (479,864)
Accumulated other comprehensive loss (“AOCI”), net of tax 6,881
 (18,408)
Total stockholders’ equity 4,902,985
 5,017,617
TOTAL $45,948,545
 $44,196,096
 

See accompanying Notes to Consolidated Financial Statements.

3



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands, except per share data)
(Unaudited)
 Three Months Ended March 31,Three Months Ended
June 30,		Six Months Ended
June 30,
 2020 20192020201920202019
INTEREST AND DIVIDEND INCOME    INTEREST AND DIVIDEND INCOME
Loans receivable, including fees $411,869
 $423,534
Loans receivable, including fees$367,393  $434,450  $779,262  $857,984  
AFS debt securities 20,142
 15,748
AFS debt securities21,004  15,685  41,146  31,433  
Resale agreements 5,565
 7,846
Resale agreements5,514  7,404  11,139  15,310  
Restricted equity securities 446
 713
Restricted equity securities301  505  747  1,218  
Interest-bearing cash and deposits with banks 11,168
 15,470
Interest-bearing cash and deposits with banks4,564  16,800  15,672  32,210  
Total interest and dividend income 449,190
 463,311
Total interest and dividend income398,776  474,844  847,966  938,155  
INTEREST EXPENSE    INTEREST EXPENSE
Deposits 76,403
 92,005
Deposits46,399  97,964  122,802  189,969  
Federal funds purchased and other short-term borrowings 556
 616
Short-term borrowingsShort-term borrowings265  361  821  977  
FHLB advances 4,166
 2,979
FHLB advances3,343  4,011  7,509  6,990  
Repurchase agreements 3,991
 3,492
Repurchase agreements3,540  3,469  7,531  6,961  
Long-term debt and finance lease liabilities 1,367
 1,758
Long-term debt and finance lease liabilities1,454  1,713  2,821  3,471  
Total interest expense 86,483
 100,850
Total interest expense55,001  107,518  141,484  208,368  
Net interest income before provision for credit losses
362,707
 362,461
Net interest income before provision for credit losses343,775  367,326  706,482  729,787  
Provision for credit losses 73,870
 22,579
Provision for credit losses102,443  19,245  176,313  41,824  
Net interest income after provision for credit losses 288,837
 339,882
Net interest income after provision for credit losses241,332  348,081  530,169  687,963  
NONINTEREST INCOME    NONINTEREST INCOME
Lending fees 15,773
 14,969
Lending fees21,946  16,423  37,719  31,392  
Deposit account fees 10,447
 9,468
Deposit account fees10,872  9,607  21,319  19,075  
Foreign exchange income 7,819
 5,015
Foreign exchange income4,562  7,286  12,381  12,301  
Wealth management fees 5,357
 3,812
Wealth management fees3,091  3,800  8,444  7,574  
Interest rate contracts and other derivative income 7,073
 3,216
Interest rate contracts and other derivative income6,107  10,398  13,180  13,614  
Net gains on sales of loans 950
 915
Net gains on sales of loans132  15  1,082  930  
Net gains on sales of AFS debt securities 1,529
 1,561
Gains on sales of AFS debt securitiesGains on sales of AFS debt securities9,640  1,447  11,169  3,008  
Other investment income 1,921
 1,202
Other investment income966  706  2,887  1,908  
Other income 3,180
 1,973
Other income1,321  3,077  4,505  5,088  
Total noninterest income 54,049
 42,131
Total noninterest income58,637  52,759  112,686  94,890  
NONINTEREST EXPENSE    NONINTEREST EXPENSE
Compensation and employee benefits 101,960
 102,299
Compensation and employee benefits96,955  100,531  198,915  202,830  
Occupancy and equipment expense 17,076
 17,318
Occupancy and equipment expense16,217  17,362  33,293  34,680  
Deposit insurance premiums and regulatory assessments 3,427
 3,088
Deposit insurance premiums and regulatory assessments3,700  2,919  7,127  6,007  
Legal expense 3,197
 2,225
Legal expense1,530  2,355  4,727  4,580  
Data processing 3,826
 3,157
Data processing4,480  3,460  8,306  6,617  
Consulting expense 1,217
 2,059
Consulting expense1,413  2,069  2,630  4,128  
Deposit related expense 3,563
 3,504
Deposit related expense3,353  3,338  6,916  6,842  
Computer software expense 6,166
 6,078
Computer software expense7,301  6,211  13,467  12,289  
Other operating expense 21,119
 22,289
Other operating expense19,248  22,679  40,367  44,968  
Amortization of tax credit and other investments 17,325
 24,905
Amortization of tax credit and other investments24,759  16,739  42,084  41,644  
Repurchase agreements’ extinguishment costRepurchase agreements’ extinguishment cost8,740  —  8,740  —  
Total noninterest expense 178,876
 186,922
Total noninterest expense187,696  177,663  366,572  364,585  
INCOME BEFORE INCOME TAXES 164,010
 195,091
INCOME BEFORE INCOME TAXES112,273  223,177  276,283  418,268  
INCOME TAX EXPENSE 19,186
 31,067
INCOME TAX EXPENSE12,921  72,797  32,107  103,864  
NET INCOME $144,824
 $164,024
NET INCOME$99,352  $150,380  $244,176  $314,404  
EARNINGS PER SHARE (“EPS”)    EARNINGS PER SHARE (“EPS”)
BASIC $1.00
 $1.13
BASIC$0.70  $1.03  $1.71  $2.16  
DILUTED $1.00
 $1.12
DILUTED$0.70  $1.03  $1.70  $2.15  
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING    WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC 144,814
 145,256
BASIC141,486  145,546  143,150  145,402  
DILUTED 145,285
 145,921
DILUTED141,827  146,052  143,560  146,016  

See accompanying Notes to Consolidated Financial Statements.

4



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
Net income$99,352  $150,380  $244,176  $314,404  
Other comprehensive income (loss), net of tax:
Net changes in unrealized gains on AFS debt securities17,816  29,027  45,269  51,038  
Net changes in unrealized losses on cash flow hedges(1,333) —  (1,333) —  
Foreign currency translation adjustments(230) (6,016) (2,394) (2,836) 
Other comprehensive income16,253  23,011  41,542  48,202  
COMPREHENSIVE INCOME$115,605  $173,391  $285,718  $362,606  
 
  Three Months Ended March 31,
  2020 2019
Net income $144,824
 $164,024
Other comprehensive income (loss), net of tax:    
Net changes in unrealized gains on AFS debt securities 27,453
 22,011
Foreign currency translation adjustments (2,164) 3,180
Other comprehensive income 25,289
 25,191
COMPREHENSIVE INCOME $170,113
 $189,215
 

See accompanying Notes to Consolidated Financial Statements.

5



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except shares)
(Unaudited)
 
  Common Stock and
Additional Paid-in Capital		 Retained
Earnings		 Treasury
Stock		 AOCI,
Net of Tax		 Total
Stockholders’
Equity
  Shares Amount    
Balance, January 1, 2019 144,961,363
 $1,789,977
 $3,160,132
 $(467,961) $(58,174) $4,423,974
Cumulative-effect of change in accounting principle related to leases (1)
 —
 —
 14,668
 —
 —
 14,668
Net income —
 —
 164,024
 —
 —
 164,024
Other comprehensive loss —
 —
 —
 —
 25,191
 25,191
Warrants exercised 180,226
 1,711
 —
 2,732
 —
 4,443
Net activity of common stock pursuant to various stock compensation plans and agreements 359,712
 7,436
 —
 (14,036) —
 (6,600)
Cash dividends on common stock ($0.23 per share) —
 —
 (33,770) —
 —
 (33,770)
BALANCE, MARCH 31, 2019 145,501,301
 $1,799,124
 $3,305,054
 $(479,265) $(32,983) $4,591,930
Balance, January 1, 2020 145,625,385
 $1,826,512
 $3,689,377
 $(479,864) $(18,408) $5,017,617
Cumulative-effect of change in accounting principle related to credit losses (2)
 —
 —
 (97,967) —
 —
 (97,967)
Net income —
 —
 144,824
 —
 —
 144,824
Other comprehensive income —
 —
 —
 —
 25,289
 25,289
Net activity of common stock pursuant to various stock compensation plans and agreements 281,396
 7,272
 —
 (7,609) —
 (337)
Repurchase of common stock pursuant to the Stock Repurchase Program (4,471,682) —
 —
 (145,966) —
 (145,966)
Cash dividends on common stock ($0.275 per share) —
 —
 (40,475) —
 —
 (40,475)
BALANCE, MARCH 31, 2020 141,435,099
 $1,833,784
 $3,695,759
 $(633,439) $6,881
 $4,902,985
 

(1)
Common Stock and
Additional Paid-in Capital		Retained EarningsTreasury StockAOCI,
Net of Tax		Total
Stockholders’ Equity
SharesAmount
BALANCE, APRIL 1, 2019145,501,301  $1,799,124  $3,305,054  $(479,265) $(32,983) $4,591,930  
Net income—  —  150,380  —  —  150,380  
Other comprehensive income—  —  —  —  23,011  23,011  
Net activity of common stock pursuant to various stock compensation plans and agreements45,268  9,938  —  (133) —  9,805  
Cash dividends on common stock ($0.275 per share)—  —  (40,533) —  —  (40,533) 
BALANCE, JUNE 30, 2019145,546,569  $1,809,062  $3,414,901  $(479,398) $(9,972) $4,734,593  
BALANCE, APRIL 1, 2020141,435,099  $1,833,784  $3,695,759  $(633,439) $6,881  $4,902,985  
Net income—  —  99,352  —  —  99,352  
Other comprehensive income—  —  —  —  16,253  16,253  
Net activity of common stock pursuant to various stock compensation plans and agreements51,298  8,131  —  (16) —  8,115  
Cash dividends on common stock ($0.275 per share)—  —  (39,462) —  —  (39,462) 
BALANCE, JUNE 30, 2020141,486,397  $1,841,915  $3,755,649  $(633,455) $23,134  $4,987,243  

Common Stock and
Additional Paid-in Capital		Retained
Earnings		Treasury
Stock		AOCI,
Net of Tax		Total
Stockholders’
Equity
SharesAmount
BALANCE, JANUARY 1, 2019144,961,363  $1,789,977  $3,160,132  $(467,961) $(58,174) $4,423,974  
Cumulative-effect of change in accounting principle related to leases (1)
—  —  14,668  —  —  14,668  
Net income—  —  314,404  —  —  314,404  
Other comprehensive income—  —  —  —  48,202  48,202  
Warrants exercised180,226  1,711  —  2,732  —  4,443  
Net activity of common stock pursuant to various stock compensation plans and agreements404,980  17,374  —  (14,169) —  3,205  
Cash dividends on common stock ($0.505 per share)—  —  (74,303) —  —  (74,303) 
BALANCE, JUNE 30, 2019145,546,569  $1,809,062  $3,414,901  $(479,398) $(9,972) $4,734,593  
BALANCE, JANUARY 1, 2020145,625,385  $1,826,512  $3,689,377  $(479,864) $(18,408) $5,017,617  
Cumulative-effect of change in accounting principle related to credit losses (2)
—  —  (97,967) —  —  (97,967) 
Net income—  —  244,176  —  —  244,176  
Other comprehensive income—  —  —  —  41,542  41,542  
Net activity of common stock pursuant to various stock compensation plans and agreements332,694  15,403  —  (7,625) —  7,778  
Repurchase of common stock pursuant to the Stock Repurchase Program(4,471,682) —  —  (145,966) —  (145,966) 
Cash dividends on common stock ($0.550 per share)—  —  (79,937) —  —  (79,937) 
BALANCE, JUNE 30, 2020141,486,397  $1,841,915  $3,755,649  $(633,455) $23,134  $4,987,243  
 

(1) Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and subsequent related ASUsin the first quarter of 2019.
(2) Represents the impact of the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020. Refer to Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q (“this Form 10-Q”) for additional information.
Represents the impact of the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and subsequent related ASUsin the first quarter of 2019.
(2)
Represents the impact of the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020. Refer to Note 2 — Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q (“this Form 10-Q”) for additional information.

See accompanying Notes to Consolidated Financial Statements.

6



EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
 
  Three Months Ended March 31,
  2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income $144,824
 $164,024
Adjustments to reconcile net income to net cash provided by operating activities:  
  
Depreciation and amortization 31,186
 39,498
Accretion of discount and amortization of premiums, net (4,519) (4,414)
Stock compensation costs 7,209
 7,444
Deferred income tax expense (benefit) 28
 (406)
Provision for credit losses 73,870
 22,579
Net gains on sales of loans (950) (915)
Net gains on sales of AFS debt securities (1,529) (1,561)
Net loss on sales of fixed assets 3
 —
Loans held-for-sale:    
Originations and purchases (5,802) (2,167)
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale 4,657
 2,454
Proceeds from distributions received from equity method investees 973
 1,150
Net change in accrued interest receivable and other assets (462,766) (27,639)
Net change in accrued expenses and other liabilities 304,680
 (60,806)
Other net operating activities (161) —
Total adjustments (53,121) (24,783)
Net cash provided by operating activities 91,703
 139,241
CASH FLOWS FROM INVESTING ACTIVITIES  
  
Net (increase) decrease in:  
  
Investments in qualified affordable housing partnerships, tax credit and other investments (27,581) (33,261)
Interest-bearing deposits with banks (115,419) 245,375
Resale agreements:    
Proceeds from paydowns and maturities 250,000
 —
AFS debt securities:    
Proceeds from sales 306,463
 151,339
Proceeds from repayments, maturities and redemptions 308,620
 55,712
Purchases (987,130) (69,805)
Loans held-for-investment:    
Proceeds from sales of loans originally classified as held-for-investment 110,945
 92,887
Purchases (133,185) (147,938)
Other changes in loans held-for-investment, net (1,116,358) (409,930)
Premises and equipment:  
  
Purchases (916) (3,336)
Proceeds from sales of other real estate owned (“OREO”) 295
 —
Proceeds from distributions received from equity method investees 374
 1,005
Other net investing activities (1,438) (729)
Net cash used in investing activities (1,405,330) (118,681)
CASH FLOWS FROM FINANCING ACTIVITIES  
  
Net increase in deposits 1,374,287
 800,053
Net increase (decrease) in short-term borrowings 39,962
 (19,514)
FHLB advances:    
Proceeds —
 300,000
Repayment (99,999) (282,000)
Repayment of long-term debt and lease liabilities (289) (217)
Common stock:    
Repurchase of common stock pursuant to the Stock Repurchase Program (145,966) —
Stocks tendered for payment of withholding taxes (7,609) (14,036)
Cash dividends paid (41,358) (34,916)
Net cash provided by financing activities 1,119,028
 749,370
Effect of exchange rate changes on cash and cash equivalents 13,492
 14,018
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (181,107) 783,948
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,261,149
 3,001,377
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,080,042
 $3,785,325
 

Six Months Ended June 30,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$244,176  $314,404  
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization68,926  72,113  
Accretion of discount and amortization of premiums, net(18,901) (9,817) 
Stock compensation costs14,280  15,525  
Deferred income tax benefit(111) (2,110) 
Provision for credit losses176,313  41,824  
Net gains on sales of loans(1,082) (930) 
Gains on sales of AFS debt securities(11,169) (3,008) 
Loans held-for-sale:
Originations and purchases(21,791) (3,339) 
Proceeds from sales and paydowns/payoffs of loans originally classified as held-for-sale18,386  3,632  
Proceeds from distributions received from equity method investees1,107  1,538  
Net change in accrued interest receivable and other assets(456,374) (150,154) 
Net change in accrued expenses and other liabilities257,397  10,320  
Other net operating activities(241) 3  
Total adjustments26,740  (24,403) 
Net cash provided by operating activities270,916  290,001  
CASH FLOWS FROM INVESTING ACTIVITIES  
Net (increase) decrease in:  
Investments in qualified affordable housing partnerships, tax credit and other investments(68,884) (61,555) 
Interest-bearing deposits with banks(315,497) 222,387  
Resale agreements:
Proceeds from paydowns and maturities350,000  50,000  
Purchases(500,000) (25,000) 
AFS debt securities:
Proceeds from sales484,380  375,102  
Proceeds from repayments, maturities and redemptions848,633  117,325  
Purchases(1,834,087) (316,740) 
Loans held-for-investment:
Proceeds from sales of loans originally classified as held-for-investment144,015  170,174  
Purchases(145,695) (326,456) 
Other changes in loans held-for-investment, net(2,475,089) (1,196,094) 
Premises and equipment:  
Proceeds from sales1,883  —  
Purchases(1,846) (4,414) 
Proceeds from distributions received from equity method investees1,948  3,636  
Other net investing activities(374) (5,516) 
Net cash used in investing activities(3,510,613) (997,151) 
CASH FLOWS FROM FINANCING ACTIVITIES  
Net increase in deposits3,355,168  1,035,650  
Net increase (decrease) in short-term borrowings225,834  (38,107) 
FHLB advances:
Proceeds10,100  1,500,000  
Repayment(100,099) (1,082,000) 
Repayment of repurchase agreements(150,000) —  
Repurchase agreements’ extinguishment cost(8,740) —  
Long-term debt and lease liabilities:
Proceeds from long-term debt1,437,269  —  
Repayment of long-term debt and lease liabilities(9,320) (435) 
Common stock:
Repurchase of common stocks pursuant to the Stock Repurchase Program(145,965) —  
Proceeds from issuance pursuant to various stock compensation plans and agreements1,170  1,894  
Stocks tendered for payment of withholding taxes(7,626) (14,169) 
Cash dividends paid(80,271) (74,949) 
Net cash provided by financing activities4,527,520  1,327,884  
Effect of exchange rate changes on cash and cash equivalents(15,470) (497) 
NET INCREASE IN CASH AND CASH EQUIVALENTS1,272,353  620,237  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD3,261,149  3,001,377  
CASH AND CASH EQUIVALENTS, END OF PERIOD$4,533,502  $3,621,614  

See accompanying Notes to Consolidated Financial Statements.

7


EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
(Unaudited)
(Continued)
Six Months Ended June 30,
20202019
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest$145,723  $203,577  
Income taxes, net$5,609  $76,153  
Noncash investing and financing activities:
Loans transferred from held-for-investment to held-for-sale$143,283  $173,394  
Loans transferred to OREO$19,504  $—  
 
  Three Months Ended March 31,
  2020 2019
SUPPLEMENTAL CASH FLOW INFORMATION    
Cash paid during the period for:    
Interest $88,520
 $97,930
Income taxes, net $2,904
 $303
Noncash investing and financing activities:    
Loans transferred from held-for-investment to held-for-sale $110,223
 $92,228
Loans transferred to OREO $19,504
 $—
 



See accompanying Notes to Consolidated Financial Statements.

8



EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Basis of Presentation

East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) is a registered bank holding company that offers a full range of banking services to individuals and businesses through its subsidiary bank, East West Bank and its subsidiaries (“East West Bank” or the “Bank”). The unaudited interim Consolidated Financial Statements in this Form 10-Q include the accounts of East West, East West Bank and East West’s subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. As of March 31,June 30, 2020, East West also has 6 wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Trusts are not included on the Consolidated Financial Statements. East West also owns East West Insurance Services, Inc. In 2019, the Company acquired Enstream CapitalEast West Markets, LLC, a private broker dealer and also established East West Investment Management LLC, a registered investment adviser. Both East West Markets, LLC and East West Investment Management LLC are wholly-owned subsidiaries of East West.

The unaudited interim Consolidated Financial Statements are presented in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), applicable guidelines prescribed by regulatory authorities, and general practices in the banking industry. They reflect all adjustments that, in the opinion of management, are necessary for fair statement of the interim period Consolidated Financial Statements. Certain items on the Consolidated Financial Statements and notes for the prior periods have been reclassified to conform to the current period presentation.

The current period’s results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. While the COVID-19 outbreak had a material impact on our provision for credit losses, the Company is unable to fully predict the impact that COVID-19 will have on its financial position and results of operations due to numerous uncertainties, and will continue to assess the potential impacts on its financial position and results of operations. Events subsequent to the Consolidated Balance Sheet date have been evaluated through the date the Consolidated Financial Statements are issued for inclusion in the accompanying Consolidated Financial Statements. The unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on February 27, 2020 (the “Company’s 2019 Form 10-K”).


9



Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies

New Accounting Pronouncements Adopted
StandardRequired Date of AdoptionDescriptionEffect on Financial Statements
Standards Adopted in 2020
ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent related ASUs
January 1, 2020


Early adoption is permitted on January 1, 2019.

The ASU introduces a new current expected credit loss (“CECL”) model that applies to most financial assets measured at amortized cost and certain instruments, including trade and other receivables, loan receivables, AFS and held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted in each period for changes in expected lifetime credit losses. ASU 2016-13 also eliminates the guidance for purchased credit impaired (“PCI”) loans, but requires an allowance for loan losses for purchased financial assets with more than an insignificant deterioration of credit since origination. The ASU also modifies the other-than-temporary impairment (“OTTI”) model for AFS debt securities to require an allowance for credit losses instead of a direct write-down. A reversal of the allowance for credit losses is allowed in future periods based on improvements in credit performance expectations. This ASU also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). The guidance should be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The new guidance also allows optional relief for certain instruments measured at amortized cost with an option to irrevocably elect the fair value option under ASC Topic 825, Financial Instruments.
The Company adopted ASU 2016-13 using a modified retrospective approach on January 1, 2020 without electing the fair value option on eligible financial instruments under ASU 2019-05. The Company has completed its implementation efforts, which includes the implementation of new processes and controls over the new credit and loss aggregation models, completion of parallel runs, updates to the allowance documentation, policies and reporting processes.

The adoption of this ASU increased the allowance for loan losses by $125.2 million, and allowance for unfunded credit commitments by $10.5 million. The Company also recordedmillion and an after-tax decrease to opening retained earnings of $98.0 million on January 1, 2020. The increase to allowance for loan losses was primarily related to the commercial and industrial (“C&I”) and commercial real estate (“CRE”) loan portfolios. The Company did not record an allowance for credit losses onrelated to the Company’s AFS debt securities as a result of this adoption. Disclosures for periods after January 1, 2020 are presented in accordance with ASC 326
while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies
described in the Company’s 2019 Form 10-K.

The Company has elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital for two years, followed by a three-year transition period.
ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
January 1, 2020


Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017.
The ASU simplifies the accounting for goodwill impairment. Under this guidance, an entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, an impairment loss will be recognized when the carrying amount of a reporting unit exceeds its fair value.value and the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance also eliminates the requirement to perform a qualitative assessment for any reporting units with a zero or negative carrying amount. This guidance should be applied prospectively.The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.



New Accounting Pronouncements Adopted
StandardRequired Date of AdoptionDescriptionEffect on Financial Statements
Standards Adopted in 2020
ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
January 1, 2020The ASU amends ASC Topic 350-40 to align the accounting for costs incurred in a cloud computing arrangement with the guidance on developing internal use software. Specifically, if a cloud computing arrangement is deemed to be a service contract, certain implementation costs are eligible for capitalization. The new guidance prescribes the balance sheet and income statement presentation and cash flow classification for the capitalized costs and related amortization expense. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.The Company adopted this guidance on a prospective basis on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

Recent Accounting Pronouncements
Standard
10

Recent Accounting Pronouncement
StandardRequired Date of AdoptionDescriptionEffect on Financial Statements
Standard Not Yet Adopted
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Effective for all entities as of March 12, 2020

through December 31, 2022.
In March 2020, the FASB issued a new accounting standard related to contracts or hedging relationships that reference LIBORLondon interbank offered rate or other reference rates that are expected to be discontinued due to reference rate reform.
This ASU provideprovides temporary optional expedients and exceptions regarding the accounting requirements related to the modification of certain contracts, hedging relationships and other transactions that are affected by the reference rate reform. The guidance permits the Company to make a one-time election to sell and/or transfer qualifying held-to-maturity securities, and not to apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the dedesignationde-designation criteria of the hedging relationship and the
assessment of hedge effectiveness during the transition period. This one time election may be made at any time after March 12, 2020, but no later than December 31, 2022.
The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment. WeThe Company will continue to assess the impact as the reference rate transition occurs over the next two years.


Summary of Significant Accounting Policies

The Company has revised the following significant accounting policies as a result of the adoption of ASU 2016-13.policies.

Allowance for Loan Losses — The allowance for loan losses is established as management’s estimate of expected credit losses inherent in the Company’s lending activities and increased by the provision for credit losses and decreased by net charge-offs. Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses is evaluated quarterly by management based on periodic reviewregular reviews of the collectability of the loans, and more often if deemed necessary.loans. The Company develops and documents the allowance for loan losses methodology at the portfolio segment level — thecommercial loan portfolio comprisingis comprised of C&I, CRE, multifamily residential, and construction and land loans; and the consumer loan portfolio comprisingis comprised of single-family residential, home equity lines of credit (“HELOC”), and other consumer loans.

The allowance for loan losses represents the portion of the loan’s amortized cost basis that the Company does not expect to collect due to anticipated credit losses over the loan’s contractual life. The Company measures the expected loan losses on a collective pool basis when similar risk characteristics exist. Models consisting of quantitative and qualitative components are designed for each pool to develop the expected credit loss estimates. Reasonable and supportable forecast periods vary by loan portfolio. The collectively evaluated loans include non-classified and classified loans that have not been determined as notto be impaired. The Company has adopted lifetime loss rate models for the portfolios, which use historical loss rates and forecast economic variables to calculate the expected credit losses for each loan pool.



When theimpaired loans do not share similar risk characteristics, the Company evaluates the loan for expected credit losses on an individual basis (e.g., impaired loans).basis. Impaired loans include nonaccrual and troubled debt restructuring (“TDR”) loans. The Company considers loans to be impaired if, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. For loans determined to be impaired, three different asset valuation measurement methods are available: (1) the present value of expected future cash flows, (2) the fair value of collateral less costs to sell, and (3) the loan's observable market price. The allowance for loan losses for collateral-dependent loans is determined based on the fair value of the collateral less costs to sell. For loans that are not collateral-dependent, the Company applies the present value of expected future cash flows valuation or the market value of the loan. When the loan is deemed uncollectible, the Company’s policy is to promptly charge off the estimated impaired amount.

The amortized cost of loans held-for-investment excludes accrued interest, which is included in Other assets on the Consolidated Balance Sheet. The Company has made an accounting policy election to not to recognize an allowance for credit losses for accrued interest receivables as the Company reverses accrued interest if a loan is on nonaccrual loans since the Company timely reverses any previously accrued interest when the borrower remains in default for an extended period.status.

The allowance for loan losses is reported separately on the Consolidated Balance Sheet and the Provision for credit losses is reported on the Consolidated Statement of Income.

11

Allowance for Unfunded Credit Commitments — The allowance for unfunded credit commitments includes reserves provided for unfunded loan commitments, letters of credit, standby letters of credit (“SBLCs”) and recourse obligations for loans sold. The Company estimates the allowance for unfunded credit commitments over the contractual period in which the entity is exposed to credit risk via a present contractual obligation to extend credit. Within the period of credit exposure, the estimate of credit losses will consider both the likelihood that funding will occur, and an estimate of the expected credit losses on the commitments that are expected to fund over their estimated lives.

The allowance for unfunded credit commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities. For all off-balance-sheetoff-balance sheet instruments and commitments, including unfunded lending commitments, letters of credit, SBLCs and recourse obligations for loans sold, the unfunded credit exposure is calculated using utilization assumptions based on the Company's historical utilization experience in related portfolio segments. Loss rates are applied to the calculated exposure balances to estimate the allowance for unfunded credit commitments. Other elements such as credit risk factors for loans outstanding, terms and expiration dates of the unfunded credit facilities, and other pertinent information are considered to determine the adequacy of the allowance.

The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. Changes to the allowance for unfunded credit commitments are included in Provision for credit losses on the Consolidated Income Statements.

Allowance for Credit Losses on Available-for-Sale Debt Securities — ASU 2016-13 modifies the impairmentOTTI model for AFS debt securities.securities to apply an allowance approach for credit impairment as opposed to permanently writing down the cost basis of the security. For each reporting period, AFS debt securities that are in an unrealized loss position are individually analyzed as part of the Company’s ongoing assessments to determine whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. The initial indicator of impairment is a decline in fair value below the amortized cost, excluding accrued interest, of the AFS debt security. The Company first considers whether there is a plan to sell the AFS debt security or it is more-likely-than-not that it will be required to sell the debt security before recovery of the amortized cost. In determining whether an impairment is due to credit related factors, the Company considers the severity of the decline in fair value, nature of the security, the underlying collateral, the financial condition of the issuer, changes in the AFS debt securities’ ratings and other qualitative factors, as well as whetherfactors. For securities that are fully guaranteed by the U.S. government, or certain government enterprises, the Company either plans to sellbelieves that the debt security or it is more-likely-than-not that it will be required to sell the debt security before recovery of the amortized cost. ASU 2016-13 removes the ability to consider the length of time the debt security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist.exposure on these securities is remote and applies a zero credit loss assumption.



When the Company does not intend to sell the impaired AFS debt security and it is more-likely-than-not that the Company will not be required to sell the impaired debt security prior to recovery of its amortized cost basis, the credit component of the unrealized loss of the impaired AFS debt security is recognized as an allowance for credit losses, with a corresponding Provision for credit losseson the Consolidated Statement of Income and the non-credit component is recognized in Other comprehensive income (loss), on the Consolidated Statement of Comprehensive Income, net of applicable taxes. At each reporting period, the Company increases or decreases the allowance for credit losses as appropriate, while limiting reversals of the allowance for credit losses to the extent of the amounts previously recorded. If the Company intends to sell the impaired debt security or it is more-likely-than-not that the Company will be required to sell the impaired debt security prior to recovering its amortized cost basis, the entire impairment amount is recognized as an adjustment to the debt security’s amortized cost basis, with a corresponding Provision for credit losses on the Consolidated Statement of Income.

The amortized cost of the Company’s AFS debt securities excludes accrued interest, which is included in Other assets on the Consolidated Balance Sheet. The Company has made an accounting policy election to not to measurerecognize an allowance for credit losses for accrued interest receivables on AFS debt securities sinceas the Company timely reverses any previously accrued interest when theif a debt security remains in default for an extended period. is impaired. As each AFS debt security has a unique security structure, where the accrual status is clearly determined when certain criteria listed in the terms are met, the Company assesses the default status of each security as defined by the debt security’s specific security structure.

12

Allowance for Collateral-Dependent Financial Assets — A financial asset is considered collateral-dependent if repayment is expected to be provided substantially through the operation or sale of the collateral. The allowance for credit losses is measured on an individual basis for collateral-dependent financial assets and determined by comparing the fair value of the collateral, minus the cost to sell, to the amortized cost basis of the related financial asset at the reporting date. Other than impaired loans, collateral-dependent financial assets could also include resale agreements. In arrangements in which the borrower must continually adjust the collateral securing the asset to reflect changes in the collateral’s fair value (e.g., resale agreements), the Company estimates the expected credit losses on the basis of the unsecured portion of the amortized cost as of the balance sheet date. If the fair value of the collateral is equal to or greater than the amortized cost of the resale agreement, the expected losses would be zero. If the fair value of the collateral is less than the amortized cost of the asset, the expected losses are limited to the difference between the fair value of the collateral and the amortized cost basis of the resale agreement.

Allowance for Purchased Credit Deteriorated Assets — ASU 2016-13 replaces the concept of PCI accounting under ASC 310-30 Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality with the concept of purchased financial assets with credit deterioration (“PCD”).deterioration. The Company adopted ASU 2016-13 using the prospective transition approach for PCDPurchased credit deteriorated (“PCD”) assets that were previously classified as PCI assets. PCD financial assets are defined as acquired individual financial assets (or groups with similar risk characteristics) that as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination. For PCD debt securities and PCD loans, the company records the allowance for credit losses by grossing up the initial amortized cost, which includes the purchase price and the allowance for credit losses. The expected credit losses of PCD debt securities are measured at the individual security level. The expected credit losses for PCD loans are measured based on the loan’s unpaid principal balance. Beginning January 1, 2020, for any asset designated as a PCD asset at the time of acquisition, the Company estimates and records an allowance for credit losses, which is added to the purchase price to establish the initial amortized cost basis of the financial asset. Hence, there is no income statement impact onfrom the acquisition. Subsequent changes in the allowance for credit losses on PCD assets will be recognized in Provision for credit losses on the Consolidated Statement of Income. The noncredit discount or premium will be accreted to interest income based on the effective interest rate on the PCD assets determined after the gross-up for the allowance for credit losses.

Troubled Debt Restructurings — The Company has implemented various loan modification programs to provide its borrowers relief from the economic impacts of the Coronavirus Disease 2019 (“COVID-19”). In accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company has elected to not apply TDR classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. For loans modified in response to the COVID-19 pandemic that do not meet the CARES Act criteria (e.g., current payment status at December 31, 2019), the Company has applied the guidance included in “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”) issued by the federal banking regulators on April 7, 2020. The Interagency Statement states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were current as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are not TDRs. The delinquency of the loans modified under the CARES Act and Interagency Statement is frozen at the time of the modification, and interest income continues to be recognized over the contractual life of the loan. For more information on the Company's TDR accounting, see Note 1 — Summary of Significant Accounting Principles — Troubled Debt Restructurings to the Consolidated Financial Statements of the Company’s 2019 Annual Report on Form 10-K.

Paycheck Protection Program (“PPP”) — In April 2020, the Company started accepting PPP applications and began to originate loans to qualified small businesses under the PPP established by the CARES Act. These loans are included in the C&I portfolio, carry an interest rate of 1%, and are 100% guaranteed by the Small Business Administration (“SBA”). No allowance for loan losses were recorded for these loans as of June 30, 2020. As of June 30, 2020, the Company has funded over 7,200 PPP loans for customers with an outstanding loan balance totaling $1.75 billion. The majority of the Company’s PPP loans have a term of two years. The SBA pays the Company fees for processing PPP loans in the following amounts: (1) five percent for loans of not more than $350,000; (2) three percent for loans of more than $350,000 and less than $2,000,000; and (3) one percent for loans of at least $2,000,000. Loan processing fees paid to the Company by the SBA are accounted for as loan origination fees, where net deferred fees are recognized over the estimated life of the loan as a yield adjustment on the loans. Payments by borrowers on PPP loans begin ten months after the loan forgiveness covered period. Under the terms of the PPP, such loans are eligible to be forgiven if certain conditions are satisfied, in which case the SBA will make payments to the Company for the forgiven amounts. If a loan is paid off or forgiven by the SBA prior to its projected estimated life, the remaining unamortized deferred fees will be recognized as interest income in that period.

13



Note 3 — Fair Value Measurement and Fair Value of Financial Instruments


Fair Value Determination

Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value of financial instruments, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing an asset or a liability. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy noted below is based on the quality and reliability of the information used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:

•Level 1 — Valuation is based on quoted prices for identical instruments traded in active markets.
•Level 2 — Valuation is based on quoted prices for similar instruments traded in active markets; quoted prices for identical or similar instruments traded in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.
•Level 3 — Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.

Available-for-Sale Debt Securities —— When available, the Company uses quoted market prices to determine the fair value of AFS debt securities, which are classified as Level 1. Level 1 AFS debt securities are comprised of U.S. Treasury securities. The fair value of other AFS debt securities is generally determined by independent external pricing service providers who have experience in valuing these securities or by taking the average quoted market prices obtained from independent external brokers. The valuations provided by the third-party pricing service providers are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, prepayment expectation and reference data obtained from market research publications. Inputs used by the third-party pricing service providers in valuing collateralized mortgage obligations and other securitization structures also include new issue data, monthly payment information, whole loan collateral performance, tranche evaluation and “To Be Announced” prices. In valuing securities issued by state and political subdivisions, inputs used by third-party pricing service providers also include material event notices.

On a monthly basis, the Company validates the valuations provided by third-party pricing service providers to ensure that the fair value determination is consistent with the applicable accounting guidance and the financial instruments are properly classified in the fair value hierarchy. To perform this validation, the Company evaluates the fair values of securities by comparing the fair values provided by the third-party pricing service providers to prices from other available independent sources for the same securities. When variances in prices are identified, the Company further compares inputs used by different sources to ascertain the reliability of these sources. On a quarterly basis, the Company reviews the documentation received from the third-party pricing service providers regarding the valuation inputs and methodology used for each category of securities.

When pricing is unavailable from third-party pricing service providers for certain securities, the Company requests market quotes from various independent external brokers and utilizes the average quoted market prices. These valuations are based on observable inputs in the current marketplace and are classified as Level 2. The Company periodically communicates with the independent external brokers to validate their pricing methodology. Information such as pricing sources, pricing assumptions, data inputs and valuation technique are reviewed.


14

Equity Securities — Equity securities consisted of mutual funds as of both March 31,June 30, 2020 and December 31, 2019. The Company uses Net Asset Valuenet asset value (“NAV”) information to determine the fair value of these equity securities. When NAV is available periodically and the equity securities can be put back to the transfer agents at the publicly available NAV, the fair value of the equity securities is classified as Level 1. When NAV is available periodically but the equity securities may not be readily marketable at its periodic NAV in the secondary market, the fair value of these equity securities is classified as Level 2.

Interest Rate Contracts — The Company enters into interest rate swap and option contracts with its borrowers to lock in attractive intermediate and long-term interest rates, resulting in the customer obtaining a synthetic fixed-rate loan. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certificates of deposit issued.issued and certain variable interest rate borrowings. The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The fair value of the interest rate options, which consist of floors and caps, is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fall below (rise above) the strike rate of the floors (caps). In addition, to comply with the provisions of ASC 820, Fair Value Measurement, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments associated with the Company’s derivatives utilize model-derived credit spreads, which are Level 3 inputs. As of March 31,June 30, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these interest rate contracts and has determined that the credit valuation adjustments were not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.

Foreign Exchange Contracts — The Company enters into foreign exchange contracts to accommodate the business needs of its customers. For a majority of the foreign exchange contracts entered with its customers, the Company entered into offsetting foreign exchange contracts with third-party financial institutions to manage its exposure. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits that it offers to its customers. The fair value is determined at each reporting period based on changes in the foreign exchange rates. These are over-the-counter contracts where quoted market prices are not readily available. Valuation is measured using conventional valuation methodologies with observable market data. Due to the short-term nature of the majority of these contracts, the counterparties’ credit risks are considered nominal and result in no adjustments to the valuation of the foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these contracts, the valuation of foreign exchange contracts are classified as Level 2. As of March 31,June 30, 2020 and December 31, 2019, the CompanyBank held foreign currency non-deliverable forward contracts to hedge its net investment in its China subsidiary, East West Bank (China) Limited, a non-U.S. dollar (“USD”) functional currency subsidiary in China. These foreign currency non-deliverable forward contracts were designated as net investment hedges. The fair value of foreign currency contracts is determined by comparing the contracted foreign exchange rate to the current market foreign exchange rate. Key inputs of the current market exchange rate include spot rates and forward rates of the contractual currencies. Foreign exchange forward curves are used to determine which forward rate pertains to a specific maturity. Due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are classified as Level 2.

Credit Contracts — The Company may periodically enter into credit risk participation agreements (“RPAs”) to manage the credit exposure on interest rate contracts associated with the syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. The majority of the inputs used to value the RPAs are observable. Accordingly, RPAs fall within Level 2.


15

Equity Contracts — As part of the loan origination process, from time to time, the Company obtains warrants to purchase preferred and/or common stock of technology and life sciences companies it provides loans to. As of March 31,June 30, 2020 and December 31, 2019, the warrants included on the Consolidated Financial Statements were from both public and private companies. The Company values these warrants based on the Black-Scholes option pricing model. For warrants from public companies, the model uses the underlying stock price, stated strike price, warrant expiration date, risk-free interest rate based on a duration-matched U.S. Treasury rate and market-observable company-specific option volatility as inputs to value the warrants. Due to the observable nature of the inputs used in deriving the estimated fair value, warrants from public companies are classified as Level 2. For warrants from private companies, the model uses inputs such as the offering price observed in the most recent round of funding, stated strike price, warrant expiration date, risk-free interest rate based on duration-matched U.S. Treasury rate and option volatility. The Company applies proxy volatilities based on the industry sectors of the private companies. The model values are then adjusted for a general lack of liquidity due to the private nature of the underlying companies. Due to the unobservable nature of the option volatility and liquidity discount assumptions used in deriving the estimated fair value, warrants from private companies are classified as Level 3. Since both option volatility and liquidity discount assumptions are subject to management’s judgment, measurement uncertainty is inherent in the valuation of private companies’ warrants. Given that the Company holds long positions in all warrants, an increase in volatility assumption would generally result in an increase in fair value. A higher liquidity discount would result in a decrease in fair value. On a quarterly basis, the changes in the fair value of warrants from private companies are reviewed for reasonableness, and a measurement uncertainty analysis on the option volatility and liquidity discount assumptions is performed.

Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. The fair value of the commodity option contracts is determined using the Black-Scholes model and assumptions that include expectations of future commodity price and volatility. The future commodity contract price is derived from observable inputs such as the market price of the commodity. Commodity swaps are structured as an exchange of fixed cash flows for floating cash flows. The fixed cash flows are predetermined based on the known volumes and fixed price as specified in the swap agreement. The floating cash flows are correlated with the change of forward commodity prices, which is derived from market corroborated futures settlement prices. The fair value of the commodity swaps is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments) based on the market prices of the commodity. As a result, the Company classifies these derivative instruments as Level 2 due to the observable nature of the significant inputs utilized.


16

The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of June 30, 2020
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		Total
Fair Value
AFS debt securities:
U.S. Treasury securities$251,201  $—  $—  $251,201  
U.S. government agency and U.S. government- sponsored enterprise debt securities—  442,644  —  442,644  
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities—  858,440  —  858,440  
Residential mortgage-backed securities—  1,280,895  —  1,280,895  
Municipal securities—  215,184  —  215,184  
Non-agency mortgage-backed securities:
Commercial mortgage-backed securities—  151,368  —  151,368  
Residential mortgage-backed securities—  114,338  —  114,338  
Corporate debt securities—  30,826  —  30,826  
Foreign bonds—  204,080  —  204,080  
Asset-backed securities—  61,619  —  61,619  
Collateralized loan obligations (“CLOs”)—  273,979  —  273,979  
Total AFS debt securities$251,201  $3,633,373  $—  $3,884,574  
Investments in tax credit and other investments:
Equity securities (1)
$22,462  $8,680  $—  $31,142  
Total investments in tax credit and other investments$22,462  $8,680  $—  $31,142  
Derivative assets:
Interest rate contracts$—  $613,480  $—  $613,480  
Foreign exchange contracts—  24,289  —  24,289  
Credit contracts—  41  —  41  
Equity contracts—  8,857  316  9,173  
Commodity contracts—  117,447  —  117,447  
Gross derivative assets$—  $764,114  $316  $764,430  
Netting adjustments (2)
$—  $(122,218) $—  $(122,218) 
Net derivative assets$—  $641,896  $316  $642,212  
Derivative liabilities:
Interest rate contracts$—  $401,803  $—  $401,803  
Foreign exchange contracts—  19,741  —  19,741  
Credit contracts—  327  —  327  
Commodity contracts—  138,298  —  138,298  
Gross derivative liabilities$—  $560,169  $—  $560,169  
Netting adjustments (2)
$—  $(205,004) $—  $(205,004) 
Net derivative liabilities$—  $355,165  $—  $355,165  
 
($ in thousands) Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of March 31, 2020
 Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total
Fair Value
AFS debt securities:        
U.S. Treasury securities $51,428
 $—
 $—
 $51,428
U.S. government agency and U.S. government- sponsored enterprise debt securities —
 518,408
 —
 518,408
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:        
Commercial mortgage-backed securities —
 697,948
 —
 697,948
Residential mortgage-backed securities —
 1,352,367
 —
 1,352,367
Municipal securities —
 309,626
 —
 309,626
Non-agency mortgage-backed securities:        
Commercial mortgage-backed securities —
 87,114
 —
 87,114
Residential mortgage-backed securities —
 62,134
 —
 62,134
Corporate debt securities —
 10,963
 —
 10,963
Foreign bonds —
 284,521
 —
 284,521
Asset-backed securities —
 61,556
 —
 61,556
Collateralized loan obligations (“CLOs”) —
 259,878
 —
 259,878
Total AFS debt securities $51,428
 $3,644,515
 $—
 $3,695,943
         
Investments in tax credit and other investments:        
Equity securities (1)
 $22,195
 $8,135
 $—
 $30,330
Total investments in tax credit and other investments $22,195
 $8,135
 $—
 $30,330
         
Derivative assets:        
Interest rate contracts $—
 $605,122
 $—
 $605,122
Foreign exchange contracts —
 64,383
 —
 64,383
Credit contracts —
 8
 —
 8
Equity contracts —
 415
 713
 1,128
Commodity contracts —
 163,563
 —
 163,563
Gross derivative assets $—
 $833,491
 $713
 $834,204
Netting adjustments (2)
 $—
 $(178,774) $—
 $(178,774)
Net derivative assets $—
 $654,717
 $713
 $655,430
         
Derivative liabilities:        
Interest rate contracts $—
 $403,351
 $—
 $403,351
Foreign exchange contracts —
 55,658
 —
 55,658
Credit contracts —
 218
 —
 218
Commodity contracts —
 199,288
 —
 199,288
Gross derivative liabilities $—
 $658,515
 $—
 $658,515
Netting adjustments (2)
 $—
 $(243,101) $—
 $(243,101)
Net derivative liabilities $—
 $415,414
 $—
 $415,414
 
(1)Equity securities consist of mutual funds with readily determinable fair values.
(1)Equity securities consist of mutual funds with readily determinable fair values.
(2)
(2)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.


 
($ in thousands) Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of December 31, 2019
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
AFS debt securities:        
U.S. Treasury securities $176,422
 $—
 $—
 $176,422
U.S. government agency and U.S. government- sponsored enterprise debt securities —
 581,245
 —
 581,245
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:       

Commercial mortgage-backed securities —
 603,471
 —
 603,471
Residential mortgage-backed securities —
 1,003,897
 —
 1,003,897
Municipal securities —
 102,302
 —
 102,302
Non-agency mortgage-backed securities:        
Commercial mortgage-backed securities —
 88,550
 —
 88,550
Residential mortgage-backed securities —
 46,548
 —
 46,548
Corporate debt securities —
 11,149
 —
 11,149
Foreign bonds —
 354,172
 —
 354,172
Asset-backed securities —
 64,752
 —
 64,752
CLOs —
 284,706
 —
 284,706
Total AFS debt securities $176,422
 $3,140,792
 $—
 $3,317,214
         
Investments in tax credit and other investments:        
Equity securities (1)
 $21,746
 $9,927
 $—
 $31,673
Total investments in tax credit and other investments $21,746
 $9,927
 $—
 $31,673
         
Derivative assets:        
Interest rate contracts $—
 $192,883
 $—
 $192,883
Foreign exchange contracts —
 54,637
 —
 54,637
Credit contracts —
 2
 —
 2
Equity contracts —
 993
 421
 1,414
Commodity contracts —
 81,380
 —
 81,380
Gross derivative assets $—
 $329,895
 $421
 $330,316
Netting adjustments (2)
 $—
 $(125,319) $—
 $(125,319)
Net derivative assets $—
 $204,576
 $421
 $204,997
         
Derivative liabilities:        
Interest rate contracts $—
 $127,317
 $—
 $127,317
Foreign exchange contracts —
 48,610
 —
 48,610
Credit contracts —
 84
 —
 84
Commodity contracts —
 80,517
 —
 80,517
Gross derivative liabilities $—
 $256,528
 $—
 $256,528
Netting adjustments (2)
 $—
 $(159,799) $—
 $(159,799)
Net derivative liabilities $—
 $96,729
 $—
 $96,729
 
17

(1)Equity securities consist of mutual funds with readily determinable fair values.
(2)
($ in thousands)Assets and Liabilities Measured at Fair Value on a Recurring Basis
as of December 31, 2019
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		Total
Fair Value
AFS debt securities:
U.S. Treasury securities$176,422  $—  $—  $176,422  
U.S. government agency and U.S. government- sponsored enterprise debt securities—  581,245  —  581,245  
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities—  603,471  —  603,471  
Residential mortgage-backed securities—  1,003,897  —  1,003,897  
Municipal securities—  102,302  —  102,302  
Non-agency mortgage-backed securities:
Commercial mortgage-backed securities—  88,550  —  88,550  
Residential mortgage-backed securities—  46,548  —  46,548  
Corporate debt securities—  11,149  —  11,149  
Foreign bonds—  354,172  —  354,172  
Asset-backed securities—  64,752  —  64,752  
CLOs—  284,706  —  284,706  
Total AFS debt securities$176,422  $3,140,792  $—  $3,317,214  
Investments in tax credit and other investments:
Equity securities (1)
$21,746  $9,927  $—  $31,673  
Total investments in tax credit and other investments$21,746  $9,927  $—  $31,673  
Derivative assets:
Interest rate contracts$—  $192,883  $—  $192,883  
Foreign exchange contracts—  54,637  —  54,637  
Credit contracts—  2  —  2  
Equity contracts—  993  421  1,414  
Commodity contracts—  81,380  —  81,380  
Gross derivative assets$—  $329,895  $421  $330,316  
Netting adjustments (2)
$—  $(125,319) $—  $(125,319) 
Net derivative assets$—  $204,576  $421  $204,997  
Derivative liabilities:
Interest rate contracts$—  $127,317  $—  $127,317  
Foreign exchange contracts—  48,610  —  48,610  
Credit contracts—  84  —  84  
Commodity contracts—  80,517  —  80,517  
Gross derivative liabilities$—  $256,528  $—  $256,528  
Netting adjustments (2)
$—  $(159,799) $—  $(159,799) 
Net derivative liabilities$—  $96,729  $—  $96,729  
(1)Equity securities consist of mutual funds with readily determinable fair values.
(2)Represents balance sheet netting of derivative assets and liabilities and related cash collateral under master netting agreements or similar agreements. See Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.

18



For the three and six months ended March 31,June 30, 2020 and 2019, Level 3 fair value measurements that were measured on a recurring basis consist of warrants issued by private companies. The following table provides a reconciliation of the beginning and ending balances of these equity warrants for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Equity Contracts
Beginning balance$713  $442  $421  $673  
Total gains included in earnings (1)
7,976  769  8,268  538  
Issuances—  28  —  28  
Settlements—  (847) —  (847) 
Transfers out of Level 3 (2)
(8,373) —  (8,373) —  
Ending balance$316  $392  $316  $392  
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Equity Contracts    
Beginning balance $421
 $673
Total gains (losses) included in earnings (1)
 292
 (231)
Ending balance
$713
 $442
 
(1)Includes unrealized gains (losses) of $8.0 million and $(4) thousand for the three months ended June 30, 2020 and 2019, respectively, and $8.3 million and $(235) thousand for the six months ended June 30, 2020 and 2019, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income.
(2)During the three and six months ended June 30, 2020, the Company transferred $8.4 million of equity contracts measured on a recurring basis out of Level 3 into Level 2 after the corresponding issuer of the equity warrant, which was previously a private company, completed its initial public offering and became a public company.

(1)
Includes unrealized gains (losses) of $292 thousand and $(43) thousand for the three months ended March 31, 2020 and 2019, respectively. The realized/unrealized gains (losses) of equity warrants are included in Lending fees on the Consolidated Statement of Income.

The following table presents quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements as of March 31,June 30, 2020 and December 31, 2019, respectively. The significant unobservable inputs presented in the table below are those that the Company considers significant to the fair value of the Level 3 assets. The Company considers unobservable inputs to be significant if, by their exclusion, the fair value of the Level 3 assets would be impacted by a predetermined percentage change.
 
($ in thousands) 
Fair Value
Measurements
(Level 3)
 
Valuation
Technique
 
Unobservable
Inputs
 Range of Inputs 
Weighted-
Average (1)
March 31, 2020          
Derivative assets:          
Equity contracts $713
 Black-Scholes option pricing model Equity volatility 72% — 86% 82%
      Liquidity discount 47% 47%
December 31, 2019          
Derivative assets:          
Equity contracts $421
 Black-Scholes option pricing model Equity volatility 39% — 44% 42%
      Liquidity discount 47% 47%
 
(1)Weighted-average is calculated based on fair value of equity warrants as of March 31, 2020 and December 31, 2019.

($ in thousands)Fair Value
Measurements
(Level 3)		Valuation
Technique		Unobservable
Inputs		Range of Inputs
Weighted-
Average (1)
June 30, 2020
Derivative assets:
Equity contracts$316  Black-Scholes option pricing modelEquity volatility58% — 70%63%
Liquidity discount47%47%
December 31, 2019
Derivative assets:
Equity contracts$421  Black-Scholes option pricing modelEquity volatility39% — 44%42%
Liquidity discount47%47%
(1)Weighted-average is calculated based on fair value of equity warrants as of June 30, 2020 and December 31, 2019.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis include certain loans, investments in qualified affordable housing partnerships, tax credit and other investments, OREO, loans held-for-sale, and loans held-for-sale.other nonperforming assets. Nonrecurring fair value adjustments result from impairment on certain loans and investments in qualified affordable housing partnerships, tax credit and other investments, write-downs of OREO, or from the application of lower of cost or fair value on loans held-for-sale.

ImpairedIndividually Evaluated Loans — The Company typically adjusts the carrying amount of impairedindividually evaluated loans when there is evidence of probable loss and when the expected fair value of the loan is less than its carrying amount. ImpairedIndividually evaluated loans with specific reserves are classified as Level 3 assets. The following two methods are used to derive the fair value of impairedindividually evaluated loans:

•Discounted cash flows valuation techniques that consist of developing an expected stream of cash flows over the life of the loans and then valuing the loans at the present value by discounting the expected cash flows at a designated discount rate.
19

•A specific reserve is established for an impairedindividually evaluated loan based on the fair value of the underlying collateral, which may take the form of real estate, inventory, equipment, contracts or guarantees. The fair value of the underlying collateral is generally based on third-party appraisals, or an internal valuation if a third-party appraisal is not required by regulations, which utilize one or more valuation techniques such as income, market and/or cost approaches.




Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net — As part of the Company’sits monitoring process, the Company conducts ongoing due diligence on the Company’s investments in its qualified affordable housing partnerships, tax credit and other investments after the initial investment date and prior to the being placed in service date.placed-in-service-date. After these investments are either acquired or placed into service, periodic monitoring is performed, whichperformed. This includes the quarterly review of the financial statements of the tax credit investment entity, and the annual review of the financial statements of the guarantor (if any), as well as the review of the annual tax returns of the tax credit investment entity;entity, and the comparison of the actual cash distributions received against the financial projections prepared at the time when the investment was made. The Company assesses its tax credit and other investments for possible OTTI on an annual basis or when events or circumstances suggest that the carrying amount of the tax credit investments may not be realizable. These circumstances can include, but are not limited to the following factors:

•The current fair value of the tax credit investment based upon the expected future cash flows is less than the carrying amount;amount of the investment;
Change•Changes in the economic, market or technological environment that could adversely affect the investee’s operations; and
•Other factors that raise doubt about the investee’s ability to continue as a going concern, such as negative cash flows from operations and the continuing prospects of the underlying operations of the investment.

All available evidence is considered in assessing whether a decline in value is other-than-temporary. Generally, none of the aforementioned factors are individually conclusive and the relative importance placed on individual facts may vary depending on the situation. In accordance with ASC 323-10-35-32, an impairment charge would only be recognized in earnings for a decline in value that is determined to be other-than-temporary.

Other Real Estate Owned — The Company’s OREO represents properties acquired through foreclosure, or through full or partial satisfaction of loans held-for-investment. These OREO properties are recorded at estimated fair value less the costs to sell at the time of foreclosure or at the lower of cost or estimated fair value less the costs to sell subsequent to acquisition. On a monthly basis, the current fair market value of each OREO property is reviewed to ensure that the current carrying value is appropriate. OREO properties are classified as Level 3.

Other nonperforming assetsNonperforming Assets — Other nonperforming assets are recorded at fair value upon transfers from loans to foreclosed assets. Subsequently, foreclosed assets are recorded at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised values of the collateral or management’s estimates of the foreclosed asset. The Company records an impairment when the foreclosed asset’s fair value declines below its carrying value. Other nonperforming assets are classified as Level 3.


20

The following tables present the carrying amounts of assets that were still held and had fair value changes measured on a nonrecurring basis as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)Assets Measured at Fair Value on a Nonrecurring Basis
as of June 30, 2020
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		Fair Value
Measurements
Individually evaluated loans (1):
Commercial:
C&I$—  $—  $53,122  $53,122  
CRE:
CRE—  —  50,453  50,453  
Total commercial—  —  103,575  103,575  
Consumer:
Residential mortgage:
HELOCs—  —  3,338  3,338  
Other consumer—  —  2,491  2,491  
Total consumer—  —  5,829  5,829  
Total individually evaluated loans$—  $—  $109,404  $109,404  
Investments in tax credit and other investments, net$—  $—  $6,216  $6,216  
($ in thousands) Assets Measured at Fair Value on a Nonrecurring Basis
as of March 31, 2020		($ in thousands)Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2019
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 
Significant
Unobservable
Inputs
(Level 3)
 Fair Value
Measurements		Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)		Fair Value
Measurements
Impaired loans (1):
        
Non-PCI impaired loans:Non-PCI impaired loans:
Commercial:        Commercial:
C&I $—
 $—
 $28,877
 $28,877
C&I$—  $—  $47,554  $47,554  
CRE:        CRE:
CRE —
 —
 735
 735
CRE—  —  753  753  
Total commercial —
 —
 29,612
 29,612
Total commercial—  —  48,307  48,307  
Consumer:        Consumer:
Residential mortgage:        Residential mortgage:
HELOCs —
 —
 1,798
 1,798
HELOCs—  —  1,372  1,372  
Other consumer —
 —
 2,491
 2,491
Total consumer —
 —
 4,289
 4,289
Total consumer—  —  1,372  1,372  
Total impaired loans $—
 $—
 $33,901
 $33,901
Total non-PCI impaired loansTotal non-PCI impaired loans$—  $—  $49,679  $49,679  
OREO (2)
OREO (2)
$—  $—  $125  $125  
Investments in tax credit and other investments, net $—
 $—
 $3,076
 $3,076
Investments in tax credit and other investments, net$—  $—  $3,076  $3,076  
Other nonperforming assets $—
 $—
 $867
 $867
Other nonperforming assets$—  $—  $1,167  $1,167  
(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total individually evaluated loans as of June 30, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 include only non-PCI loans.
 
($ in thousands) Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2019
 Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Fair Value
Measurements
Non-PCI impaired loans:        
Commercial:        
C&I $—
 $—
 $47,554
 $47,554
CRE:        
CRE —
 —
 753
 753
Total commercial —
 —
 48,307
 48,307
Consumer:        
Residential mortgage:        
HELOCs —
 —
 1,372
 1,372
Total consumer —
 —
 1,372
 1,372
Total non-PCI impaired loans $—
 $—
 $49,679
 $49,679
OREO (2)
 $—
 $—
 $125
 $125
Investments in tax credit and other investments, net $—
 $—
 $3,076
 $3,076
 
(2)Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO.

(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total impaired loans as of March 31, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 includes only non-PCI loans.
(2)
Amounts are included in Other assets on the Consolidated Balance Sheet and represent the carrying value of OREO properties that were written down subsequent to their initial classification as OREO.
21




The following table presents the increase (decrease) in fair value of assets for which a nonrecurring fair value adjustment has been recognized for the three and six months ended March 31,June 30, 2020 and 2019, related to assets2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Individually
Evaluated Loans (1)
Non-PCI Impaired Loans
Individually
Evaluated Loans (1)
Non-PCI Impaired Loans
Loans:
Commercial:
C&I$(8,846) $(24,001) $(30,372) $(25,823) 
CRE:
CRE(271) 2  (276) 4  
Total commercial(9,117) (23,999) (30,648) (25,819) 
Consumer:
Residential mortgage:
HELOCs(64) —  (257) —  
Other consumer—  —  2,491  —  
Total consumer(64) —  2,234  —  
Total loans$(9,181) $(23,999) $(28,414) $(25,819) 
OREO$—  $(3) $—  $(3) 
Investments in tax credit and other investments, net$(733) $(2,892) $(583) $(9,870) 
Other nonperforming assets$—  $—  $—  $(3,000) 
(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were still heldpreviously accounted for as of those dates:PCI loans. Total individually evaluated loans during thethree and six months ended June 30, 2020 considers PCD loans, if impaired, whereas impaired loans during the three and six months ended June 30, 2019 include only non-PCI loans.
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Impaired loans: 
Total Impaired Loans (1)
 Non-PCI Impaired Loans
Commercial:    
C&I $(21,501) $(2,734)
CRE:    
CRE (5) 2
Total commercial (21,506) (2,732)
Consumer:    
Residential mortgage:    
HELOCs (193) (78)
Other consumer 2,491
 —
Total consumer 2,298
 (78)
Total impaired loans $(19,208) $(2,810)
Investments in tax credit and other investments, net $150
 $(6,978)
Other nonperforming assets $(300) $—
 

(1)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total impaired loans during the three months ended March 31, 2020 considers PCD loans, if impaired, whereas impaired loans during the three months ended March 31, 2019 includes only non-PCI loans.

The following table presents the quantitative information about the significant unobservable inputs used in the valuation of Level 3 fair value measurements that are measured on a nonrecurring basis as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)($ in thousands)Fair Value
Measurements
(Level 3)		Valuation
Techniques		Unobservable
Inputs		Range of 
Inputs
Weighted-
Average of Inputs (1)
June 30, 2020June 30, 2020
Individually evaluated loans (2)
Individually evaluated loans (2)
$29,949  Discounted cash flowsDiscount4% — 15%10%
$5,658  Fair value of collateralDiscount10% — 63%19%
$21,452  Fair value of collateralContract valueNMNM
$52,345  Fair value of propertySelling cost8%8%
($ in thousands) Fair Value
Measurements
(Level 3)		 Valuation
Technique(s)		 
Unobservable
Input(s)
 
Range of 
Input(s)
 
Weighted-
Average (1)
March 31, 2020   
Impaired loans (1)
 $25,140
 Discounted cash flows Discount 4% — 15% 12%
 $5,712
 Fair value of collateral Discount 8% — 9% 9%
 $2,491
 Fair value of collateral Contract value NM NM
Investments in tax credit and other investments, netInvestments in tax credit and other investments, net$6,216  Individual analysis of each investmentExpected future tax benefits and distributionsNMNM
 $558
 Fair value of property Selling cost 8% 8%
Other nonperforming assets $867
 Fair value of collateral Contract value NM NM
Investments in tax credit and other investments, net $3,076
 Individual analysis of each investment Expected future tax benefits and distributions NM NM
December 31, 2019   December 31, 2019
Non-PCI impaired loans $27,841
 Discounted cash flows Discount 4% — 15% 14%Non-PCI impaired loans$27,841  Discounted cash flowsDiscount4% — 15%14%
 $1,014
 Fair value of collateral Discount 8% — 20% 19%
 $20,824
 Fair value of collateral Contract value NM NM$1,014  Fair value of collateralDiscount8% — 20%19%
$20,824  Fair value of collateralContract valueNMNM
OREO $125
 Fair value of property Selling cost 8% 8%OREO$125  Fair value of propertySelling cost8%8%
Other nonperforming assetsOther nonperforming assets$1,167  Fair value of collateralContract valueNMNM
Investments in tax credit and other investments, net $3,076
 Individual analysis of each investment Expected future tax benefits and distributions NM NMInvestments in tax credit and other investments, net$3,076  Individual analysis of each investmentExpected future tax benefits and distributionsNMNM
NM — Not meaningful.
(1)Presented on a total impaired loan basis due to the adoption of ASU 2016-13 PCD loans (formerly, PCI loans) are assessed for impairment in the same manner as non-PCD loans.
(2)Weighted-average is based on the relative fair value of the respective assets as of March 31, 2020 and December 31, 2019.

(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of June 30, 2020 and December 31, 2019.

(2)The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans that were previously accounted for as PCI loans. Total individually evaluated loans as of June 30, 2020 considers PCD loans, if impaired, whereas the impaired loans as of December 31, 2019 include only non-PCI loans.

22

Disclosures about Fair Value of Financial Instruments

The following tables present the fair value estimates for financial instruments as of March 31,June 30, 2020 and December 31, 2019, excluding financial instruments recorded at fair value on a recurring basis as they are included in the tables presented elsewhere in this Note. The carrying amounts in the following tables are recorded on the Consolidated Balance Sheet under the indicated captions, except for accrued interest receivable and mortgage servicing rights that are included in Other assets, and accrued interest payable that is included in Accrued expenses and other liabilities. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet.
($ in thousands)June 30, 2020
Carrying
Amount		Level 1Level 2Level 3Estimated
Fair Value
Financial assets:
Cash and cash equivalents$4,533,502  $4,533,502  $—  $—  $4,533,502  
Interest-bearing deposits with banks$531,591  $—  $531,591  $—  $531,591  
Resale agreements (1)
$1,260,000  $—  $1,263,068  $—  $1,263,068  
Restricted equity securities, at cost$78,963  $—  $78,963  $—  $78,963  
Loans held-for-sale$3,875  $—  $3,875  $—  $3,875  
Loans held-for-investment, net$36,597,341  $—  $—  $36,714,052  $36,714,052  
Mortgage servicing rights$5,363  $—  $—  $7,798  $7,798  
Accrued interest receivable$149,595  $—  $149,595  $—  $149,595  
Financial liabilities:
Demand, checking, savings and money market deposits$31,410,130  $—  $31,410,130  $—  $31,410,130  
Time deposits$9,262,548  $—  $9,295,199  $—  $9,295,199  
Short-term borrowings$252,851  $—  $252,851  $—  $252,851  
FHLB advances$656,759  $—  $667,996  $—  $667,996  
Repurchase agreements (1)
$300,000  $—  $320,361  $—  $320,361  
Long-term debt$1,575,653  $—  $1,578,801  $—  $1,578,801  
Accrued interest payable$23,007  $—  $23,007  $—  $23,007  
($ in thousands) March 31, 2020($ in thousands)December 31, 2019
Carrying
Amount
 Level 1 Level 2 Level 3 
Estimated
Fair Value
Carrying
Amount		Level 1Level 2Level 3Estimated
Fair Value
Financial assets:          Financial assets:
Cash and cash equivalents $3,080,042
 $3,080,042
 $—
 $—
 $3,080,042
Cash and cash equivalents$3,261,149  $3,261,149  $—  $—  $3,261,149  
Interest-bearing deposits with banks $293,509
 $—
 $293,509
 $—
 $293,509
Interest-bearing deposits with banks$196,161  $—  $196,161  $—  $196,161  
Resale agreements (1)
 $860,000
 $—
 $867,872
 $—
 $867,872
Resale agreements (1)
$860,000  $—  $856,025  $—  $856,025  
Restricted equity securities, at cost $78,745
 $—
 $78,745
 $—
 $78,745
Restricted equity securities, at cost$78,580  $—  $78,580  $—  $78,580  
Loans held-for-sale $1,594
 $—
 $1,594
 $—
 $1,594
Loans held-for-sale$434  $—  $434  $—  $434  
Loans held-for-investment, net $35,336,390
 $—
 $—
 $35,736,331
 $35,736,331
Loans held-for-investment, net$34,420,252  $—  $—  $35,021,300  $35,021,300  
Mortgage servicing rights $5,711
 $—
 $—
 $7,926
 $7,926
Mortgage servicing rights$6,068  $—  $—  $8,199  $8,199  
Accrued interest receivable $148,294
 $—
 $148,294
 $—
 $148,294
Accrued interest receivable$144,599  $—  $144,599  $—  $144,599  
Financial liabilities:          Financial liabilities:
Demand, checking, savings and money market deposits $28,720,425
 $—
 $28,720,425
 $—
 $28,720,425
Demand, checking, savings and money market deposits$27,109,951  $—  $27,109,951  $—  $27,109,951  
Time deposits $9,966,533
 $—
 $9,992,060
 $—
 $9,992,060
Time deposits$10,214,308  $—  $10,208,895  $—  $10,208,895  
Short-term borrowings $66,924
 $—
 $66,924
 $—
 $66,924
Short-term borrowings$28,669  $—  $28,669  $—  $28,669  
FHLB advances $646,336
 $—
 $657,859
 $—
 $657,859
FHLB advances$745,915  $—  $755,371  $—  $755,371  
Repurchase agreements (1)
 $450,000
 $—
 $470,230
 $—
 $470,230
Repurchase agreements (1)
$200,000  $—  $232,597  $—  $232,597  
Long-term debt $147,169
 $—
 $152,942
 $—
 $152,942
Long-term debt$147,101  $—  $152,641  $—  $152,641  
Accrued interest payable $25,209
 $—
 $25,209
 $—
 $25,209
Accrued interest payable$27,246  $—  $27,246  $—  $27,246  
(1)Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of June 30, 2020, NaN of the $300.0 million of gross repurchase agreements were eligible for netting against gross resale agreements. Out of $450.0 million of gross repurchase agreements, $250.0 million were eligible for netting against gross resale agreements as of December 31, 2019.
 
($ in thousands) December 31, 2019
 Carrying
Amount		 Level 1 Level 2 Level 3 Estimated
Fair Value
Financial assets:          
Cash and cash equivalents $3,261,149
 $3,261,149
 $—
 $—
 $3,261,149
Interest-bearing deposits with banks $196,161
 $—
 $196,161
 $—
 $196,161
Resale agreements (1)
 $860,000
 $—
 $856,025
 $—
 $856,025
Restricted equity securities, at cost $78,580
 $—
 $78,580
 $—
 $78,580
Loans held-for-sale $434
 $—
 $434
 $—
 $434
Loans held-for-investment, net $34,420,252
 $—
 $—
 $35,021,300
 $35,021,300
Mortgage servicing rights $6,068
 $—
 $—
 $8,199
 $8,199
Accrued interest receivable $144,599
 $—
 $144,599
 $—
 $144,599
Financial liabilities:          
Demand, checking, savings and money market deposits $27,109,951
 $—
 $27,109,951
 $—
 $27,109,951
Time deposits $10,214,308
 $—
 $10,208,895
 $—
 $10,208,895
Short-term borrowings $28,669
 $—
 $28,669
 $—
 $28,669
FHLB advances $745,915
 $—
 $755,371
 $—
 $755,371
Repurchase agreements (1)
 $200,000
 $—
 $232,597
 $—
 $232,597
Long-term debt $147,101
 $—
 $152,641
 $—
 $152,641
Accrued interest payable $27,246
 $—
 $27,246
 $—
 $27,246
 

(1)
Resale and repurchase agreements are reported net pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Out of gross repurchase agreements of $450.0 million, $0.0 million and $250.0 million as of March 31, 2020 and December 31, 2019, respectively, were eligible for netting against gross resale agreements

23



Note 4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements

Resale Agreements

Gross resale agreements were $860.0 million$1.26 billion and $1.11 billion as of March 31,June 30, 2020 and December 31, 2019, respectively. The weighted-average yields were 2.54%2.14% and 2.80%2.71% for the three months ended March 31,June 30, 2020 and 2019, respectively, and 2.32% and 2.77% for the six months ended June 30, 2020 and 2019, respectively.

Repurchase Agreements

As of March 31,June 30, 2020, the collateral for the repurchase agreements were comprised of U.S. Treasury securities, and U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities. Gross repurchase agreements were $300.0 million and $450.0 million as of both March 31,June 30, 2020 and December 31, 2019.2019, respectively. The weighted-average interest rates were 4.10%3.40% and 5.01%4.93% for the three months ended March 31,June 30, 2020 and 2019, respectively, and 3.76% and 4.97% for the six months ended June 30, 2020 and 2019, respectively. The Company recorded $8.7 million of charges related to the extinguishment of $150.0 million of repurchase agreements for the three and six months ended June 30, 2020. In comparison, there were no extinguishment charges recorded in 2019. As of March 31,June 30, 2020, $150.0$300.0 million of repurchase agreements will mature in 2022 and $300.0 million will mature in 2023.

Balance Sheet Offsetting

The Company’s resale and repurchase agreements are transacted under legally enforceable master repurchase agreements that provide the Company, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Company nets resale and repurchase transactions with the same counterparty on the Consolidated Balance Sheet when it has a legally enforceable master netting agreement and the transactions are eligible for netting under ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. Collateral received includes securities that are not recognized on the Consolidated Balance Sheet. Collateral pledged consists of securities that are not netted on the Consolidated Balance Sheet against the related collateralized liability. Collateral received or pledged in resale and repurchase agreements with other financial institutions may also be sold or re-pledged by the secured party, and is usually delivered to and held by the third-party trustees. The collateral amounts received/pledged are limited for presentation purposes to the related recognized asset/liability balance for each counterparty, and accordingly, do not include excess collateral received/pledged.

The following tables present the resale and repurchase agreements included on the Consolidated Balance Sheet as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020
Gross
Amounts
of Recognized
Assets		Gross Amounts
Offset on the
Consolidated
Balance Sheet		Net Amounts of
Assets Presented
on the Consolidated
Balance Sheet		Gross Amounts Not Offset on the
Consolidated Balance Sheet
AssetsNet
Amount
Collateral Received
Resale agreements$1,260,000  $—  $1,260,000  $(1,258,866) 
(1)
$1,134  
Gross
Amounts
of Recognized
Liabilities		Gross Amounts
Offset on the
Consolidated
Balance Sheet		Net Amounts of
Liabilities
Presented
on the Consolidated
Balance Sheet		Gross Amounts Not Offset on the
Consolidated Balance Sheet
LiabilitiesNet
Amount
Collateral Pledged
Repurchase agreements$300,000  $—  $300,000  $(300,000) 
(2)
$—  
24

($ in thousands) March 31, 2020($ in thousands)December 31, 2019
Gross
Amounts
of Recognized
Assets		Gross Amounts
Offset on the
Consolidated
Balance Sheet		Net Amounts of
Assets Presented
on the Consolidated
Balance Sheet		Gross Amounts Not Offset on the
Consolidated Balance Sheet
Assets 
Gross
Amounts
of Recognized
Assets
 Gross Amounts
Offset on the
Consolidated
Balance Sheet		 
Net Amounts of
Assets Presented
on the Consolidated
Balance Sheet
 Gross Amounts Not Offset on the
Consolidated Balance Sheet		 
Net
Amount
AssetsNet
Amount
 Collateral Received Gross
Amounts
of Recognized
Assets		Gross Amounts
Offset on the
Consolidated
Balance Sheet		Net Amounts of
Assets Presented
on the Consolidated
Balance Sheet		Collateral Received
Resale agreements $860,000
 $—
 $860,000
 $(859,842)
(1) 
$158
Resale agreements$1,110,000  $(250,000) $860,000  $(856,058) 
(1)
$3,942  
          Gross
Amounts
of Recognized
Liabilities		Gross Amounts
Offset on the
Consolidated
Balance Sheet		Net Amounts of
Liabilities
Presented
on the Consolidated
Balance Sheet		Gross Amounts Not Offset on the
Consolidated Balance Sheet
Liabilities 
Gross
Amounts
of Recognized
Liabilities
 Gross Amounts
Offset on the
Consolidated
Balance Sheet		 
Net Amounts of
Liabilities
Presented
on the Consolidated
Balance Sheet
 Gross Amounts Not Offset on the
Consolidated Balance Sheet		 
Net
Amount
LiabilitiesNet
Amount
 Collateral Pledged Gross
Amounts
of Recognized
Liabilities		Gross Amounts
Offset on the
Consolidated
Balance Sheet		Net Amounts of
Liabilities
Presented
on the Consolidated
Balance Sheet		Collateral Pledged
Repurchase agreements $450,000
 $—
 $450,000
 $(441,246)
(2) 
$8,754
Repurchase agreements$450,000  $(250,000) $200,000  $(200,000) 
(2)
$—  

(1)Represents the fair value of securities the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.

(2)Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability due to each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
 
($ in thousands) December 31, 2019
Assets 
Gross
Amounts
of Recognized
Assets
 Gross Amounts
Offset on the
Consolidated
Balance Sheet		 
Net Amounts of
Assets Presented
on the Consolidated
Balance Sheet
 Gross Amounts Not Offset on the
Consolidated Balance Sheet		 
Net
Amount
    Collateral Received 
Resale agreements $1,110,000
 $(250,000) $860,000
 $(856,058)
(1) 
$3,942
           
Liabilities 
Gross
Amounts
of Recognized
Liabilities
 Gross Amounts
Offset on the
Consolidated
Balance Sheet		 
Net Amounts of
Liabilities
Presented
on the Consolidated
Balance Sheet
 Gross Amounts Not Offset on the
Consolidated Balance Sheet		 
Net
Amount
    Collateral Pledged 
Repurchase agreements $450,000
 $(250,000) $200,000
 $(200,000)
(2) 
$—
 
(1)Represents the fair value of securities the Company has received under resale agreements, limited for table presentation purposes to the amount of the recognized asset due from each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
(2)Represents the fair value of securities the Company has pledged under repurchase agreements, limited for table presentation purposes to the amount of the recognized liability due to each counterparty. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to derivatives. Refer to Note 6 — Derivatives to the Consolidated Financial Statements in this Form 10-Q for additional information.

Note 5 — Securities

The following tables present the amortized cost, gross unrealized gains and losses, and fair value by major categories of AFS debt securities as of March 31,June 30, 2020 and December 31, 2019:
 
($ in thousands) March 31, 2020
 
Amortized
Cost (1)
 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
AFS debt securities:        
U.S. Treasury securities $50,606
 $822
 $—
 $51,428
U.S. government agency and U.S. government-sponsored enterprise debt securities 511,176
 7,232
 —
 518,408
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:        
Commercial mortgage-backed securities 677,644
 24,472
 (4,168) 697,948
Residential mortgage-backed securities 1,316,009
 38,770
 (2,412) 1,352,367
Municipal securities 300,551
 10,147
 (1,072) 309,626
Non-agency mortgage-backed securities:        
Commercial mortgage-backed securities 85,843
 2,008
 (737) 87,114
Residential mortgage-backed securities 64,112
 156
 (2,134) 62,134
Corporate debt securities 11,250
 1
 (288) 10,963
Foreign bonds 283,822
 749
 (50) 284,521
Asset-backed securities 65,400
 —
 (3,844) 61,556
CLOs 294,000
 —
 (34,122) 259,878
Total AFS debt securities $3,660,413
 $84,357
 $(48,827) $3,695,943
 

($ in thousands)June 30, 2020
Amortized
CostGross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
AFS debt securities:
U.S. Treasury securities$250,494 $707 $— $251,201 
U.S. government agency and U.S. government-sponsored enterprise debt securities433,923 8,853 (132)442,644 
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities827,929 34,585 (4,074)858,440 
Residential mortgage-backed securities1,246,609 34,445 (159)1,280,895 
Municipal securities208,333 7,002 (151)215,184 
Non-agency mortgage-backed securities:
Commercial mortgage-backed securities148,322 3,989 (943)151,368 
Residential mortgage-backed securities113,548 804 (14)114,338 
Corporate debt securities31,254 74 (502)30,826 
Foreign bonds204,540 106 (566)204,080 
Asset-backed securities64,762 — (3,143)61,619 
CLOs294,000 — (20,021)273,979 
Total AFS debt securities$3,823,714 $90,565 $(29,705)$3,884,574 
 
($ in thousands) December 31, 2019
 Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
AFS debt securities:        
U.S. Treasury securities $177,215
 $—
 $(793) $176,422
U.S. government agency and U.S. government-sponsored enterprise debt securities 584,275
 1,377
 (4,407) 581,245
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:       

Commercial mortgage-backed securities 599,814
 8,551
 (4,894) 603,471
Residential mortgage-backed securities 998,447
 6,927
 (1,477) 1,003,897
Municipal securities 101,621
 790
 (109) 102,302
Non-agency mortgage-backed securities:       

Commercial mortgage-backed securities 86,609
 1,947
 (6) 88,550
Residential mortgage-backed securities 46,830
 3
 (285) 46,548
Corporate debt securities 11,250
 12
 (113) 11,149
Foreign bonds 354,481
 198
 (507) 354,172
Asset-backed securities 66,106
 —
 (1,354) 64,752
CLOs 294,000
 —
 (9,294) 284,706
Total AFS debt securities $3,320,648
 $19,805
 $(23,239) $3,317,214
 
25

($ in thousands)December 31, 2019
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
AFS debt securities:
U.S. Treasury securities$177,215  $—  $(793) $176,422  
U.S. government agency and U.S. government-sponsored enterprise debt securities584,275  1,377  (4,407) 581,245  
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities599,814  8,551  (4,894) 603,471  
Residential mortgage-backed securities998,447  6,927  (1,477) 1,003,897  
Municipal securities101,621  790  (109) 102,302  
Non-agency mortgage-backed securities:
Commercial mortgage-backed securities86,609  1,947  (6) 88,550  
Residential mortgage-backed securities46,830  3  (285) 46,548  
Corporate debt securities11,250  12  (113) 11,149  
Foreign bonds354,481  198  (507) 354,172  
Asset-backed securities66,106  —  (1,354) 64,752  
CLOs294,000  —  (9,294) 284,706  
Total AFS debt securities$3,320,648  $19,805  $(23,239) $3,317,214  

As of March 31,June 30, 2020, the amortized cost of AFS debt securities excludes accrued interest receivable receivables of $14.4$17.8 million which isare included in Other assets on the Consolidated Balance Sheet. For ourthe Company’s accounting policy related to AFS debt securities’ accrued interest receivable, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.

Unrealized Losses

The following tables present the fair value and the associated gross unrealized losses of the Company’s AFS debt securities, aggregated by investment category and the length of time that the securities have been in a continuous unrealized loss position as of March 31,June 30, 2020 and December 31, 2019.
($ in thousands)June 30, 2020
Less Than 12 Months12 Months or MoreTotal
Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses
AFS debt securities:
U.S. government agency and U.S. government sponsored enterprise debt securities$24,868  $(132) $—  $—  $24,868  $(132) 
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities139,097  (3,477) 11,572  (597) 150,669  (4,074) 
Residential mortgage-backed securities91,491  (157) 195  (2) 91,686  (159) 
Municipal securities8,617  (151) —  —  8,617  (151) 
Non-agency mortgage-backed securities:
Commercial mortgage-backed securities59,418  (943) —  —  59,418  (943) 
Residential mortgage-backed securities23,720  (14) —  —  23,720  (14) 
Corporate debt securities1,002  (2) 9,500  (500) 10,502  (502) 
Foreign bonds85,274  (566) —  —  85,274  (566) 
Asset-backed securities18,359  (483) 43,260  (2,660) 61,619  (3,143) 
CLOs273,979  (20,021) —  —  273,979  (20,021) 
Total AFS debt securities$725,825  $(25,946) $64,527  $(3,759) $790,352  $(29,705) 
26

($ in thousands) March 31, 2020($ in thousands)December 31, 2019
Less Than 12 Months 12 Months or More TotalLess Than 12 Months12 Months or MoreTotal
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses
AFS debt securities:            AFS debt securities:
U.S. Treasury securitiesU.S. Treasury securities$—  $—  $176,422  $(793) $176,422  $(793) 
U.S. government agency and U.S. government-sponsored enterprise debt securitiesU.S. government agency and U.S. government-sponsored enterprise debt securities310,349  (4,407) —  —  310,349  (4,407) 
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:            U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities $116,225
 $(2,277) $19,252
 $(1,891) $135,477
 $(4,168)Commercial mortgage-backed securities204,675  (2,346) 108,314  (2,548) 312,989  (4,894) 
Residential mortgage-backed securities 192,572
 (2,408) 193
 (4) 192,765
 (2,412)Residential mortgage-backed securities325,354  (1,234) 34,337  (243) 359,691  (1,477) 
Municipal securities 18,705
 (1,072) —
 —
 18,705
 (1,072)Municipal securities31,130  (109) —  —  31,130  (109) 
Non-agency mortgage-backed securities:            Non-agency mortgage-backed securities:
Commercial mortgage-backed securities 31,087
 (737) —
 —
 31,087
 (737)Commercial mortgage-backed securities7,914  (6) —  —  7,914  (6) 
Residential mortgage-backed securities 47,044
 (2,134) —
 —
 47,044
 (2,134)Residential mortgage-backed securities42,894  (285) —  —  42,894  (285) 
Corporate debt securities —
 —
 9,713
 (288) 9,713
 (288)Corporate debt securities—  —  9,888  (113) 9,888  (113) 
Foreign bonds 49,950
 (50) —
 —
 49,950
 (50)Foreign bonds129,074  (407) 9,900  (100) 138,974  (507) 
Asset-backed securities 50,097
 (2,657) 11,459
 (1,187) 61,556
 (3,844)Asset-backed securities52,565  (902) 12,187  (452) 64,752  (1,354) 
CLOs 259,878
 (34,122) —
 —
 259,878
 (34,122)CLOs284,706  (9,294) —  —  284,706  (9,294) 
Total AFS debt securities $765,558
 $(45,457) $40,617
 $(3,370) $806,175
 $(48,827)Total AFS debt securities$1,388,661  $(18,990) $351,048  $(4,249) $1,739,709  $(23,239) 


 
($ in thousands) December 31, 2019
 Less Than 12 Months 12 Months or More Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
AFS debt securities:            
U.S. Treasury securities $—
 $—
 $176,422
 $(793) $176,422
 $(793)
U.S. government agency and U.S. government-sponsored enterprise debt securities 310,349
 (4,407) —
 —
 310,349
 (4,407)
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities:            
Commercial mortgage-backed securities 204,675
 (2,346) 108,314
 (2,548) 312,989
 (4,894)
Residential mortgage-backed securities 325,354
 (1,234) 34,337
 (243) 359,691
 (1,477)
Municipal securities 31,130
 (109) —
 —
 31,130
 (109)
Non-agency mortgage-backed securities:            
Commercial mortgage-backed securities 7,914
 (6) —
 —
 7,914
 (6)
Residential mortgage-backed securities 42,894
 (285) —
 —
 42,894
 (285)
Corporate debt securities —
 —
 9,888
 (113) 9,888
 (113)
Foreign bonds 129,074
 (407) 9,900
 (100) 138,974
 (507)
Asset-backed securities 52,565
 (902) 12,187
 (452) 64,752
 (1,354)
CLOs

 284,706
 (9,294) —
 —
 284,706
 (9,294)
Total AFS debt securities $1,388,661
 $(18,990) $351,048
 $(4,249) $1,739,709
 $(23,239)
 


As of June 30, 2020, the Company had 41 AFS debt securities in a gross unrealized loss position with 0 credit impairment, primarily consisting of 3 CLOs, 19 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and 4 asset-backed securities. In comparison, as of December 31, 2019, the Company had 101 AFS debt securities in a gross unrealized loss position with 0 credit impairment, primarily consisting of 3 CLOs, 57 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and 14 U.S. government agency and U.S. government-sponsored enterprise debt securities.

Allowance for Credit Losses

Each reporting period, the Company assesses each AFS debt security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for impairment related to credit losses, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies — Allowance for Credit Losses on Available-For-SaleAvailable-for-Sale Debt Securities to the Consolidated Financial Statements in this Form 10-Q. Prior to January 1, 2020, the Company assessed individual securities that were in an unrealized loss position for OTTI.

The gross unrealized losses across all major security types presented in the above tables were primarily attributable to yield curve movements and widened spreads arising from the negative outlook and uncertainty as a result of the COVID-19 pandemic. The increase in unrealized losses during the six months ended June 30, 2020 was primarily due to further deterioration in the market values of the following security types:

•U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities — The market value decline was primarily due to the interest rate movement. Since these securities were guaranteed or sponsored by agencies of the U.S. government, and the credit profiles were strong (rated A, AA+ and AAA by Moody’s Investors Service (“Moody’s”), S&P and Fitch Ratings (“Fitch”), respectively), the Company expects to receive all contractual interest payments on-time, and believes the credit loss exposure on these securities is remote.
•Asset-backed securities — The market value decline of these securitized student loans was primarily due to the interest rate movement and the widening in spreads. Since credit profiles of these securities were strong (rated Aa1, AA+, and AA or higher by Moody’s Investors Service, S&P and Fitch Ratings, respectively), were backed by the Federal Family Education Loan Program, and the contractual payments from these bonds have been on-time, the Company deemed that the credit loss exposure on these securities is low and no credit loss is expected.
27

•CLOs — The market value decline was largely due to market dislocation in this sector resulting in wider liquidity spreads. The credit profiles of the securities were strong (rated A or higher by Standard and Poor's (“S&P”)) and the contractual payments from these bonds are expected to be received on-time. Accordingly, the Company believes that credit loss exposure on these securities is remote.

Overall, the Company believes that the credit support levels of the Company’s AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received even if the credit performance deteriorates under the impact of the COVID-19 pandemic.

As of March 31,June 30, 2020, the Company has the intent to hold the AFS debt securities with unrealized losses through the anticipated recovery period and it is more-likely-than-not that the Company will not have to sell these securities before recovery of their amortized cost. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities. As a result, the Company expects to recover the entire amortized cost basis of these securities. Accordingly, there was 0 allowance for credit losses as of March 31,June 30, 2020, norand there were 0 provision for credit losses recognized for the three and six months ended March 31, 2020 were recorded.June 30, 2020. In comparison, 0 OTTI credit loss was recognized for the three and six months ended March 31,June 30, 2019.

As of March 31, 2020, the Company had 56 AFS debt securities in a gross unrealized loss position with 0 credit impairment, primarily consisting of 3 CLOs, 32 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and 4 asset-backed securities. In comparison, as of December 31, 2019, the Company had 101 AFS debt securities in a gross unrealized loss position with 0 credit impairment, primarily consisting of 3 CLOs, 57 U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, and 14 U.S. government agency and U.S. government-sponsored enterprise debt securities.



Realized Gains and Losses

The following table presents the proceeds, gross realized gains and tax expense related to the sales of AFS debt securities for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Proceeds from sales$177,917  $223,763  $484,380  $375,102  
Gross realized gains$9,640  $1,447  $11,169  $3,008  
Related tax expense$2,850  $428  $3,302  $889  
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Proceeds from sales $306,463
 $151,339
Gross realized gains $1,529
 $1,561
Related tax expense $452
 $461
 


Contractual Maturities of Available-for-Sale Debt Securities

The following table presents the contractual maturities of AFS debt securities as of March 31, 2020:
 
($ in thousands) Amortized Cost Fair Value
Due within one year $588,392
 $590,461
Due after one year through five years 314,312
 319,938
Due after five years through ten years 240,566
 252,057
Due after ten years 2,517,143
 2,533,487
Total AFS debt securities $3,660,413
 $3,695,943
 

ActualJune 30, 2020. Expected maturities of mortgage-backed securities canwill differ from contractual maturities on certain securities as the issuers and borrowers of the underlying collateral may have the right to call or prepay obligations. In addition, factors such as prepayments and interest rates may affect the yields on the carrying values of mortgage-backed securities.obligations with or without prepayment penalties.

($ in thousands)Amortized CostFair Value
Due within one year$561,935  $562,869  
Due after one year through five years366,403  371,895  
Due after five years through ten years277,823  289,730  
Due after ten years2,617,553  2,660,080  
Total AFS debt securities$3,823,714  $3,884,574  

As of March 31,June 30, 2020 and December 31, 2019, AFS debt securities with fair valuevalue of $742.4$745.2 million and $479.4 million, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.


Restricted Equity Securities

The following table presents the restricted equity securities on the Consolidated Balance Sheet as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Federal Reserve Bank (“FRB”) stock$58,781  $58,330  
FHLB stock20,182  20,250  
Total restricted equity securities$78,963  $78,580  
 
($ in thousands) March 31, 2020 December 31, 2019
Federal Reserve Bank of San Francisco (“FRB”) stock $58,563
 $58,330
FHLB stock 20,182
 20,250
Total restricted equity securities $78,745
 $78,580
 


28

Note 6 — Derivatives

The Company uses derivatives to manage exposure to market risk, primarily interest rate risk and foreign currency risk, and to assist customers with their risk management objectives. The Company’s goal is to manage interest rate sensitivity and volatility so that movements in interest rates aredo not significant tosignificantly affect earnings or capital. The Company also uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities, as well as the Company’sBank’s investment in its China subsidiary, East West Bank (China) Limited. The Company recognizes all derivatives on the Consolidated Balance Sheet at fair value. While the Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, other derivatives consist of economic hedges. For additional information on the Company’s derivatives and hedging activities, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Derivatives to the Consolidated Financial Statements of the Company’s 2019 Form 10-K.



The following table presents the total notional amounts and gross fair values of the Company’s derivatives, as well as the balance sheet netting adjustments on an aggregate basis as of March 31,June 30, 2020 and December 31, 2019. The derivative assets and liabilities are presented on a gross basis prior to the application of bilateral collateral and master netting agreements, but after the variation margin payments with central clearing organizations have been applied as settlement, as applicable. Total derivative assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of March 31,June 30, 2020 and December 31, 2019. The resulting net derivative asset and liability fair values are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Balance Sheet.
($ in thousands)June 30, 2020December 31, 2019
Notional
Amount		Fair ValueNotional
Amount		Fair Value
Derivative
Assets 		Derivative
Liabilities 		Derivative
Assets 		Derivative
Liabilities 
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate contracts$15,194  $—  $174  $31,026  $—  $3,198  
Cash flow hedges:
Interest rate contracts275,000  —  1,483  —  —  —  
Net investment hedges:
Foreign exchange contracts77,689  245  —  86,167  —  1,586  
Total derivatives designated as hedging instruments$367,883  $245  $1,657  $117,193  $—  $4,784  
Derivatives not designated as hedging instruments:
Interest rate contracts$17,170,884  $613,480  $400,146  $15,489,692  $192,883  $124,119  
Foreign exchange contracts2,738,018  24,044  19,741  4,839,661  54,637  47,024  
Credit contracts204,498  41  327  210,678  2  84  
Equity contracts—  (1)9,173  —  —  (1)1,414  —  
Commodity contracts—  (2)117,447  138,298  —  (2)81,380  80,517  
Total derivatives not designated as hedging instruments$20,113,400  $764,185  $558,512  $20,540,031  $330,316  $251,744  
Gross derivative assets/liabilities$764,430  $560,169  $330,316  $256,528  
Less: Master netting agreements(110,569) (110,569) (121,561) (121,561) 
Less: Cash collateral received/paid(11,649) (94,435) (3,758) (38,238) 
Net derivative assets/liabilities$642,212  $355,165  $204,997  $96,729  
 
($ in thousands) March 31, 2020 December 31, 2019
 
Notional
Amount
 Fair Value 
Notional
Amount
 Fair Value
  
Derivative
Assets 
 
Derivative
 Liabilities 
  
Derivative
Assets 
 
Derivative
 Liabilities 
Derivatives designated as hedging instruments:            
Fair value hedges:            
Interest rate contracts $31,026
 $—
 $1,144
 $31,026
 $—
 $3,198
Net investment hedges:            
Foreign exchange contracts 155,255
 73
 31
 86,167
 —
 1,586
Total derivatives designated as hedging instruments $186,281
 $73
 $1,175
 $117,193
 $—
 $4,784
             
Derivatives not designated as hedging instruments:            
Interest rate contracts $16,657,306
 $605,122
 $402,207
 $15,489,692
 $192,883
 $124,119
Foreign exchange contracts 4,958,834
 64,310
 55,627
 4,839,661
 54,637
 47,024
Credit contracts 210,357
 8
 218
 210,678
 2
 84
Equity contracts —
(1) 
1,128
 —
 —
(1) 
1,414
 —
Commodity contracts —
(2) 
163,563
 199,288
 —
(2) 
81,380
 80,517
Total derivatives not designated as hedging instruments $21,826,497
 $834,131
 $657,340
 $20,540,031
 $330,316
 $251,744
Gross derivative assets/liabilities   $834,204
 $658,515
   $330,316
 $256,528
Less: Master netting agreements   (158,674) (158,674)   (121,561) (121,561)
Less: Cash collateral received/paid   (20,100) (84,427)   (3,758) (38,238)
Net derivative assets/liabilities   $655,430
 $415,414
   $204,997
 $96,729
 
(1)The Company held equity contracts in 3 public companies and 17 private companies as of June 30, 2020. In comparison, the Company held equity contracts in 3 public companies and 18 private companies as of December 31, 2019.
(2)The notional amount of the Company’s commodity contracts entered with its customers totaled 6,155 thousand barrels of crude oil and 84,957 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of June 30, 2020. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 7,811 thousand barrels of crude oil and 63,773 thousand MMBTUs of natural gas as of December 31, 2019. The Company simultaneously entered into the offsetting commodity contracts with mirrored terms with third-party financial institutions.

(1)The Company held equity contracts in 2 public companies and 18 private companies as of March 31, 2020. In comparison, the Company held equity contracts in 3 public companies and 18 private companies as of December 31, 2019.
(2)The notional amount of the Company’s commodity contracts entered with its customers totaled 6,738 thousand barrels of crude oil and 61,296 thousand units of natural gas, measured in million British thermal units (“MMBTUs”) as of March 31, 2020. In comparison, the notional amount of the Company’s commodity contracts entered with its customers totaled 7,811 thousand barrels of crude oil and 63,773 thousand MMBTUs natural gas as of December 31, 2019. The Company simultaneously entered into the offsetting commodity contracts with mirrored terms with third-party financial institutions.
29

Derivatives Designated as Hedging Instruments

Fair Value Hedges — The Company is exposed to changes in the fair value of certain certificates of deposit due to changes in the benchmark interest rates. The Company has entered into interest rate swaps, which were designated as fair value hedges. The interest rate swaps involve the exchange of variable rate payments over the life of the agreements without the exchange of the underlying notional amounts.

The following table presents the net gains (losses) recognized on the Consolidated Statement of Income related to the derivatives designated as fair value hedges for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Gains (losses) recorded in interest expense:
Recognized on interest rate swaps$951  $1,634  $2,996  $2,854  
Recognized on certificates of deposit$(357) $(1,434) $(1,719) $(2,695) 
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Gains (losses) recorded in interest expense:    
Recognized on interest rate swaps $2,045
 $1,220
Recognized on certificates of deposit $(1,362) $(1,261)
 




The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of the hedged certificates of deposit as of March 31,June 30, 2020 and December 31, 2019:
 
($ in thousands) 
Carrying Value (1)
 
Cumulative Fair
    Value Adjustment (2)
 March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019
Certificates of deposit $(30,441) $(29,080) $243
 $1,604
 
(1)Represents the full carrying amount of the hedged certificates of deposit.
(2)For liabilities, (increase) decrease to carrying value.

($ in thousands)
Carrying Value (1)
Cumulative Fair
    Value Adjustment (2)
June 30, 2020December 31, 2019June 30, 2020December 31, 2019
Certificates of deposit$(14,986) $(29,080) $(114) $1,604  
(1)Represents the full carrying amount of the hedged certificates of deposit.
(2)For liabilities, (increase) decrease to carrying value.

Cash Flow Hedges— The Company entered into interest rate swaps that were designated and qualified as cash flow hedges in the second quarter of 2020 to hedge the variability in interest payments on certain floating rate borrowings. For cash flow hedges, the entire change in the fair value of the hedging instruments is recognized in AOCI and reclassified to earnings in the same period when the hedged cash flows impacts earnings. Reclassified gains and losses on interest rate swaps are recorded in the same line item as the interest payments of the hedged long-term borrowings within Interest expense in the Consolidated Statements of Income. As of June 30, 2020, the notional amount of the interest rate swaps that were designated as cash flow hedges was $275.0 million. Considering the interest rates, yield curve and notional amounts as of June 30, 2020, the Company expects to reclassify an estimated $183 thousand of after-tax net gains on derivative instruments designated as cash flow hedges from AOCI into earnings during the next 12 months.

The following table presents the pre-tax changes in AOCI from cash flow hedges for the three and six months ended June 30, 2020 and 2019. The after-tax impact of cash flow hedges on AOCI is shown in Note 14 — Accumulated Other Comprehensive Income (Loss) to the Consolidated Financial Statements in the Form-10-Q.
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Gains (losses) recognized in AOCI$(1,483) $—  $(1,483) $—  
Gains (losses) reclassified from AOCI to Interest expense$377  $—  $377  $—  

Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. The Company enters into foreign currency forward contracts to hedge a portion of itsthe Bank’s investment in East West Bank (China) Limited, a non-USD functional currency subsidiary in China. The hedging instruments designated as net investment hedges, involve hedging the risk of changes in the USD equivalent value of a designated monetary amount of the Company’sBank’s net investment in East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate of the Chinese Renminbi (“RMB”). The Company may dedesignatede-designate the net investment hedges when the Company expects the hedge will cease to be highly effective. The notional and fair value amounts of the foreign exchange forward contracts were $112.9$77.7 million and $73$245 thousand asset, and $42.3 million and $31 thousand liability, respectively, as of March 31,June 30, 2020. In comparison, the notional and fair value amounts of the foreign exchange forward contracts, were $86.2 million and $1.6 million liability, respectively, as of December 31, 2019.

30

The following table presents the after-tax (losses) gains recordedrecognized in AOCI on net investment hedges for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Gains (losses) recognized in AOCI$(377) $(598) $627  $(2,603) 
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Gains recognized in AOCI $1,004
 $2,005
 


Derivatives Not Designated as Hedging Instruments

Interest Rate Contracts — The Company enters into interest rate contracts, which include interest rate swaps and options with its customers to allow customers to hedge against the risk of rising interest rates on their variable rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored offsetting interest rate contracts with third-party financial institutions, including central clearing organizations. Beginning in January 2018, the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments made to and received from LCH as settlements of derivatives, and not as collateral against derivatives. Included in the total notional amount of $8.34$8.60 billion of interest rates contracts entered into with financial counterparties as of March 31,June 30, 2020, was a notional amount of $2.68$2.82 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative liability fair values of $213.9$229.8 million,, as of March 31,June 30, 2020. In comparison, included in the total notional amount of $7.75 billion of interest rates contracts entered into with financial counterparties as of December 31, 2019, was a notional amount of $2.53 billion of interest rate swaps that cleared through LCH. Applying variation margin payments as settlement to LCH cleared derivative transactions resulted in a reduction in derivative asset fair values of $2.9 million and liability fair values of $75.1 million as of December 31, 2019.



The following tables present the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020
Customer Counterparty($ in thousands)Financial Counterparty
Notional
Amount		Fair ValueNotional
Amount		Fair Value
AssetsLiabilitiesAssetsLiabilities
Written options$858,996  $—  $241  Purchased options$858,996  $241  $—  
Sold collars and corridors531,098  10,658  1  Collars and corridors531,098  1  10,696  
Swaps7,179,331  601,250  —  Swaps7,211,365  1,330  389,208  
Total$8,569,425  $611,908  $242  Total$8,601,459  $1,572  $399,904  
($ in thousands) March 31, 2020($ in thousands)December 31, 2019
Customer Counterparty ($ in thousands) Financial CounterpartyCustomer Counterparty($ in thousands)Financial Counterparty
Notional
Amount
 Fair Value 
Notional
Amount
 Fair ValueNotional
Amount		Fair ValueNotional
Amount		Fair Value
 Assets Liabilities Assets($ in thousands)Assets LiabilitiesAssetsLiabilities($ in thousands)AssetsLiabilities
Written options $897,893
 $—
 $179
 Purchased options $897,893
 180
 $—
Written options$1,003,558  $—  $66  Purchased options$1,003,558  $67  $—  
Sold collars and corridors 518,307
 10,125
 2
 Collars and corridors 518,307
 2
 10,215
Sold collars and corridors490,852  1,971  16  Collars and corridors490,852  17  1,996  
Swaps 6,900,299
 593,753
 —
 Swaps 6,924,607
 1,062
 391,811
Swaps6,247,667  187,294  6,237  Swaps6,253,205  3,534  115,804  
Total $8,316,499
 $603,878
 $181
 Total $8,340,807
 $1,244
 $402,026
Total$7,742,077  $189,265  $6,319  Total$7,747,615  $3,618  $117,800  
 
($ in thousands) December 31, 2019
 Customer Counterparty ($ in thousands) Financial Counterparty
 
Notional
Amount
 Fair Value  
Notional
Amount
 Fair Value
  Assets Liabilities   Assets Liabilities
Written options $1,003,558
 $—
 $66
 Purchased options $1,003,558
 $67
 $—
Sold collars and corridors 490,852
 1,971
 16
 Collars and corridors 490,852
 17
 1,996
Swaps 6,247,667
 187,294
 6,237
 Swaps 6,253,205
 3,534
 115,804
Total $7,742,077
 $189,265
 $6,319
 Total $7,747,615
 $3,618
 $117,800
 


Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forwards, spot, swap and option contracts to accommodate the business needs of its customers. For the foreign exchange contracts entered into with its customers, the Company managed its foreign exchange exposure by entering into offsetting foreign exchange contracts with third-party financial institutions and/or entering into bilateral collateral and master netting agreements with customer counterparties to manage its credit exposure. The Company also utilizes foreign exchange contracts, which are not designated as hedging instruments to mitigate the economic effect of currency fluctuations on certain foreign currency-denominated on-balance sheet assets and liabilities, primarily for foreign currency-denominated deposits offered to its customers. A majority of the foreign exchange contracts had original maturities of one year or less as of March 31,June 30, 2020 and December 31, 2019.

31

The following tables present the notional amounts and the gross fair values of foreign exchange derivative contracts outstanding as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020
Customer Counterparty($ in thousands)Financial Counterparty
Notional
Amount		Fair ValueNotional
Amount		Fair Value
AssetsLiabilitiesAssetsLiabilities
Forwards and spot$1,768,864  $17,940  $14,246  Forwards and spot$62,424  $62  $98  
Swaps7,160  —  42  Swaps734,640  4,502  3,808  
Collars1,685  2  —  Collars162,245  1,538  1,547  
Total$1,777,709  $17,942  $14,288  Total$959,309  $6,102  $5,453  
($ in thousands) March 31, 2020($ in thousands)December 31, 2019
Customer Counterparty ($ in thousands) Financial CounterpartyCustomer Counterparty($ in thousands)Financial Counterparty
Notional
Amount
 Fair Value Notional
Amount		 Fair ValueNotional
Amount		Fair ValueNotional
Amount		Fair Value
 Assets Liabilities Assets($ in thousands)Assets LiabilitiesAssetsLiabilities($ in thousands)AssetsLiabilities
Forwards and spot $3,658,965
 $50,674
 $38,564
 Forwards and spot $176,903
 4,049
 $7,721
Forwards and spot$3,581,036  $45,911  $40,591  Forwards and spot$207,492  $1,400  $507  
Swaps 9,007
 4
 95
 Swaps 773,059
 7,569
 7,256
Swaps6,889  16  84  Swaps702,391  6,156  4,712  
Written options 86,810
 217
 —
 Purchased options 86,810
 —
 217
Written options87,036  127  —  Purchased options87,036  —  127  
Collars 2,205
 27
 —
 Collars 165,075
 1,770
 1,774
Collars2,244  —  14  Collars165,537  1,027  989  
Total $3,756,987
 $50,922
 $38,659
 Total $1,201,847
 $13,388
 $16,968
Total$3,677,205  $46,054  $40,689  Total$1,162,456  $8,583  $6,335  


 
($ in thousands) December 31, 2019
 Customer Counterparty ($ in thousands) Financial Counterparty
 
Notional
Amount
 Fair Value  Notional
Amount		 Fair Value
  Assets Liabilities   Assets Liabilities
Forwards and spot $3,581,036
 $45,911
 $40,591
 Forwards and spot $207,492
 $1,400
 $507
Swaps 6,889
 16
 84
 Swaps 702,391
 6,156
 4,712
Written options 87,036
 127
 —
 Purchased options 87,036
 —
 127
Collars 2,244
 —
 14
 Collars 165,537
 1,027
 989
Total $3,677,205
 $46,054
 $40,689
 Total $1,162,456
 $8,583
 $6,335
 


Credit Contracts — The Company may periodically enter into RPA contracts to manage the credit exposure on interest rate contracts associated with syndicated loans. The Companyloans and may enter into protection sold or protection purchased RPAs with institutional counterparties. Under the RPA,RPAs, the Company will receive or make a payment if a borrower defaults on the related interest rate contract. The Company manages its creditCredit risk on RPAs is managed by monitoring the creditworthinesscredit worthiness of the borrowers and institutional counterparties, which is based on the normal credit review process. The referenced entities of the RPAs were investment grade as of both March 31,June 30, 2020 and December 31, 2019. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table presents the notional amounts and the gross fair values of RPAs sold and purchased outstanding as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Notional
Amount		Fair ValueNotional
Amount		Fair Value
AssetsLiabilitiesAssetsLiabilities
RPAs - protection sold$193,783  $—  $327  $199,964  $—  $84  
RPAs - protection purchased10,714  41  —  10,714  2  —  
Total RPAs$204,497  $41  $327  $210,678  $2  $84  
 
($ in thousands) March 31, 2020 December 31, 2019
 
Notional
Amount
 Fair Value 
Notional
Amount
 Fair Value
  Assets Liabilities  Assets Liabilities
RPAs - protection sold $199,643
 $—
 $218
 $199,964
 $—
 $84
RPAs - protection purchased 10,714
 8
 —
 10,714
 2
 —
Total RPAs $210,357
 $8
 $218
 $210,678
 $2
 $84
 


Assuming all underlying borrowers referenced in the interest rate contracts defaulted as of March 31,June 30, 2020 and December 31, 2019, the exposure from the RPAs with protections sold would be $688$778 thousand and $125 thousand, respectively. As of March 31,June 30, 2020 and December 31, 2019, the weighted-average remaining maturities of the outstanding RPAs were 1.91.7 years and 2.2 years, respectively.

Equity Contracts — As part of the Company’s loan origination process, from time to time, the Company obtains warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans to.loans. Warrants grant the Company the right to buy a certain class of the underlying company’s equity at a certain price before expiration. The Company held warrants in 23 public companies and 1817 private companies as of March 31,June 30, 2020, and held warrants in 3 public companies and 18 private companies as of December 31, 2019. The total fair value of the warrants held in both public and private companies was $1.1$9.2 million and $1.4 million in assets as of March 31,June 30, 2020 and December 31, 2019, respectively.

32

Commodity Contracts — The Company enters into energy commodity contracts in the form of swaps and options with its commercial loan customers to allow them to hedge against the risk of fluctuation in energy commodity prices. To economically hedge against the risk of fluctuation in commodity prices in the products offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions to manage the exposure with its customers. Beginning in January 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook to legally characterize variation margin payments made to and received from CME as settlements of derivatives and not as collateral against derivatives. As of March 31,June 30, 2020, the notional quantities that cleared through CME totaled 1,5821,532 thousand barrels of crude oil and 5,29024,895 thousand MMBTUs of natural gas. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in reductions in gross derivative asset fair value of $39.6$25.0 million and liability fair value of $203$631 thousand, respectively, as of March 31,June 30, 2020, for a net asset fair value of $2.4$2.3 million. In comparison, the notional quantities that cleared through CME totaled 1,752 thousand barrels of crude oil and 6,075 thousand MMBTUs of natural gas as of December 31, 2019. Applying the variation margin payments as settlement to CME-cleared derivative transactions resulted in a reduction in gross derivative asset fair value of $2.9 million and liability fair value of $1.5 million, respectively, as of December 31, 2019, for a net asset fair value of $986 thousand.



The following tables present the notional amounts and fair values of the commodity derivative positions outstanding as of March 31,June 30, 2020 and December 31, 2019:
($ and units in thousands)June 30, 2020
Customer Counterparty($ and units in thousands)Financial Counterparty
Notional
Unit		Fair ValueNotional
Unit		Fair Value
AssetsLiabilitiesAssetsLiabilities
Crude oil:Crude oil:
Written options—  Barrels$—  $70  Purchased options—  Barrels$70  $—  
Collars1,966  Barrels63  20,463  Collars2,218  Barrels21,847  1,607  
Swaps4,189  Barrels1,273  51,320  Swaps4,261  Barrels32,875  1,779  
Total6,155  $1,336  $71,853  Total6,479  $54,792  $3,386  
Natural gas:Natural gas:
Written options1,033  MMBTUs$—  $172  Purchased Options1,023  MMBTUs$157  $—  
Collars13,066  MMBTUs881  955  Collars13,186  MMBTUs883  881  
Swaps70,858  MMBTUs29,550  31,988  Swaps78,528  MMBTUs29,848  29,063  
Total84,957  $30,431  $33,115  Total92,737  $30,888  $29,944  
Total$31,767  $104,968  Total$85,680  $33,330  
($ and units
in thousands)
 March 31, 2020($ and units in thousands)December 31, 2019
Customer Counterparty 
($ and units
in thousands)
 Financial CounterpartyCustomer Counterparty($ and units in thousands)Financial Counterparty
Notional
Unit
 Fair Value 
Notional
Unit
 Fair ValueNotional
Unit		Fair ValueNotional
Unit		Fair Value
 Assets Liabilities Assets
($ and units
in thousands)
Assets LiabilitiesAssetsLiabilities($ and units in thousands)AssetsLiabilities
Crude oil:       Crude oil:      Crude oil:Crude oil:
Written options 24
 Barrels $—
 $681
 Purchased options 24
 Barrels $
 $—
Written options36  Barrels$—  $30  Purchased options36  Barrels$29  $—  
Collars 2,522
 Barrels 13
 46,210
 Collars 2,859
 Barrels 49,546
 3,732
Collars3,174  Barrels2,673  538  Collars3,630  Barrels677  2,815  
Swaps 4,192
 Barrels 789
 87,097
 Swaps 4,294
 Barrels 54,366
 2,408
Swaps4,601  Barrels6,949  5,531  Swaps4,721  Barrels4,516  5,215  
Total 6,738
 
 $802
 $133,988
 Total 7,177
 
 $104,593
 $6,140
Total7,811  $9,622  $6,099  Total8,387  $5,222  $8,030  
            
Natural gas:       Natural gas:      Natural gas:Natural gas:
Written options 420
 MMBTUs $—
 $43
 Purchased Options 410
 MMBTUs $22
 $—
Written options540  MMBTUs$—  $22  Purchased options530  MMBTUs$21  $—  
Collars 14,201
 MMBTUs 541
 1,364
 Collars 14,291
 MMBTUs 996
 403
Collars14,277  MMBTUs186  522  Collars14,517  MMBTUs471  150  
Swaps 46,675
 MMBTUs 25,791
 31,732
 Swaps 46,500
 MMBTUs 30,818
 25,618
Swaps48,956  MMBTUs30,257  35,497  Swaps48,779  MMBTUs35,601  30,197  
Total 61,296
 
 $26,332
 $33,139
 Total 61,201
 
 $31,836
 $26,021
Total63,773  $30,443  $36,041  Total63,826  $36,093  $30,347  
Total   
 $27,134
 $167,127
 Total   
 $136,429
 $32,161
Total$40,065  $42,140  Total$41,315  $38,377  
 
($ and units
in thousands)		 December 31, 2019
 Customer Counterparty ($ and units
in thousands)		 Financial Counterparty
 
Notional
Unit
 Fair Value  
Notional
Unit
 Fair Value
  Assets Liabilities   Assets Liabilities
Crude oil:         Crude oil:        
Written options 36
 Barrels��$—
 $30
 Purchased options 36
 Barrels $29
 $—
Collars 3,174
 Barrels 2,673
 538
 Collars 3,630
 Barrels 677
 2,815
Swaps 4,601
 Barrels 6,949
 5,531
 Swaps 4,721
 Barrels 4,516
 5,215
Total 7,811
 
 $9,622
 $6,099
 Total 8,387
 
 $5,222
 $8,030
                   
Natural gas:         Natural gas:        
Written options 540
 MMBTUs $—
 $22
 Purchased options 530
 MMBTUs $21
 $—
Collars 14,277
 MMBTUs 186
 522
 Collars 14,517
 MMBTUs 471
 150
Swaps 48,956
 MMBTUs 30,257
 35,497
 Swaps 48,779
 MMBTUs 35,601
 30,197
Total 63,773
 
 $30,443
 $36,041
 Total 63,826
 
 $36,093
 $30,347
Total     $40,065
 $42,140
 Total     $41,315
 $38,377
 

33

The following table presents the net (losses) gains recognized on the Company’s Consolidated Statement of Income related to derivatives not designated as hedging instruments for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Classification on
Consolidated
Statement of Income		Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Derivatives not designated as hedging instruments:
Interest rate contractsInterest rate contracts and other derivative income$(5,361) $(1,359) $(12,372) $(3,138) 
Foreign exchange contractsForeign exchange income6,201  3,495  9,062  9,821  
Credit contractsInterest rate contracts and other derivative income(75) (36) (98) 47  
Equity contractsLending fees8,070  917  8,379  1,167  
Commodity contractsInterest rate contracts and other derivative income(71) (22) (47) (18) 
Net gains$8,764  $2,995  $4,924  $7,879  
 
($ in thousands) 
Classification on
Consolidated
Statement of Income
 Three Months Ended March 31,
  2020 2019
Derivatives not designated as hedging instruments:      
Interest rate contracts Interest rate contracts and other derivative income $(7,011) $(1,779)
Foreign exchange contracts Foreign exchange income 2,861
 6,326
Credit contracts Interest rate contracts and other derivative income (23) 83
Equity contracts Lending fees 309
 250
Commodity contracts Interest rate contracts and other derivative income 24
 4
Net (losses) gains   $(3,840) $4,884
 




Credit Risk-Related Contingent Features — Certain over-the-counter derivative contracts of the Company contain early termination provisions that may require the Company to settle any outstanding balances upon the occurrence of a specified credit risk-related event. These events, which are defined by the existing derivative contracts, primarily relate to a downgrade in the credit rating of East West Bank to below investment grade. As of March 31,June 30, 2020, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that are in a net liability position totaled $139.1$136.6 million, in which $138.9$136.5 million in cash and securities collateral were posted to cover this position.these positions. As of December 31, 2019, the aggregate fair value amounts of all derivative instruments with credit risk-related contingent features that are in a net liability position totaled $56.4 million, which includes $14.4 million in derivative assets and $70.8 million in derivative liabilities. WeThe Company posted $56.4 million in cash and securities collateral to cover these positions as of December 31, 2019. In the event that the credit rating of East West Bank had been downgraded to below investment grade, additional minimal collateral would have been required to be posted as of March 31,June 30, 2020, and December 31, 2019.

Offsetting of Derivatives

The following tables present the gross derivative fair values, the balance sheet netting adjustments and the resulting net fair values recorded on the consolidated balance sheet, as well as the cash and non-cashnoncash collateral associated with master netting arrangements. The gross amounts of derivative assets and liabilities are presented after the application of variation margin payments as settlements with centrally cleared organizations, where applicable. The collateral amounts in the following tables are limited to the outstanding balances of the related asset or liability, after the application of netting; therefore instances of overcollateralization are not shown:
($ in thousands)As of June 30, 2020
Gross
Amounts
Recognized (1)
Gross Amounts Offset
on the
Consolidated Balance Sheet		Net Amounts
Presented
on the
Consolidated
Balance Sheet		Gross Amounts Not Offset
on the
Consolidated Balance Sheet		Net Amount
Master Netting Arrangements
Cash Collateral Received (3)
Security Collateral
Received (5)
Derivative assets$764,430  $(110,569) $(11,649) $642,212  $(13,447) $628,765  
 Gross
Amounts
Recognized (2)
Gross Amounts Offset
on the
Consolidated Balance Sheet		Net Amounts
Presented
on the
Consolidated
Balance Sheet		Gross Amounts Not Offset
on the
Consolidated Balance Sheet		Net Amount
Master Netting Arrangements
Cash Collateral Pledged (4)
Security Collateral
Pledged (5)
Derivative liabilities$560,169  $(110,569) $(94,435) $355,165  $(279,528) $75,637  
34

($ in thousands) As of March 31, 2020($ in thousands)As of December 31, 2019
 
 Gross
Amounts
Recognized (1)
 Gross Amounts Offset
on the
Consolidated Balance Sheet		 Net Amounts
Presented
on the
Consolidated
Balance Sheet		 Gross Amounts Not Offset
on the
Consolidated Balance Sheet		 Net Amount
 Master Netting Arrangements 
Cash Collateral Received (3)
 
Security Collateral
Received (5)
 
 Gross
Amounts
Recognized (1)
Gross Amounts Offset
on the
Consolidated Balance Sheet		Net Amounts
Presented
on the
Consolidated
Balance Sheet		Gross Amounts Not Offset
on the
Consolidated Balance Sheet		Net Amount
Master Netting Arrangements
Cash Collateral Received (3)
Security Collateral
Received (5)
 $834,204
 $(158,674) $(20,100) $655,430
 $(29,103) $626,327
Derivative assets$330,316  $(121,561) $(3,758) $204,997  $—  $204,997  
 
 Gross
Amounts
Recognized (2)
 Gross Amounts Offset
on the
Consolidated Balance Sheet		 Net Amounts
Presented
on the
Consolidated
Balance Sheet		 Gross Amounts Not Offset
on the
Consolidated Balance Sheet		 Net Amount
 Gross
Amounts
Recognized (2)
Gross Amounts Offset
on the
Consolidated Balance Sheet		Net Amounts
Presented
on the
Consolidated
Balance Sheet		Gross Amounts Not Offset
on the
Consolidated Balance Sheet		Net Amount
 Master Netting Arrangements 
Cash Collateral Pledged (4)
 
Security Collateral
Pledged (5)
 Master Netting Arrangements
Cash Collateral Pledged (4)
Security Collateral
Pledged (5)
Derivative liabilities $658,515
 $(158,674) $(84,427) $415,414
 $(232,940) $182,474
Derivative liabilities$256,528  $(121,561) $(38,238) $96,729  $(79,619) $17,110  

(1)Gross amounts recognized for derivative assets include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $754.7 million and $328.7 million, respectively, as of June 30, 2020 and December 31, 2019, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $9.7 million and $1.6 million, respectively, as of June 30, 2020 and December 31, 2019.

(2)Gross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $560.0 million and $256.5 million, respectively, as of June 30, 2020 and December 31, 2019, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $211 thousand and $20 thousand, respectively, as of June 30, 2020 and December 31, 2019.

(3)Gross cash collateral received under master netting arrangements or similar agreements were $18.1 million and $3.8 million, respectively, as of June 30, 2020 and December 31, 2019. Of the gross cash collateral received, $11.6 million and $3.8 million were used to offset against derivative assets, respectively, as of June 30, 2020 and December 31, 2019.
(4)Gross cash collateral pledged under master netting arrangements or similar agreements were $98.9 million and $43.0 million, respectively, as of June 30, 2020 and December 31, 2019. Of the gross cash collateral pledged, $94.4 million and $38.2 million were used to offset against derivative liabilities, respectively, as of June 30, 2020 and December 31, 2019.
 
($ in thousands) As of December 31, 2019
  
 Gross
Amounts
Recognized (1)
 Gross Amounts Offset
on the
Consolidated Balance Sheet		 Net Amounts
Presented
on the
Consolidated
Balance Sheet		 Gross Amounts Not Offset
on the
Consolidated Balance Sheet		 Net Amount
  Master Netting Arrangements 
Cash Collateral Received (3)
  
Security Collateral
Received (5)
 
Derivative assets $330,316
 $(121,561) $(3,758) $204,997
 $—
 $204,997
  
 Gross
Amounts
Recognized (2)
 Gross Amounts Offset
on the
Consolidated Balance Sheet		 Net Amounts
Presented
on the
Consolidated
Balance Sheet		 Gross Amounts Not Offset
on the
Consolidated Balance Sheet		 Net Amount
  Master Netting Arrangements 
Cash Collateral Pledged (4)
  
Security Collateral
Pledged (5)
 
Derivative liabilities $256,528
 $(121,561) $(38,238) $96,729
 $(79,619) $17,110
 
(5)Represents the fair value of security collateral received and pledged limited to derivative assets and liabilities that are subject to enforceable master netting arrangements or similar agreements. GAAP does not permit the netting of noncash collateral on the consolidated balance sheet but requires disclosure of such amounts.
(1)Gross amounts recognized for derivative assets include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $831.9 million and $328.7 million, respectively, as of March 31, 2020 and December 31, 2019, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $2.3 million and $1.6 million, respectively, as of March 31, 2020 and December 31, 2019.
(2)Gross amounts recognized for derivative liabilities include amounts with counterparties subject to enforceable master netting arrangements or similar agreements of $657.6 million and $256.5 million, respectively, as of March 31, 2020 and December 31, 2019, and amounts with counterparties not subject to enforceable master netting arrangements or similar agreements of $931 thousand and $20 thousand, respectively, as of March 31, 2020 and December 31, 2019.
(3)Gross cash collateral received under master netting arrangements or similar agreements were $20.1 million and $3.8 million, respectively, as of March 31, 2020 and December 31, 2019. Of the gross cash collateral received, $20.1 million and $3.8 million were used to offset against derivative assets, respectively, as of March 31, 2020 and December 31, 2019.
(4)Gross cash collateral pledged under master netting arrangements or similar agreements were $89.8 million and $43.0 million, respectively, as of March 31, 2020 and December 31, 2019. Of the gross cash collateral pledged, $84.4 million and $38.2 million were used to offset against derivative liabilities, respectively, as of March 31, 2020 and December 31, 2019.
(5)Represents the fair value of security collateral received and pledged limited to derivative assets and liabilities that are subject to enforceable master netting arrangements or similar agreements. GAAP does not permit the netting of non-cash collateral on the consolidated balance sheet but requires disclosure of such amounts.

In addition to the amounts included in the tables above, the Company also has balance sheet netting related to the resale and repurchase agreements. Refer to Note 4 — Securities Purchased under Resale Agreements and Sold under Repurchase Agreements to the Consolidated Financial Statements for additional information. Refer to Note 3 — Fair Value Measurement and Fair Value of Financial Instruments to the Consolidated Financial Statements in this Form 10-Q for fair value measurement disclosures on derivatives.


35

Note 7 — Loans Receivable and Allowance for Credit Losses

On January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective method through a cumulative-effect adjustment to retained earnings. Balance sheet information and results for reporting periods beginning with January 1, 2020 are presented under ASC 326, while prior period comparisons continue to be presented under legacy GAAP. ASU 2016-13 also introduces the concept of PCD financial assets, which replaces PCI assets. The Company’s held-for-investment loan portfolio comprises both originated and purchased loans. The Company adopted ASU 2016-13 using the prospective transition approach for PCD assets that were previously classified as PCI. Prior to January 1, 2020, originated loans and purchased loans with no evidence of credit deterioration at their acquisition date were referred to collectively as non-PCI loans; while PCI loans were loans acquired with evidence of credit deterioration since their acquisition date, and for which it was probable that the Company would be unable to collect all contractually required payments.



The following table presents the composition of the Company’s loans held-for-investment as of March 31,June 30, 2020 and December 31, 2019:
 
($ in thousands) March 31, 2020 December 31, 2019
 
Amortized Cost (1)
 
Non-PCI Loans (1)
 PCI Loans 
Total (1)
Commercial:        
C&I $12,590,764
 $12,149,121
 $1,810
 $12,150,931
CRE:        
CRE 10,682,242
 10,165,247
 113,201
 10,278,448
Multifamily residential 2,902,601
 2,834,212
 22,162
 2,856,374
Construction and land 606,209
 628,459
 40
 628,499
Total CRE 14,191,052
 13,627,918
 135,403
 13,763,321
Total commercial 26,781,816
 25,777,039
 137,213
 25,914,252
Consumer:        
Residential mortgage:        
Single-family residential 7,403,723
 7,028,979
 79,611
 7,108,590
HELOCs 1,452,862
 1,466,736
 6,047
 1,472,783
Total residential mortgage 8,856,585
 8,495,715
 85,658
 8,581,373
Other consumer 254,992
 282,914
 —
 282,914
Total consumer 9,111,577
 8,778,629
 85,658
 8,864,287
Total loans held-for-investment $35,893,393
 $34,555,668
 $222,871
 $34,778,539
Allowance for loan losses (557,003) (358,287) —
 (358,287)
Loans held-for-investment, net $35,336,390
 $34,197,381
 $222,871
 $34,420,252
 
(1)Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(50.3) million and $(43.2) million as of March 31, 2020 and December 31, 2019, respectively.

The commercial portfolio includes C&I, CRE, multifamily residential, and construction and land loans. The consumer portfolio includes single-family residential, HELOC and other consumer loans.

The C&I loan portfolio includes loans and financing for businesses in a wide spectrum of industries and includes asset-based lending, equipment financing and leasing, project-based finance, revolving lines of credit, Small Business Administration lending, structured finance, term loans and trade finance. The CRE loan portfolio consists of income producing real estate loans that are either owner occupied or non-owner occupied; non-owner occupied properties are defined as those for which 50% or more of the loan debt service is primarily provided by unaffiliated rental income from a third party. The multifamily residential loan portfolio largely consists of loans secured by residential properties with 5 or more units. Construction and land loans mainly provide construction financing for multifamily residential, hotels, offices, industrial and retail projects, and financing for the purchase of land.

The consumer portfolio includes single-family residential loans and HELOCs originated by the Company through a variety of mortgage loan programs. A substantial number of these loans are originated through a reduced documentation loan program, in which a large down payment is required, resulting in a low loan-to-value (“LTV”) ratio at origination, typically 60% or less. The Company is in a first lien position for virtually all reduced documentation single-family residential loans and for most of the HELOCs. These loans have historically experienced low delinquency and loss rates. Other consumer loans are mainly consumer insurance premium financing.

($ in thousands)June 30, 2020December 31, 2019
Amortized Cost (1)
Non-PCI Loans (1)
PCI Loans
Total (1)
Commercial:
C&I$13,422,691  $12,149,121  $1,810  $12,150,931  
CRE:
CRE10,902,114  10,165,247  113,201  10,278,448  
Multifamily residential3,032,385  2,834,212  22,162  2,856,374  
Construction and land567,716  628,459  40  628,499  
Total CRE14,502,215  13,627,918  135,403  13,763,321  
Total commercial27,924,906  25,777,039  137,213  25,914,252  
Consumer:
Residential mortgage:
Single-family residential7,660,094  7,028,979  79,611  7,108,590  
HELOCs1,461,951  1,466,736  6,047  1,472,783  
Total residential mortgage9,122,045  8,495,715  85,658  8,581,373  
Other consumer182,461  282,914  —  282,914  
Total consumer9,304,506  8,778,629  85,658  8,864,287  
Total loans held-for-investment$37,229,412  $34,555,668  $222,871  $34,778,539  
Allowance for loan losses(632,071) (358,287) —  (358,287) 
Loans held-for-investment, net$36,597,341  $34,197,381  $222,871  $34,420,252  
(1)Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(72.1) million and $(43.2) million as of June 30, 2020 and December 31, 2019, respectively.

Loans held-for-investments’ accrued interest receivable was $117.6$111.8 million and $121.8 million as of March 31,June 30, 2020 and December 31, 2019, respectively. Approximately $366 thousand of interestInterest income related to nonaccrual loans wasof approximately $1.2 million and $1.6 million were reversed during the three and six months ended March 31,June 30, 2020, respectively. Interest income of approximately $10 thousand and there was 0 interest income$12 thousand were recognized on nonaccrual loans for the three and six months ended March 31, 2020.June 30, 2020, respectively. For ourthe accounting policy related to held-for-investment loans’on accrued interest receivable related to loans held-for-investment, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.

AsLoans totaling $27.41 billion and $22.43 billion as of March 31,June 30, 2020 and December 31, 2019, loans of $23.11 billion and $22.43 billion, respectively, were pledged to secure borrowings and provide additional borrowing capacity from the FRB and the FHLB.



Credit Quality Indicators

All loans are subject to the Company’s credit review and monitoring. For the commercial portfolio, loans are risk rated based on an analysis of the borrower’s current payment performance or delinquency, repayment sources, financial and liquidity factors, including industry and geographic considerations. For the majority of the consumer portfolio, payment performance or delinquency is the driving indicator for the risk ratings.

For the Company’s internal credit risk ratings, each individual loan is given a risk rating of 1 through 10. Loans risk rated 1 through 5 are assigned an internal risk rating of “Pass”, with loans risk rated 1 being fully secured by cash or U.S. government securities. Pass loans have sufficient sources of repayment to repay the loan in full, in accordance with all terms and conditions. Loans assigned a risk rating of 6 have potential weaknesses that warrant closer attention by management; these are assigned an internal risk rating of “Special Mention”. Loans assigned a risk rating of 7 or 8 have well-defined weaknesses that may jeopardize the full and timely repayment of the loan; these are assigned an internal risk rating of “Substandard”. Loans assigned a risk rating of 9 have insufficient sources of repayment and a high probability of loss; these are assigned an internal risk rating of “Doubtful”. Loans assigned a risk rating of 10 are uncollectable and of such little value that they are no longer considered bankable assets; these are assigned an internal risk rating of “Loss”. The loans’Company reviews the internal risk ratings are reviewed routinelyfor its loan portfolio on a regular and adjustedongoing basis and make adjustments to the risk ratings based on changes in the borrowers’ financial status and the loans’ collectability. These risk ratings were updated ascollectability of March 31, 2020.the loans.
36



The following table summarizes the Company’s loans held-for-investment as of March 31,June 30, 2020, presented by loan portfolio segments, internal risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification.
($ in thousands)June 30, 2020
Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost Basis
Term LoansTotal
Amortized Cost Basis by Origination Year
20202019201820172016Prior
Commercial:
C&I:
Pass$2,922,977  $2,010,048  $818,374  $328,471  $85,000  $380,727  $6,007,247  $9,830  $12,562,674  
Special mention525  80,449  54,144  22,757  150  6,105  251,461  —  415,591  
Substandard8,102  82,574  52,383  7,979  6,313  2,515  283,335  —  443,201  
Doubtful—  —  —  —  964  261  —  —  1,225  
Total C&I2,931,604  2,173,071  924,901  359,207  92,427  389,608  6,542,043  9,830  13,422,691  
CRE:
Pass1,249,819  2,859,844  2,410,797  1,380,086  794,228  1,722,081  170,556  10,716  10,598,127  
Special mention13,072  —  49,860  22,468  1,611  45,309  —  —  132,320  
Substandard8,303  51,944  7,711  43,914  17,213  42,582  —  —  171,667  
Total CRE1,271,194  2,911,788  2,468,368  1,446,468  813,052  1,809,972  170,556  10,716  10,902,114  
Multifamily residential:
Pass489,855  1,045,053  507,413  414,771  181,265  357,680  5,809  —  3,001,846  
Special mention—  20,433  —  —  262  1,228  —  —  21,923  
Substandard—  744  2,150  —  —  5,722  —  —  8,616  
Total multifamily residential489,855  1,066,230  509,563  414,771  181,527  364,630  5,809  —  3,032,385  
Construction and land:
Pass46,378  283,670  185,570  5,982  21,636  1,170  —  —  544,406  
Substandard3,618  —  —  —  —  19,692  —  —  23,310  
Total construction and land49,996  283,670  185,570  5,982  21,636  20,862  —  —  567,716  
Total CRE1,811,045  4,261,688  3,163,501  1,867,221  1,016,215  2,195,464  176,365  10,716  14,502,215  
Total commercial4,742,649  6,434,759  4,088,402  2,226,428  1,108,642  2,585,072  6,718,408  20,546  27,924,906  
Consumer:
Single-family residential:
Pass1,150,786  1,987,025  1,694,022  1,162,434  593,501  1,047,965  —  —  7,635,733  
Special mention—  637  1,601  836  305  1,834  —  —  5,213  
Substandard—  1,393  3,256  3,382  1,349  9,768  —  —  19,148  
Total single-family residential mortgage1,150,786  1,989,055  1,698,879  1,166,652  595,155  1,059,567  —  —  7,660,094  
HELOCs:
Pass185  836  4,417  7,949  7,511  18,097  1,239,458  168,658  1,447,111  
Special mention—  —  200  —  —  380  2  190  772  
Substandard—  151  788  4,632  1,308  4,038  —  3,151  14,068  
Total HELOCs185  987  5,405  12,581  8,819  22,515  1,239,460  171,999  1,461,951  
Total residential mortgage1,150,971  1,990,042  1,704,284  1,179,233  603,974  1,082,082  1,239,460  171,999  9,122,045  
Other consumer:
Pass3,236  4,272  3,358  1,838  —  131,825  35,372  —  179,901  
Special mention51  —  —  —  —  —  —  —  51  
Substandard2  —  —  2,491  —  3  13  —  2,509  
Total other consumer3,289  4,272  3,358  4,329  —  131,828  35,385  —  182,461  
Total consumer1,154,260  1,994,314  1,707,642  1,183,562  603,974  1,213,910  1,274,845  171,999  9,304,506  
Total$5,896,909  $8,429,073  $5,796,044  $3,409,990  $1,712,616  $3,798,982  $7,993,253  $192,545  $37,229,412  

37
 
($ in thousands) March 31, 2020
 Term Loans Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total
 Amortized Cost Basis by Origination Year   
 2020 2019 2018 2017 2016 Prior   
Commercial:                  
C&I:                 

Pass $884,043
 $2,320,726
 $830,428
 $381,798
 $94,032
 $411,215
 $6,945,982
 $10,081
 $11,878,305
Special mention 21,388
 98,629
 16,948
 27,701
 1,064
 10,600
 218,835
 —
 395,165
Substandard 4,324
 65,448
 27,200
 40,985
 13,431
 2,196
 147,012
 —
 300,596
Doubtful —
 15,654
 —
 —
 1,044
 —
 —
 —
 16,698
Total C&I 909,755
 2,500,457
 874,576
 450,484
 109,571
 424,011
 7,311,829
 10,081
 12,590,764
CRE:                 

Pass 1,023,184
 2,994,402
 2,319,358
 1,317,389
 739,774
 1,926,748
 157,889
 10,775
 10,489,519
Special mention 3,636
 66,004
 15,438
 19,896
 674
 10,518
 —
 —
 116,166
Substandard 5,540
 29,695
 2,415
 18,900
 520
 19,487
 —
 —
 76,557
Total CRE 1,032,360
 3,090,101
 2,337,211
 1,356,185
 740,968
 1,956,753
 157,889
 10,775
 10,682,242
Multifamily residential:                 

Pass 293,032
 1,091,261
 489,564
 408,783
 212,174
 372,554
 5,386
 —
 2,872,754
Special mention —
 21,164
 1,893
 —
 —
 521
 —
 —
 23,578
Substandard —
 —
 285
 —
 —
 5,984
 —
 —
 6,269
Total multifamily residential 293,032
 1,112,425
 491,742
 408,783
 212,174
 379,059
 5,386
 —
 2,902,601
Construction and land:                 

Pass 67,143
 316,396
 159,847
 15,630
 21,048
 1,183
 —
 —
 581,247
Substandard 1,608
 3,662
 —
 —
 —
 19,692
 —
 —
 24,962
Total construction and land 68,751
 320,058
 159,847
 15,630
 21,048
 20,875
 —
 —
 606,209
Total CRE 1,394,143
 4,522,584
 2,988,800
 1,780,598
 974,190
 2,356,687
 163,275
 10,775
 14,191,052
Total commercial 2,303,898
 7,023,041
 3,863,376
 2,231,082
 1,083,761
 2,780,698
 7,475,104
 20,856

26,781,816
Consumer:                  
Single-family residential:                  
Pass 612,040
 2,043,504
 1,775,928
 1,218,685
 624,427
 1,099,351
 —
 —
 7,373,935
Special mention —
 238
 1,639
 1,253
 2,811
 6,796
 —
 —
 12,737
Substandard —
 839
 1,733
 3,180
 1,158
 10,141
 —
 —
 17,051
Total single-family residential mortgage 612,040
 2,044,581
 1,779,300
 1,223,118
 628,396
 1,116,288
 —
 —
 7,403,723
HELOCs:                  
Pass —
 —
 3,182
 5,980
 6,525
 19,809
 1,260,844
 142,090
 1,438,430
Special mention —
 —
 700
 —
 165
 1,945
 571
 605
 3,986
Substandard —
 150
 289
 2,611
 1,145
 4,789
 —
 1,462
 10,446
Total HELOCs —
 150
 4,171
 8,591
 7,835
 26,543
 1,261,415
 144,157
 1,452,862
Total residential mortgage 612,040
 2,044,731
 1,783,471
 1,231,709
 636,231
 1,142,831
 1,261,415
 144,157
 8,856,585
Other consumer:                  
Pass 3,951
 4,440
 2,637
 1,885
 18
 198,988
 40,556
 —
 252,475
Special mention 11
 —
 —
 —
 —
 —
 —
 —
 11
Substandard —
 —
 —
 2,491
 —
 3
 12
 —
 2,506
Total other consumer 3,962
 4,440
 2,637
 4,376
 18
 198,991
 40,568
 —
 254,992
Total consumer 616,002
 2,049,171
 1,786,108
 1,236,085
 636,249
 1,341,822
 1,301,983
 144,157
 9,111,577
Total $2,919,900
 $9,072,212
 $5,649,484
 $3,467,167
 $1,720,010
 $4,122,520
 $8,777,087
 $165,013
 $35,893,393
 




Revolving loans that are converted to term loans presented in the table above are excluded from the term loans by vintage year columns. During the three months ended March 31, 2020, $31.3HELOCS totaling $12.1 million of HELOCsand $43.4 million converted to term loans during the three and theresix months ended June 30, 2020, respectively. There were 0 conversions forof C&I or CRE loans.revolving loans to term loans during the three and six months ended June 30, 2020.

The following tables present the credit risk ratings for non-PCI and PCI loans by portfolio segments as of December 31, 2019:
($ in thousands)December 31, 2019
PassSpecial
Mention		SubstandardDoubtfulTotal
Non-PCI Loans
Commercial:
C&I$11,423,094  $406,543  $302,509  $16,975  $12,149,121  
CRE:
CRE10,003,749  83,683  77,815  —  10,165,247  
Multifamily residential2,806,475  20,406  7,331  —  2,834,212  
Construction and land603,447  —  25,012  —  628,459  
Total CRE13,413,671  104,089  110,158  —  13,627,918  
Total commercial24,836,765  510,632  412,667  16,975  25,777,039  
Consumer:
Residential mortgage:
Single-family residential7,012,522  2,278  14,179  —  7,028,979  
HELOCs1,453,207  2,787  10,742  —  1,466,736  
Total residential mortgage8,465,729  5,065  24,921  —  8,495,715  
Other consumer280,392  5  2,517  —  282,914  
Total consumer8,746,121  5,070  27,438  —  8,778,629  
Total$33,582,886  $515,702  $440,105  $16,975  $34,555,668  
($ in thousands)December 31, 2019
PassSpecial
Mention		SubstandardDoubtfulTotal
PCI Loans
Commercial:
C&I$1,810  $—  $—  $—  $1,810  
CRE:
CRE102,257  —  10,944  —  113,201  
Multifamily residential22,162  —  —  —  22,162  
Construction and land40  —  —  —  40  
Total CRE124,459  —  10,944  —  135,403  
Total commercial126,269  —  10,944  —  137,213  
Consumer:
Residential mortgage:
Single-family residential79,517  —  94  —  79,611  
HELOCs5,849  —  198  —  6,047  
Total residential mortgage85,366  —  292  —  85,658  
Total consumer85,366  —  292  —  85,658  
Total (1)
$211,635  $—  $11,236  $—  $222,871  
(1)Loans net of ASC 310-10 discount.

38

 
($ in thousands) December 31, 2019
 Pass 
Special
Mention
 Substandard Doubtful 
Total
Non-PCI Loans
Commercial:          
C&I $11,423,094
 $406,543
 $302,509
 $16,975
 $12,149,121
CRE:          
CRE 10,003,749
 83,683
 77,815
 —
 10,165,247
Multifamily residential 2,806,475
 20,406
 7,331
 —
 2,834,212
Construction and land 603,447
 —
 25,012
 —
 628,459
Total CRE 13,413,671
 104,089
 110,158
 —
 13,627,918
Total commercial 24,836,765
 510,632
 412,667
 16,975
 25,777,039
Consumer:          
Residential mortgage:         

Single-family residential 7,012,522
 2,278
 14,179
 —
 7,028,979
HELOCs 1,453,207
 2,787
 10,742
 —
 1,466,736
Total residential mortgage 8,465,729
 5,065
 24,921
 —
 8,495,715
Other consumer 280,392
 5
 2,517
 —
 282,914
Total consumer 8,746,121
 5,070
 27,438
 —
 8,778,629
Total $33,582,886
 $515,702
 $440,105
 $16,975
 $34,555,668
 
 
($ in thousands) December 31, 2019
 Pass 
Special
Mention
 Substandard Doubtful 
Total
PCI Loans
Commercial:          
C&I $1,810
 $—
 $—
 $—
 $1,810
CRE:          
CRE 102,257
 —
 10,944
 —
 113,201
Multifamily residential 22,162
 —
 —
 —
 22,162
Construction and land 40
 —
 —
 —
 40
Total CRE 124,459
 —
 10,944
 —
 135,403
Total commercial 126,269
 —
 10,944
 —
 137,213
Consumer:          
Residential mortgage:          
Single-family residential 79,517
 —
 94
 —
 79,611
HELOCs 5,849
 —
 198
 —
 6,047
Total residential mortgage 85,366
 —
 292
 —
 85,658
Total consumer 85,366
 —
 292
 —
 85,658
Total (1)
 $211,635
 $—
 $11,236
 $—
 $222,871
 
(1)Loans net of ASC 310-10 discount.



Nonaccrual and Past Due Loans

Loans that are 90 or more days past due are generally placed on nonaccrual status, unless the loan is well-collateralized or guaranteed by government agencies, and in the process of collection. Loans that are less than 90 days past due but have identified deficiencies, such as when the full collection of principal or interest becomes uncertain, are also placed on nonaccrual status. The following table presents the aging analysis of total loans held-for-investment as of March 31,June 30, 2020:
($ in thousands)June 30, 2020
Current
Accruing
Loans		Accruing
Loans
30-59  Days
Past Due		Accruing
Loans
60-89  Days
Past Due		Total
Accruing
Past Due
Loans		Nonaccrual
Loans Less
Than 90 
Days
Past Due		Nonaccrual
Loans
90 or More
Days 
Past Due		Total
Nonaccrual
Loans		Total
Loans
Commercial:
C&I$13,277,732  $46,774  $13,362  $60,136  $54,555  $30,268  $84,823  $13,422,691  
CRE:
CRE10,836,810  7,452  1,275  8,727  1,210  55,367  56,577  10,902,114  
Multifamily residential3,025,648  3,655  2,308  5,963  774  —  774  3,032,385  
Construction and land567,716  —  —  —  —  —  —  567,716  
Total CRE14,430,174  11,107  3,583  14,690  1,984  55,367  57,351  14,502,215  
Total commercial27,707,906  57,881  16,945  74,826  56,539  85,635  142,174  27,924,906  
Consumer:
Residential mortgage:
Single-family residential7,619,333  15,739  4,952  20,691  1,713  18,357  20,070  7,660,094  
HELOCs1,444,945  2,165  773  2,938  443  13,625  14,068  1,461,951  
Total residential mortgage9,064,278  17,904  5,725  23,629  2,156  31,982  34,138  9,122,045  
Other consumer165,258  14,636  59  14,695  —  2,508  2,508  182,461  
Total consumer9,229,536  32,540  5,784  38,324  2,156  34,490  36,646  9,304,506  
Total$36,937,442  $90,421  $22,729  $113,150  $58,695  $120,125  $178,820  $37,229,412  
 
($ in thousands) March 31, 2020
 Accruing
Loans
30-59  Days
Past Due		 Accruing
Loans
60-89  Days
Past Due		 Total
Accruing
Past Due
Loans		 Nonaccrual
Loans Less
Than 90 
Days
Past Due		 Nonaccrual
Loans
90 or More
Days 
Past Due		 Total
Nonaccrual
Loans		 Current
Accruing
Loans		 Total
Loans
Commercial:                
C&I $15,168
 $3,217
 $18,385
 $59,110
 $29,969
 $89,079
 $12,483,300
 $12,590,764
CRE:                
CRE 6,050
 936
 6,986
 474
 5,824
 6,298
 10,668,958
 10,682,242
Multifamily residential 510
 366
 876
 518
 285
 803
 2,900,922
 2,902,601
Construction and land —
 —
 —
 —
 —
 —
 606,209
 606,209
Total CRE 6,560
 1,302
 7,862
 992
 6,109
 7,101
 14,176,089
 14,191,052
Total commercial 21,728
 4,519
 26,247
 60,102
 36,078
 96,180
 26,659,389
 26,781,816
Consumer:                
Residential mortgage:                
Single-family residential 45,926
 12,737
 58,663
 1,312
 16,224
 17,536
 7,327,524
 7,403,723
HELOCs 10,654
 3,980
 14,634
 444
 10,002
 10,446
 1,427,782
 1,452,862
Total residential mortgage 56,580
 16,717
 73,297
 1,756
 26,226
 27,982
 8,755,306
 8,856,585
Other consumer 34
 29
 63
 —
 2,506
 2,506
 252,423
 254,992
Total consumer 56,614
 16,746
 73,360
 1,756
 28,732
 30,488
 9,007,729
 9,111,577
Total $78,342
 $21,265
 $99,607
 $61,858
 $64,810
 $126,668
 $35,667,118
 $35,893,393
 


The following table presents amortized cost of loans on nonaccrual status for which there was no related allowance for loan losses as of March 31,June 30, 2020:
($ in thousands)June 30, 2020
Commercial:
C&I$66,109 
CRE:
CRE54,879 
Total CRE54,879 
Total commercial120,988 
Consumer:
Residential mortgage:
Single-family residential8,642 
HELOCs8,898 
Total residential mortgage17,540 
Other consumer2,491 
Total consumer20,031 
Total nonaccrual loans with no related allowance for loan losses$141,019 
 
($ in thousands) March 31, 2020
Commercial:  
C&I $64,431
CRE:  
CRE 5,253
Total CRE 5,253
Total commercial 69,684
Consumer:  
Residential mortgage:  
Single-family residential 8,718
HELOCs 6,511
Total residential mortgage 15,229
Other consumer 2,491
Total consumer 17,720
Total nonaccrual loans with no related allowance for loan losses $87,404
   

39



The following table presents the aging analysis of non-PCI loans as of December 31, 2019:
($ in thousands)December 31, 2019
Current
Accruing
Loans		Accruing
Loans
30-59 Days
Past Due		Accruing
Loans
60-89 Days
Past Due		Total
Accruing
Past Due
Loans		Nonaccrual
Loans Less
Than 90 
Days
Past Due		Nonaccrual
Loans
90 or More
Days 
Past Due		Total
Nonaccrual
Loans		Total
Non-PCI
Loans
Commercial:
C&I$12,026,131  $31,121  $17,034  $48,155  $31,084  $43,751  $74,835  $12,149,121  
CRE:
CRE10,123,999  22,830  1,977  24,807  540  15,901  16,441  10,165,247  
Multifamily residential2,832,664  198  531  729  534  285  819  2,834,212  
Construction and land628,459  —  —  —  —  —  —  628,459  
Total CRE13,585,122  23,028  2,508  25,536  1,074  16,186  17,260  13,627,918  
Total commercial25,611,253  54,149  19,542  73,691  32,158  59,937  92,095  25,777,039  
Consumer:
Residential mortgage:
Single-family residential6,993,597  15,443  5,074  20,517  1,964  12,901  14,865  7,028,979  
HELOCs1,448,930  4,273  2,791  7,064  1,448  9,294  10,742  1,466,736  
Total residential mortgage8,442,527  19,716  7,865  27,581  3,412  22,195  25,607  8,495,715  
Other consumer280,386  6  5  11  —  2,517  2,517  282,914  
Total consumer8,722,913  19,722  7,870  27,592  3,412  24,712  28,124  8,778,629  
Total$34,334,166  $73,871  $27,412  $101,283  $35,570  $84,649  $120,219  $34,555,668  
 
($ in thousands) December 31, 2019
 
Accruing
Loans
30-59 Days
Past Due
 
Accruing
Loans
60-89 Days
Past Due
 
Total
Accruing
Past Due
Loans
 
Nonaccrual
Loans Less
Than 90 
Days
Past Due
 
Nonaccrual
Loans
90 or More
Days 
Past Due
 
Total
Nonaccrual
Loans
 
Current
Accruing
Loans
 Total
Non-PCI
Loans
Commercial:                
C&I $31,121
 $17,034
 $48,155
 $31,084
 $43,751
 $74,835
 $12,026,131
 $12,149,121
CRE:                
CRE 22,830
 1,977
 24,807
 540
 15,901
 16,441
 10,123,999
 10,165,247
Multifamily residential 198
 531
 729
 534
 285
 819
 2,832,664
 2,834,212
Construction and land —
 —
 —
 —
 —
 —
 628,459
 628,459
Total CRE 23,028
 2,508
 25,536
 1,074
 16,186
 17,260
 13,585,122
 13,627,918
Total commercial 54,149
 19,542
 73,691
 32,158
 59,937
 92,095
 25,611,253
 25,777,039
Consumer:                
Residential mortgage:                
Single-family residential 15,443
 5,074
 20,517
 1,964
 12,901
 14,865
 6,993,597
 7,028,979
HELOCs 4,273
 2,791
 7,064
 1,448
 9,294
 10,742
 1,448,930
 1,466,736
Total residential mortgage 19,716
 7,865
 27,581
 3,412
 22,195
 25,607
 8,442,527
 8,495,715
Other consumer 6
 5
 11
 —
 2,517
 2,517
 280,386
 282,914
Total consumer 19,722
 7,870
 27,592
 3,412
 24,712
 28,124
 8,722,913
 8,778,629
Total $73,871
 $27,412
 $101,283
 $35,570
 $84,649
 $120,219
 $34,334,166
 $34,555,668
 


PCI loans arewere excluded from the above aging analysis table as of December 31, 2019, as the Company elected to account for these loans on a pool level basis under ASC 310-30 at the time of acquisition. As of December 31, 2019, PCI loans on nonaccrual status totaled $297 thousand.

Foreclosed Assets

The Company had $24.3$23.4 million in foreclosed assets as of March 31,June 30, 2020 compared towith $1.3 million as of December 31, 2019. The Company commences the foreclosure process on consumer mortgage loans when a borrower becomes 120 days delinquent in accordance with the Consumer Finance Protection Bureau guidelines. The carrying value of consumer real estate loans for which formal foreclosure proceedingsthat were in the process of active or suspended foreclosure was $8.1$6.3 million and $7.2 million as of March 31,June 30, 2020 and December 31, 2019, respectively. The foreclosure proceedings for these consumer real estate loans were initiated prior to the Coronavirus Aid, Relief, and Economic SecurityCARES Act (“CARES Act”) passed by Congress in March 2020. InThe Company has suspended certain mortgage foreclosure activities in connection with our actions to support our customers during the COVID-19 pandemic, we have suspended certain mortgage foreclosure activities.pandemic.

Troubled Debt Restructurings

Troubled debt restructurings (“TDRs”)TDRs are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty. A TDR is a modification of the terms of a loan when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not have otherwise considered. The Company has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act, the Company has electedCOVID-19 that are not considered TDRs. For additional details related to not apply TDR classification to any COVID-19 related loan modifications. On April 7, 2020, the federal banking regulators issued the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” (the Interagency Statement). The Interagency Statement provides additional TDR relief as it clarifies that it is not necessary to consider the impact of the COVID-19 pandemic on the financial condition of a borrower in connection with a short-term (e.g., six months) COVID-19 related loan modification provided that the borrower is current at the date the modification program is implemented. For COVID-19 related loan modifications, insee Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies — Summary of Significant Accounting Policies — Troubled Debt Restructurings to the form of payment deferrals, the delinquency status will not advance and loans that were accruing at the time that the relief is provided will generally not be placed on nonaccrual status during the deferral period. Interest income will continue to be recognized over the contractual life of the loan.Consolidated Financial Statements.


40

The following table presentstables present the additions to TDRs for the three and six months ended March 31,June 30, 2020 and 2019:
 
($ in thousands) Loans Modified as TDRs During the Three Months Ended March 31,
 2020 2019
 Number
of
Loans		 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment (1)
 
Financial
Impact (2)
 Number
of
Loans		 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment (1)
 
Financial
Impact (2)
Commercial:                
C&I 3 $16,604
 $15,735
 $98
 3 $29,152
 $29,176
 $60
Total 3 $16,604
 $15,735
 $98
 3 $29,152
 $29,176
 $60
 
(1)Includes subsequent payments after modification and reflects the balance as of March 31, 2020 and 2019.
(2)($ in thousands)The financial impact includes charge-offs and specific reserves recorded sinceLoans Modified as TDRs During the modification date.Three Months Ended June 30,
20202019
Number
of
Loans		Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
   Investment (1)
Financial
 Impact (2)
Number
of
Loans		Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
   Investment (1)
Financial
   Impact (2)
Commercial:
C&I3$35,260 $28,926 $872 6$48,099 $48,054 $5,869 
Total commercial335,260 28,926 872 648,099 48,054 5,869 
Consumer:
Residential mortgage:
Single-family residential—— — — 1220 219 — 
Total residential mortgage—— — — 1220 219 — 
Total consumer—— — — 1220 219 — 
Total3$35,260 $28,926 $872 7$48,319 $48,273 $5,869 
($ in thousands)Loans Modified as TDRs During the Six Months Ended June 30,
20202019
Number
of
Loans		Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
   Investment (1)
Financial
   Impact (2)
Number
of
Loans		Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
   Investment (1)
Financial
   Impact (2)
Commercial:
C&I6$51,708  $43,833  $1,000  9$77,250  $77,486  $5,929  
Total commercial651,708  43,833  1,000  977,250  77,486  5,929  
Consumer:
Residential mortgage:
Single-family residential——  —  —  1220  219  —  
Total residential mortgage——  —  —  1220  219  —  
Total consumer——  —  —  1220  219  —  
Total6$51,708  $43,833  $1,000  10$77,470  $77,705  $5,929  
(1)Includes subsequent payments after modification and reflects the balance as of June 30, 2020 and 2019.
(2)The financial impact includes charge-offs and specific reserves recorded since the modification date.

The following table presentstables present the TDR post-modification outstanding balances for the three and six months ended March 31,June 30, 2020 and 2019 by modification type:
($ in thousands)Modification Type During the Three Months Ended June 30,
20202019
Principal (1)
Interest DefermentsTotal
Principal (1)
Other (2)
Total
Commercial:
C&I$11,766  $17,160  $28,926  $9,909  $38,145  $48,054  
Total commercial11,766  17,160  28,926  9,909  38,145  48,054  
Consumer:
Residential mortgage:
Single-family residential—  —  —  —  219  219  
Total residential mortgage—  —  —  —  219  219  
Total consumer—  —  —  —  219  219  
Total$11,766  $17,160  $28,926  $9,909  $38,364  $48,273  
41

($ in thousands) Modification Type During the Three Months Ended March 31,($ in thousands)Modification Type During the Six Months Ended June 30,
2020 201920202019
Principal (1)
 
Principal
  and Interest (2)
 Total 
Principal (1)
 
Principal
  and Interest (2)
 Total
Principal (1)
Principal
  and Interest (3)
Interest DefermentsTotal
Principal (1)
Other (2)
Total
Commercial:            Commercial:
C&I $4,564
 $11,171
 $15,735
 $29,176
 $—
 $29,176
C&I$15,898  $10,775  $17,160  $43,833  $39,341  $38,145  $77,486  
Total commercialTotal commercial15,898  10,775  17,160  43,833  39,341  38,145  77,486  
Consumer:Consumer:
Residential mortgage:Residential mortgage:
Single-family residentialSingle-family residential—  —  —  —  —  219  219  
Total residential mortgageTotal residential mortgage—  —  —  —  —  219  219  
Total consumerTotal consumer—  —  —  —  —  219  219  
Total $4,564
 $11,171
 $15,735
 $29,176
 $—
 $29,176
Total$15,898  $10,775  $17,160  $43,833  $39,341  $38,364  $77,705  
(1)Includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payments to interest payments only.
(2)Includes principal and interest deferments or reductions.
(1)Includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payments to interest payments only.
(2)Includes funding to secure additional collateral and provides liquidity to collateral-dependent C&I loans.
(3)Includes principal and interest deferments or reductions.

Subsequent to restructuring, if a TDR that becomes delinquent, generally beyond 90 days past due, it is considered to be in default. TDRs are individually evaluated for impairment. Subsequent defaults do not generally have a significant additional impact on the allowance for loan losses. During the three months ended March 31, 2020, there were 0 TDRs that experienced payment defaults after modifications within the previous 12 months. The following table presentstables present information on loans for which a subsequent payment default occurred during the three and six months ended March 31,June 30, 2020 and 2019, respectively, which had been modified as TDR within the previous 12 months of its default, and were still in default as of March 31,June 30, 2020 and 2019:
($ in thousands)Loans Modified as TDRs that Subsequently Defaulted
During the Three Months Ended June 30,
20202019
Number of
Loans		Recorded
Investment		Number of
Loans		Recorded
Investment
Commercial:
C&I1  $17,160  $1  $1,484  
Total commercial1  17,160  1  1,484  
Total1  $17,160  $1  $1,484  
($ in thousands) Loans Modified as TDRs that Subsequently Defaulted During the Three Months Ended March 31, 2019($ in thousands)Loans Modified as TDRs that Subsequently Defaulted
During the Six Months Ended June 30,
Number of
Loans		 Recorded
Investment		20202019
($ in thousands)Number of
Loans		Recorded
Investment		Number of
Loans		Recorded
Investment
    Commercial:
 3
 $4,618
C&I1  $17,160  $1  $1,484  
Total commercialTotal commercial1  17,160  1  1,484  
Total 3
 $4,618
Total1  $17,160  $1  $1,484  


The amount of additional funds committed to lend to borrowers whose terms have been modified as TDRs was $2.3$4.5 million and $2.2 million as of March 31,June 30, 2020 and December 31, 2019, respectively.


42


Impaired Loans
Impaired Loans

In connection with the adoption of ASU 2016-13 on January 1, 2020, the Company no longer provides information on impaired loans. The Company had retained impaired loans information for the period ended December 31, 2019. The following table presents information abouton non-PCI impaired loans as of December 31, 2019:
($ in thousands) December 31, 2019($ in thousands)December 31, 2019
Unpaid
Principal
Balance
 
Recorded
Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
Unpaid
Principal
Balance		Recorded
Investment
With No
Allowance		Recorded
Investment
With
Allowance		Total
Recorded
Investment		Related
Allowance
Commercial:          Commercial:
C&I $174,656
 $73,956
 $40,086
 $114,042
 $2,881
C&I$174,656  $73,956  $40,086  $114,042  $2,881  
CRE:          CRE:
CRE 27,601
 20,098
 1,520
 21,618
 97
CRE27,601  20,098  1,520  21,618  97  
Multifamily residential 4,965
 1,371
 3,093
 4,464
 55
Multifamily residential4,965  1,371  3,093  4,464  55  
Construction and land 19,696
 19,691
 —
 19,691
 —
Construction and land19,696  19,691  —  19,691  —  
Total CRE 52,262
 41,160
 4,613
 45,773
 152
Total CRE52,262  41,160  4,613  45,773  152  
Total commercial 226,918
 115,116
 44,699
 159,815
 3,033
Total commercial226,918  115,116  44,699  159,815  3,033  
Consumer:          Consumer:
Residential mortgage:          Residential mortgage:
Single-family residential 23,626
 8,507
 13,704
 22,211
 35
Single-family residential23,626  8,507  13,704  22,211  35  
HELOCs 13,711
 6,125
 7,449
 13,574
 8
HELOCs13,711  6,125  7,449  13,574  8  
Total residential mortgage 37,337
 14,632
 21,153
 35,785
 43
Total residential mortgage37,337  14,632  21,153  35,785  43  
Other consumer 2,517
 —
 2,517
 2,517
 2,517
Other consumer2,517  —  2,517  2,517  2,517  
Total consumer 39,854
 14,632
 23,670
 38,302
 2,560
Total consumer39,854  14,632  23,670  38,302  2,560  
Total non-PCI impaired loans $266,772
 $129,748
 $68,369
 $198,117
 $5,593
Total non-PCI impaired loans$266,772  $129,748  $68,369  $198,117  $5,593  


The following table presents the average recorded investment and interest income recognized on non-PCI impaired loans for the three and six months ended March 31,June 30, 2019:
($ in thousands)Three Months Ended June 30, 2019Six Months Ended June 30, 2019
Average
Recorded
Investment
Recognized
Interest
   Income (1)
Average
Recorded
Investment
Recognized
Interest
   Income (1)
Commercial:
C&I$182,689  $1,081  $189,553  $1,816  
CRE:
CRE29,241  135  31,456  249  
Multifamily residential5,852  61  5,883  121  
Total CRE35,093  196  37,339  370  
Total commercial217,782  1,277  226,892  2,186  
Consumer:
Residential mortgage:
Single-family residential23,247  129  24,865  258  
HELOCs13,564  38  15,321  56  
Total residential mortgage36,811  167  40,186  314  
Other consumer2,515  —  2,526  —  
Total consumer39,326  167  42,712  314  
Total non-PCI impaired loans$257,108  $1,444  $269,604  $2,500  
(1)Includes interest income recognized on accruing non-PCI TDRs. Interest payments received on nonaccrual non-PCI loans are reflected as a reduction to principal, not as interest income.

43
 
($ in thousands) Three Months Ended March 31, 2019
 Average
Recorded
Investment		 
Recognized
Interest
   Income (1)
Commercial:    
C&I $93,391
 $735
CRE:    
CRE 30,827
 114
Multifamily residential 5,721
 61
Total CRE 36,548
 175
Total commercial 129,939
 910
Consumer:    
Residential mortgage:    
Single-family residential 15,898
 128
HELOCs 10,811
 18
Total residential mortgage 26,709
 146
Other consumer 2,504
 —
Total consumer 29,213
 146
Total non-PCI impaired loans $159,152
 $1,056
 

(1)Includes interest income recognized on accruing non-PCI TDRs. Interest payments received on nonaccrual non-PCI loans are reflected as a reduction to principal, not as interest income.



Allowance for CreditLoan Losses

TheOn January 1, 2020, the Company adopted ASU 2016-13 that establishes a single allowance framework for all financial assets measured at amortized cost and certain off-balance sheet credit losses includesexposures. It requires the measurement of the allowance for loan losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Company’s relevant financial assets. Balance sheet information and results for reporting periods beginning with January 1, 2020 are presented under ASC 326, while prior period comparisons continue to be presented under legacy GAAP.

The process of the allowance for unfunded credit commitments. The Company’s Allowance for Credit Losses Committee reviews and approvesloan losses involves procedures to consider the allowance forunique risk characteristics of the portfolio segments. For each loan portfolio segment, the expected credit losses on a quarterly basis.

are estimated collectively for groups of loans with similar risk characteristics. For loans that do not share similar risk characteristics, the expected credit losses are estimated individually, which includes impaired loans.

Allowance for Collectively Evaluated Loans


For loans collectively assessed, the Company’s methodology to determine the appropriateQuantitative Component—The allowance for loan losses is based onestimated using quantitative credit models, supplemented by qualitative adjustments. The Company utilizemethods that consider a lifetime loss rate model for the C&I portfolio; probabilityvariety of default (“PD”) and loss given default (“LGD”) models for all commercial and consumer real estate loan portfolios, and a loss rate approach for other consumer loans.

Factors incorporated into the qualitative adjustments are designed to capture economic, portfolio, operational and segmentation risks not captured by the quantitative credit models. These factors include, but are not limited to, current and forecast economic or market conditions; risks stemming from borrowers’ exposure to or dependence on the U.S. consumer market; industry specific risks inherent in the Company’s loan portfolio, such as oil price fluctuations or falling oil consumption; profiles of various loan segments; portfolio concentrations by loan type, industry, and geography; loan growth trends; internal credit risk ratings; historical loss experience; current delinquency and problem loan trends, and collateral values. The evaluation is inherently subjective, as it requires numerous estimates and judgments that are susceptible to revision as more information becomes available. To the extent actual results differ from estimates or management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.

For the three months ended March 31, 2020, there were no changes to the reasonable and supportable forecast period, and reversion to historical loss experience, method.the current credit quality of the portfolio as well as an economic outlook over the life of the loan. The forecastsCompany incorporates forward-looking information through the use of macroeconomic variables were updated to includescenarios applied over the impactforecasted life of the COVID-19 pandemic, oil price declinesloans. These macroeconomic scenarios include variables that are considered key drivers of increases and other assumptions.decreases in credit losses. The Company usesutilizes a third-party economicprobability-weighted multiple scenario forecast to estimate the expected credit losses in its quantitative credit models. The forecast uses three economicapproach. These scenarios includingmay consist of a base forecast representing management's view of the most likely outcome, combined with and equally-probable downside and upside scenarios reflecting possible worsening andor improving economic conditions, respectively. The economic outlook deteriorated towardsA weighted average of these macroeconomic scenarios over a reasonable and supportable forecast period is incorporated into the endquantitative models. If the loan’s life extends beyond the reasonable and supportable forecast period, then historical experience is considered over the remaining life of the quarter ended March 31, 2020, reflectingloans in the effectsallowance for loan losses.

Qualitative Component — The Company also considers the following qualitative factors in the determination of collectively evaluated allowance if they have not already been captured by the quantitative model. Such qualitative factors may include, but not limited to:

•Loan growth trends.
•The volume and severity of past due financial assets and the volume and severity of adversely classified or rated financial assets.
•The Company’s lending policies and procedures, including changes in lending strategies, underwriting standards, collection, write-off and recovery practices, as well as knowledge of the ongoing COVID-19 pandemic. Toborrower’s operations or the borrower’s standing in the community.
•The quality of the Company’s credit review system.
•The experience, ability and depth of the Company’s management, lending staff and relevant staff.
•The effect of other external factors such as the regulatory, legal and technological environments.
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates, including the actual and expected condition of various market segments.

The following table provides key credit risk characteristics and macroeconomic variables that the Company uses to estimate the expected credit losses by portfolio segments and methodologies:
Portfolio SegmentRisk CharacteristicsMacroeconomic Variables
C&IInternal risk rating, size and credit spread at origination and time to maturityUnemployment rate and two and ten year treasury spread
CRE, Multifamily residential, and Construction and landDelinquency status, maturity date, collateral value, property type and geographic locationUnemployment rate, GDP and U.S. Treasury rates
Single-family residential and HELOCsFICO, delinquency status, maturity date, collateral value and geographic locationUnemployment rate, GDP and home price index
Other consumerHistorical loss experience
Immaterial (1)
(1)Macroeconomic variables were measured in the qualitative estimate.
44

In light of the recessionary economic conditions and forecasts during the quarter, management updated its macroeconomic forecast used in the credit loss estimation process to reflect the sudden sharp and continued recession caused by the COVID-19 global pandemic, U.S. monetary and fiscal responses to the outbreak, oil price declines and other assumptions,assumptions. The macroeconomic forecast used in the forecast utilized to estimate expected credit losses was updated in late March 2020. Unemployment rate, which is a key macroeconomic variableloss estimation for the quantitative models, is projectedquarter ended June 30, 2020 was more adverse compared to significantly spike in the secondprior quarter, of 2020as expectations for the unemployment rate and beginreal GDP growth deteriorated and a slower recovery but remain at an elevated level duringwas expected. For the second half of 2020. The allowance for credit losses at March 31,three and six months ended June 30, 2020, also included qualitative adjustments for certain industry sectors, such asthere were no changes to the oilreasonable and gas loan portfolio that the Company views as higher risk, where quantitative models may not have captured the additional exposure relatedsupportable forecast period, and reversion to such industry sectors.

historical loss experience method.

Allowance for Loan Losses for the Commercial Loan Portfolio — The Company’s C&I lifetime loss rate model estimates credit losses by estimating a loss rate expected over the life of a loan. This loss rate is applied to the amortized cost basis, excluding accrued interest receivables, to determine expected credit losses. This model incorporates portfolio prepayment rate and utilization rates assumptions; loan-specific risk characteristics such as internal credit risk rating, industry segment, time-to-maturity, size and credit spread at origination, and the economic and market conditions. Each of these components, along with economic forecast information through the reasonable and supportable period, are embedded in the forecasted lifetime loss rate. The lifetime loss rate model’s reasonable and supportable period spans eight quarters, thereafter immediately reverting to the historical average loss rate, expressed implicitly through the loan-level lifetime loss rate.

The Company’s CRE PD/LGDprobability of default (“PD”)/loss given default (“LGD”) models estimate the probability that a loan will default and, in the event of default, estimate the expected credit losses upon default. The product of the PD and PD/LGD determines the Company’s current expected credit losses. In addition to the Company’s macroeconomic outlook, these models also incorporate prepayment estimates, historical loss rates, loan duration and amortization terms, interest rates, property type, and the geographic locations of the properties collateralizing the loans.CECL. The PD/LGD model assumptions and variable inputs span the entire contractual life of the loans, adjusted for expected prepayments. After a reasonable and supportable period, the forecast of future economic conditions reverts to long-run historical economic trends. The loan-specific variables apply over the lifetime of a loan.

In order to estimate the life of a loan under both models, the contractual term of the loan is adjusted for estimated prepayments, which are based on historical prepayment experience.



The Company’s macroeconomic outlook is a key driver in the commercial loan portfolio. The Company uses numerous key macroeconomic variables within its forecasts, including unemployment, real GDP and U.S. Treasury rates. The macroeconomic outlook also considers national and regional personal income, sales, employment and financial indicators that impact discrete commercial loan industry segments. The Company utilizes a probability-weighted three-scenario forecast approach to estimate the allowance for credit losses.

To the extent that information relevant to the collectability of a loan is available and not already captured by the quantitative models, the Company utilizes qualitative factors to adjust the estimate. These factors include, but are not limited to, operational risks resulting from the quality of the Company’s internal loan ratings; portfolio risks such as higher than normal growth trends, delinquencies and levels of classified loans; industry-specific risks inherent in the Company’s portfolio, and other risks borne out of geopolitical, environmental, or natural disaster events specific to the Company’s portfolio, which are not otherwise captured by the quantitative models.

Allowance for Loan Losses for the Consumer Loan Portfolio — For single-family residential and HELOC loans, PG/PD/LGD model assumptions and variable inputs span the entire contractual life of the loans, adjusted for expected prepayments. After a reasonable and supportable period, the forecast of future economic conditions reverts to long- runlong-run historical economic trends. The loan-specific variables apply over the lifetime of a loan. In addition to the consideration of the Company’s macroeconomic outlook, the PD/LGD model also incorporates prepayment estimates, historical loss rates, and loan-specific risk characteristics such as the borrower’s FICO score, loan term, interest rates, property purpose and value, and the geographic locations of the properties collateralizing the loans.

For other consumer loans, the Company uses a loss rate approach. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated prepayments, which are based on historical prepayment experience.

TheWhile the Company’s macroeconomic outlook is a key driverallowance methodologies strive to reflect all relevant credit risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the residential mortgage portfolio.estimation process due to the inherent time lag of obtaining information and normal variations between expected and actual outcomes. The Company uses several macroeconomic variables, including unemployment rate and home price index,may hold additional reserves that are designed to provide coverage for its residential mortgagelosses attributable to such risk. The allowance for loan losses as of June 30, 2020 also included qualitative adjustments for certain industry sectors, such as oil & gas, which are included as part of the C&I loan portfolio, at the national, state and Metropolitan Statistical Area level. The macroeconomic outlook takes into account national and regional personal income, employment and financial indicators impacting the residential loans industry. For other consumer loans,that the Company qualitatively adjustsviews as higher risk, where quantitative models may not have captured the expected credit loss using real GDP, unemployment, U.S. Treasury Spread and the S&P 500 index. The Company utilizes a probability-weighted three-scenario forecast approachadditional exposure related to estimate the allowancesuch industry sectors.

Allowance for credit losses.

Individually Assessed Loans— When a loan no longer shares similar risk characteristics with other loans, such as in the case for certain nonaccrual or TDR loans, the Company estimates the allowance for loan losses on an individual loan basis. The allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and their fair value. For loans evaluated individually, the Company uses one of three different asset valuation measurement methods: (1) the present value of expected future cash flows; (2) the fair value of collateral less costs to sell; and (3) the loan's observable market price. If an individually evaluated loan is determined to be collateral dependent, the Company applies the fair value of the collateral less costs to sell method. If an individually evaluated loan is determined to not be collateral dependent, the Company uses the present value of future cash flows or the observable market value of the loan.

Collateral-Dependent Loans — When a loan is collateral dependent, the allowance is measured on an individual loan basis and is limited to the difference between the recorded value and fair value of the collateral less cost of disposal or sale. As of March 31,June 30, 2020, collateral dependentcollateral-dependent commercial and consumer loans totaled $34.6$88.1 million and $17.8$23.8 million, respectively. The Company's commercial collateral-dependent loans were secured by real estate or business properties.other collateral. The Company's consumer collateral dependentcollateral-dependent loans were all residential mortgage loans, secured by the underlying real estate. As of March 31,June 30, 2020, the collateral value of the properties securing each of these collateral dependent loans, net of selling costs, exceeded the amortized cost recorded value of the individual loans, except for two loans, one C&I loan and one HELOC loan, against which there was a recorded allowance of $416 thousand.$756 thousand and $76 thousand, respectively. For the three and six months ended March 31,June 30, 2020, there was no significant deterioration or changes in the collateralscollateral securing these loans.


45


The following table presents a summarytables present summaries of activities in the allowance for loan losses by portfolio segment for the three and six months ended March 31, 2020:June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family
Residential		HELOCs
Allowance for loan losses, beginning of period$362,629  $132,819  $16,530  $11,018  $26,822  $3,881  $3,304  $557,003  
Provision for (reversal of) credit losses on loans(a)37,862  43,315  7,908  7,526  (1,667) 205  (849) 94,300  
Gross charge-offs(20,378) (320) —  —  —  (221) (30) (20,949) 
Gross recoveries602  226  620  7  159  2  93  1,709  
Total net (charge-offs) recoveries(19,776) (94) 620  7  159  (219) 63  (19,240) 
Foreign currency translation adjustments8  —  —  —  —  —  —  8  
Allowance for loan losses, end of period$380,723  $176,040  $25,058  $18,551  $25,314  $3,867  $2,518  $632,071  
($ in thousands)Three Months Ended June 30, 2019
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family
Residential		HELOCs
Allowance for loan losses, beginning of period$189,757  $39,224  $19,169  $22,349  $35,759  $7,401  $4,235  $317,894  
Provision for (reversal of) credit losses on loans(a)26,140  (1,250) 58  173  (3,068) (1,224) (98) 20,731  
Gross charge-offs(11,745) —  —  —  —  —  (14) (11,759) 
Gross recoveries1,713  1,837  53  439  72  —  7  4,121  
Total net (charge-offs) recoveries(10,032) 1,837  53  439  72  —  (7) (7,638) 
Foreign currency translation adjustments(362) —  —  —  —  —  —  (362) 
Allowance for loan losses, end of period$205,503  $39,811  $19,280  $22,961  $32,763  $6,177  $4,130  $330,625  
($ in thousands)Six Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family Residential		HELOCs
Allowance for loan losses, beginning of period$238,376  $40,509  $22,826  $19,404  $28,527  $5,265  $3,380  $358,287  
Impact of ASU 2016-13 adoption
74,237  72,169  (8,112) (9,889) (3,670) (1,798) 2,221  125,158  
Allowance for loan losses, January 1, 2020312,613  112,678  14,714  9,515  24,857  3,467  5,601  483,445  
Provision for (reversal of) credit losses on loans(a)98,480  54,750  9,189  9,008  33  617  (3,121) 168,956  
Gross charge-offs(32,355) (1,274) —  —  —  (221) (56) (33,906) 
Gross recoveries2,177  9,886  1,155  28  424  4  94  13,768  
Total net (charge-offs) recoveries(30,178) 8,612  1,155  28  424  (217) 38  (20,138) 
Foreign currency translation adjustments(192) —  —  —  —  —  —  (192) 
Allowance for loan losses, end of period$380,723  $176,040  $25,058  $18,551  $25,314  $3,867  $2,518  $632,071  

46

 
($ in thousands) March 31, 2020
 Commercial Consumer Total
 C&I CRE Residential Mortgage 
Other
Consumer
 
  CRE 
Multi-Family
Residential
 
Construction
and Land
 
Single-
Family
Residential
 HELOCs  
Allowance for loan losses, December 31, 2019 $238,376
 $40,509
 $22,826
 $19,404
 $28,527
 $5,265
 $3,380
 $358,287
Impact of ASU 2016-13 adoption 74,237
 72,169
 (8,112) (9,889) (3,670) (1,798) 2,221
 125,158
Allowance for loan losses, January 1, 2020 312,613
 112,678
 14,714
 9,515
 24,857
 3,467
 5,601
 483,445
Provision for (reversal of ) credit losses 60,618
 11,435
 1,281
 1,482
 1,700
 412
 (2,272) 74,656
Gross charge-offs (11,977) (954) —
 —
 —
 —
 (26) (12,957)
Gross recoveries 1,575
 9,660
 535
 21
 265
 2
 1
 12,059
Total net charge-offs (10,402) 8,706
 535
 21
 265
 2
 (25) (898)
Foreign currency translation adjustments (200) —
 —
 —
 —
 —
 —
 (200)
Allowance for loan losses, March 31, 2020 $362,629
 $132,819
 $16,530
 $11,018
 $26,822
 $3,881
 $3,304
 $557,003
 
($ in thousands)Six Months Ended June 30, 2019
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family Residential		HELOCs
Allowance for loan losses, beginning of period$189,117  $40,666  $19,885  $20,290  $31,340  $5,774  $4,250  $311,322  
Provision for (reversal of) credit losses on loans(a)41,404  (2,914) (939) 2,169  1,349  401  (99) 41,371  
Gross charge-offs(28,989) —  —  —  —  —  (28) (29,017) 
Gross recoveries3,964  2,059  334  502  74  2  7  6,942  
Total net (charge-offs) recoveries(25,025) 2,059  334  502  74  2  (21) (22,075) 
Foreign currency translation adjustments7  —  —  —  —  —  —  7  
Allowance for loan losses, end of period$205,503  $39,811  $19,280  $22,961  $32,763  $6,177  $4,130  $330,625  

The following table presents a summary of activities in the allowance for unfunded credit commitments for the three and six months ended March 31, 2020:June 30, 2020 and 2019:
Three Months Ended
June 30,		Six Months Ended
June 30,
($ in thousands)2020201920202019
Unfunded credit facilities
Allowance for unfunded credit commitments, beginning of period$20,829  $14,505  $11,158  $12,566  
Impact of ASU 2016-13 adoption—  —  10,457  —  
Provision for (reversal of) credit losses on unfunded credit
 commitments
(b)8,143  (1,486) 7,357  453  
Allowance for unfunded credit commitments, end of period$28,972  $13,019  $28,972  $13,019  
Provision for credit losses(a) + (b)$102,443  $19,245  $176,313  $41,824  
 
($ in thousands) Three Months Ended
March 31, 2020
Unfunded credit facilities  
Allowance for unfunded credit commitments, December 31, 2019 $11,158
Impact of ASU 2016-13 adoption 10,457
Allowance for unfunded credit commitments, January 1, 2020 21,615
Reversal of credit losses (786)
Allowance for unfunded credit commitments, March 31, 2020 $20,829
Total provision for credit losses $73,870
 



46


The following table presents a summary of activities in the allowance for loan losses by portfolio segments and the allowance for unfunded credit commitments for the three months ended March 31, 2019:
 
($ in thousands) Three Months Ended
March 31, 2019
Allowance for non-PCI loans, beginning of period $311,300
Provision for loan losses on non-PCI loans(a)20,648
Gross charge-offs:  
Commercial:  
C&I (17,244)
Consumer:  
Other consumer (14)
Total gross charge-offs (17,258)
Gross recoveries:  
Commercial:  
C&I 2,251
CRE:  
CRE 222
Multifamily residential 281
Construction and land 63
Total CRE 566
Consumer:  
Residential mortgage:  
Single-family residential 2
HELOCs 2
Total residential mortgage 4
Total gross recoveries 2,821
Net charge-offs (14,437)
Foreign currency translation adjustments 369
Allowance for non-PCI loans, end of period 317,880
PCI Loans  
Allowance for PCI loans, beginning of period 22
Reversal of loan losses on PCI loans(b)(8)
Allowance for PCI loans, end of period 14
Allowance for loan losses $317,894
Unfunded credit facilities  
Allowance for unfunded credit commitments, beginning of period $12,566
Provision for unfunded credit commitments(c)1,939
Allowance for unfunded credit commitments, ending of period $14,505
Total provision for credit losses(a)+(b)+(c)$22,579
 


Asas of March 31,June 30, 2020 the allowance for loan losses amounted to $557.0was $632.1 million, or 1.55%an increase of loans held-for-investment,$273.8 million compared with $358.3 million or 1.03% of loans held-for-investment as of December 31, 2019, and $317.9 million or 0.97% of loans held-for-investment as of March 31, 2019. The quarter-over-quarter and year-over-yearoverall increase in allowance for loan losses was largely due toprimarily driven by deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, which resulted in a provision for credit losses of $102.4 million and $176.3 million for the three and six months ended June 30, 2020, respectively, and the adoption of ASU 2016-13, which increased the allowance for loan losses by $125.2 million; deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, which drove a $73.9 million provision for credit losses for the three months ended March 31, 2020 and loan growth. First quarter 2020 gross charge-offs of $13.0 million were primarily from C&I loans, and were almost entirely offset by recoveries, primarily from CRE loans, resulting in net charge-offs of $898 thousand or annualized 0.01% of average loans held-for-investment. The C&I gross charge-offs for the three months ended March 31, 2020 totaled $12.0 million and were primarily from the oil and gas loan portfolio.on January 1, 2020.

The allowance for unfunded credit commitments is maintained at a level that management believes to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities. See Note 10 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q for additional information related to unfunded credit commitments.


47

The following table presents the Company’s allowance for loan losses and recorded investments by loan typeportfolio segments and impairment methodology as of December 31, 2019:2019. This is no longer relevant after December 31, 2019, given the adoption of ASU 2016-13 on January 1, 2020, which has a single impairment methodology:
 
($ in thousands) December 31, 2019
 Commercial Consumer Total
 C&I CRE Residential Mortgage 
Other
Consumer
 
  CRE 
Multifamily
Residential
 
Construction
and Land
 
Single-
Family
Residential
 HELOCs  
Allowance for loan losses                
Individually evaluated for impairment $2,881
 $97
 $55
 $—
 $35
 $8
 $2,517
 $5,593
Collectively evaluated for impairment 235,495
 40,412
 22,771
 19,404
 28,492
 5,257
 863
 352,694
Acquired with deteriorated credit quality —
 —
 —
 —
 —
 —
 —
 —
Total $238,376
 $40,509
 $22,826
 $19,404
 $28,527
 $5,265
 $3,380
 $358,287
Recorded investment in loans                
Individually evaluated for impairment $114,042
 $21,618
 $4,464
 $19,691
 $22,211
 $13,574
 $2,517
 $198,117
Collectively evaluated for impairment 12,035,079
 10,143,629
 2,829,748
 608,768
 7,006,768
 1,453,162
 280,397
 34,357,551
Acquired with deteriorated credit quality (1)
 1,810
 113,201
 22,162
 40
 79,611
 6,047
 —
 222,871
Total (1)
 $12,150,931
 $10,278,448
 $2,856,374
 $628,499
 $7,108,590
 $1,472,783
 $282,914
 $34,778,539
 
(1)Loans net of ASC 310-10 discount.

($ in thousands)December 31, 2019
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMultifamily
Residential		Construction
and Land		Single-
Family
Residential		HELOCs
Allowance for loan losses
Individually evaluated for impairment$2,881  $97  $55  $—  $35  $8  $2,517  $5,593  
Collectively evaluated for impairment235,495  40,412  22,771  19,404  28,492  5,257  863  352,694  
Acquired with deteriorated credit quality—  —  —  —  —  —  —  —  
Total$238,376  $40,509  $22,826  $19,404  $28,527  $5,265  $3,380  $358,287  
Recorded investment in loans
Individually evaluated for impairment$114,042  $21,618  $4,464  $19,691  $22,211  $13,574  $2,517  $198,117  
Collectively evaluated for impairment12,035,079  10,143,629  2,829,748  608,768  7,006,768  1,453,162  280,397  34,357,551  
Acquired with deteriorated credit quality (1)
1,810  113,201  22,162  40  79,611  6,047  —  222,871  
Total (1)
$12,150,931  $10,278,448  $2,856,374  $628,499  $7,108,590  $1,472,783  $282,914  $34,778,539  
(1)Loans net of ASC 310-10 discount.

Purchased Credit-Deteriorated Loans

On January 1, 2020, the amortized cost basis of the PCD loans was adjusted to reflect the $1.2 million of allowance for loan losses. For the three and six months ended March 31,June 30, 2020, the Company did not acquire any PCD loans. For information on PCD loans, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.

The following table presents the changes in accretable yield on PCI loans for the three and six months ended March 31,June 30, 2019:
($ in thousands)Three Months Ended
June 30, 2019		Six Months Ended
June 30, 2019
Accretable yield for PCI loans, beginning of period$68,861  $74,870  
Accretion(5,806) (12,007) 
Changes in expected cash flows998  1,190  
Accretable yield for PCI loans, end of period$64,053  $64,053  
 
($ in thousands) Three Months Ended
March 31, 2019
Accretable yield for PCI loans, beginning of period $74,870
Accretion (6,201)
Changes in expected cash flows 192
Accretable yield for PCI loans, end of period $68,861
 


Loans Held-for-Sale

Loans Held-for-Sale

As of March 31,June 30, 2020 and December 31, 2019, loans held-for-sale of $1.6$3.9 million and $434 thousand, respectively, consisted of single-family residential loans. Refer to Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Loans Held-for-Sale to the Consolidated Financial Statements of the Company’s 2019 Form 10-K for additional details related to the Company’s loans held-for-sale.


48


Loan Purchases, Transfers and Sales

The Company purchases and sells loans in the secondary market in the ordinary course of business. From time to time, purchased loans may be transferred from held-for-investment to held-for-sale, and write-downs to allowance for loan losses are recorded, when appropriate. The following tables provide information about the carrying value of loans purchased for the held-for-investment portfolio, loans sold and loans transferred from held-for-investment to held-for-sale at lower of cost or fair value during the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential
Mortgage
CREMultifamily
Residential		Construction
and Land		Single-Family
Residential
Loans transferred from held-for-investment to held-for-sale (1)
$33,060  $—  $—  $—  $—  $33,060  
Sales (2)(3)(4)
$33,060  $—  $—  $—  $13,708  $46,768  
Purchases (5)
$12,503  $—  $7  $—  $—  $12,510  
($ in thousands)Three Months Ended June 30, 2019
CommercialConsumerTotal
C&ICREResidential Mortgage
CREMultifamily
Residential		Construction
and Land		Single-Family
Residential
Loans transferred from held-for-investment to held-for-sale (1)
$79,593  $—  $—  $1,573  $—  $81,166  
Sales (2)(3)(4)
$76,031  $—  $—  $1,573  $1,172  $78,776  
Purchases (5)
$159,100  $—  $1,734  $—  $17,637  $178,471  

($ in thousands)Six Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential Mortgage
CREMultifamily
Residential		Construction
and Land		Single-Family
Residential
Loans transferred from held-for-investment to held-for-sale (1)
$136,033  $7,250  $—  $—  $—  $143,283  
Sales (2)(3)(4)
$136,033  $7,250  $—  $—  $18,350  $161,633  
Purchases (5)
$143,086  $—  $1,520  $—  $1,084  $145,690  
49

($ in thousands) Three Months Ended March 31, 2020($ in thousands)Six Months Ended June 30, 2019
Commercial Consumer TotalCommercialConsumerTotal
C&I CRE Residential Mortgage C&ICREResidential MortgageTotal
 CRE Multifamily
Residential		 Single-Family
Residential		 CREMultifamily
Residential		Construction
and Land		Single-Family
Residential		Total
Loans transferred from held-for-investment to held-for-sale (1)
 $102,973
 $7,250
 $—
 $—
 $110,223
Loans transferred from held-for-investment to held-for-sale (1)
$155,166  $16,655  $—  $1,573  $—  $173,394  
Sales (2)(3)(4)
 $102,973
 $7,250
 $—
 $4,642
 $114,865
Sales (2)(3)(4)
$151,677  $16,655  $—  $1,573  $3,614  $173,519  
Purchases (5)
 $130,583
 $—
 $1,513
 $1,084
 $133,180
Purchases (5)
$266,294  $—  $5,952  $—  $54,039  $326,285  
(1)The Company recorded 0 write-downs to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for both the three and six months ended June 30, 2020 and $317 thousand and $390 thousand for the same periods in 2019, respectively.
 
($ in thousands) Three Months Ended March 31, 2019
 Commercial Consumer Total
 C&I CRE Residential Mortgage 
  CRE Multifamily
Residential		 Single-Family
Residential		 
Loans transferred from held-for-investment to held-for-sale (1)
 $75,573
 $16,655
 $—
 $—
 $92,228
Sales (2)(3)(4)
 $75,646
 $16,655
 $—
 $2,442
 $94,743
Purchases (5)
 $107,194
 $—
 $4,218
 $36,402
 $147,814
 
(1)The Company recorded 0 write-downs to the allowance for loan losses related to loans transferred from held-for-investment to held-for-sale for the three months ended March 31, 2020 and $73 thousand for the same period in 2019.
(2)Includes originated loans sold of $114.9 million and $76.5 million for the three months ended March 31, 2020 and 2019, respectively. Originated loans sold during each of the three months ended March 31, 2020 and 2019 were primarily C&I loans.
(3)Includes NaN and $18.2 million of purchased loans sold in the secondary market for the three months ended March 31, 2020 and 2019, respectively.
(4)Net gains on sales of loans were $950 thousand and $915 thousand for the three months ended March 31, 2020 and 2019, respectively.
(5)C&I loan purchases for each of the three months ended March 31, 2020 and 2019 were comprised primarily of syndicated C&I term loans.

(2)Includes originated loans sold of $46.8 million and $161.6 million for the three and six months ended June 30, 2020, respectively, and $55.7 million and $132.2 million for the same periods in 2019, respectively. Originated loans sold were primarily C&I and single-family residential loans during the three and six months ended June 30, 2020. In comparison, originated loans sold were primarily C&I loans for the same periods in 2019.
(3)Includes NaN of the purchased loans sold in the secondary market for both the three and six months ended June 30, 2020 and $23.1 million and $41.3 million for the same periods in 2019, respectively.
(4)Net gains on sales of loans were $132 thousand and $1.1 million for the three and six months ended June 30, 2020, respectively, and $15 thousand and $930 thousand for the same periods in 2019, respectively.
(5)C&I loan purchases for each of the three and six months ended June 30, 2020 and 2019 were comprised primarily of syndicated C&I term loans.

Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities

The Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in low-orlow- and moderate-income neighborhoods. The Company invests in certain affordable housing projects in the form of ownership interests in limited partnerships or limited liability companies that qualify for CRA and tax credits. These entities are formed to develop and operate apartment complexes designed as high-quality affordable housing for lower income tenants throughout the U.S. To fully utilize the available tax credits, each of these entities must meet the regulatory affordable housing requirements for a minimum 15-year compliance period. In addition to affordable housing projects, the Company also invests in New Market Tax Credit projects that qualify for CRA credits, as well as eligible projects that qualify for renewable energy and historic tax credits. Investments in renewable energy tax credits help promote the development of renewable energy sources, and the investments in historic tax credits promote the rehabilitation of historic buildings and economic revitalization of the surrounding areas.

Investments in Qualified Affordable Housing Partnerships, Net

The Company records its investments in qualified affordable housing partnerships, net, using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in Income tax expense on the Consolidated Statement of Income.



The following table presents the Company’s investments in qualified affordable housing partnerships, net, and related unfunded commitments as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Investments in qualified affordable housing partnerships, net$201,888  $207,037  
Accrued expenses and other liabilities — Unfunded commitments$72,655  $80,294  
 
($ in thousands) March 31, 2020 December 31, 2019
Investments in qualified affordable housing partnerships, net $198,653
 $207,037
Accrued expenses and other liabilities — Unfunded commitments $77,487
 $80,294
 


The following table presents additional information related to the Company’s investments in qualified affordable housing partnerships, net, for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Tax credits and other tax benefits recognized$11,772  $11,506  $22,803  $23,332  
Amortization expense included in income tax expense$9,148  $9,657  $17,532  $18,554  
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Tax credits and other tax benefits recognized $11,031
 $11,826
Amortization expense included in income tax expense $8,384
 $8,897
 
50


Investments in Tax Credit and Other Investments, Net

Depending on the ownership percentage and the influence the Company has on the investments in tax credit and other investments, net, the Company applies the equity or cost method of accounting, or the measurement alternative as elected under ASU 2016-01 for equity investments without readily determinable fair value.

The following table presents the Company’s investments in tax credit and other investments, net, and related unfunded commitments as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Investments in tax credit and other investments, net$251,318  $254,140  
Accrued expenses and other liabilities — Unfunded commitments$106,969  $113,515  
 
($ in thousands) March 31, 2020 December 31, 2019
Investments in tax credit and other investments, net $268,330
 $254,140
Accrued expenses and other liabilities — Unfunded commitments $121,604
 $113,515
 


Amortization of tax credit and other investments was $17.3$24.8 million and $24.9$42.1 million, respectively, for the three and six months ended March 31,June 30, 2020, as compared with $16.7 million and 2019, respectively.$41.6 million, respectively, for the same periods in 2019.

Included in Investments in tax credit and other investments, net, on the Consolidated Balance Sheet were equity securities with readily determinable fair values of $30.3$31.1 million and $31.7 million, as of March 31,June 30, 2020 and December 31, 2019, respectively. These equity securities arewere CRA investments and were measured at fair value with changes in fair value recorded in net income. The Company recorded unrealized gains on these equity securities of $38$720 thousand and $392$758 thousand during the three and six months ended March 31,June 30, 2020, respectively, and 2019, respectively.unrealized gains of $375 thousand and $767 thousand, respectively, for the same periods in 2019.

The Company hasheld equity securities without readily determinable fair values at carrying value totaling $18.8 million and $19.1 million as of both March 31,June 30, 2020 and December 31, 2019, respectively, which arewere measured underusing the measurement alternative at cost less impairment and the related adjustments fromadjusted for observable price changes. For the three and six months ended March 31,June 30, 2020 and 2019, there were 0 adjustments to these securities.

For the three months ended March 31, 2020, theThe Company recorded an impairment recovery of $150$109 thousand related to 1 historic tax credit investment and impairment recoveries of $259 thousand related to 2 historic tax credit investments for the three and six months ended June 30, 2020, respectively. During the second quarter of 2020, the Company also recorded 0$733 thousand OTTI charge related to 1 historic tax credit and 1 CRA investment. In comparison, the Company recorded an OTTI charge of $2.9 million and $9.9 million, respectively, and 0 impairment recovery for the three and six months ended June 30, 2019. OTTI charges and impairment recoveries are recorded within Amortization of tax credit and other investments on the Consolidated Statement of Income. In comparison, the Company recorded an OTTI charge of $7.0 million related to DC Solar and 0 impairment recoveryIncome for the three and six months ended March 31,June 30, 2020 and 2019.



Variable Interest Entities

The Company invests in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, historic rehabilitation projects, wind and solar projects, of which the majority of such investments are Variable Interest Entitiesinterest entities (“VIEs”). As a limited partner in these partnerships, these investments are designed to generate a return primarily through the realization of federal tax credits and tax benefits. An unrelated third party is typically the general partner or managing member who has control over the significant activities of such investments. While the Company’s interest in some of the investments may exceed 50% of the outstanding equity interests, the Company does not consolidate these structures due to the general partner or managing member’s ability to manage the entity, which is indicative of power over them. The Company’s maximum exposure to loss in connection with these partnerships consist of the unamortized investment balance and any tax credits claimed that may become subject to recapture.

Special purpose entities formed in connection with securitization transactions are generally considered VIEs. The Company is the servicer of the multifamily residential loans it has securitized in 2016. The Company does not consolidate the multifamily securitization entity because it does not have power and does not have a variable interest that could potentially be significant to the VIE. A CLO is a VIE that purchases a pool of assets consisting primarily of non-investment grade corporate loans and issues multiple tranches of notes to investors to fund the asset purchases and pay upfront expenses associated with forming the CLO. The Company serves as the collateral manager of a CLO that closed in the fourth quarter of 2019 and retained substantially all of the investment grade rated securities issued by the CLO. In accordance with GAAP, the Company does not consolidate the CLO as it does not hold interests that could potentially be significant to the CLO. The Company’s maximum exposure to loss from the CLO is equal to the carrying amount of the retained securities of $259.9$274.0 million and $284.7 million as of March 31,June 30, 2020 and December 31, 2019, respectively.

51

Note 9 — Goodwill and Other Intangible Assets

Goodwill

Total goodwill was $465.7 million as of both March 31,June 30, 2020 and December 31, 2019. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in an acquisition. The Company assesses goodwill for impairment at the reporting unit level, equivalent to the same level as the Company’s business segments. This assessment is performed on an annual basis as of December 31 each year, or more frequently if events or circumstances, such as adverse changes in the economic or business environment, indicate there may be impairment. The Company organizes its operation into 3 reporting segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. For information on how the reporting units are identified and the components are aggregated, see Note 15 — Business Segments to the Consolidated Financial Statements in this Form 10-Q.

There was 0 change in the carrying amount of goodwill during the three and six months ended March 31,June 30, 2020. The following table presents changes in the carrying amount of goodwill by reporting unit during the threesix months ended March 31,June 30, 2019:
($ in thousands)Consumer
and
Business Banking		Commercial
Banking		Total
Beginning balance, January 1, 2019$353,321  $112,226  $465,547  
Acquisition of East West Capital Markets, LLC—  150  150  
Ending balance, June 30, 2019$353,321  $112,376  $465,697  
 
($ in thousands) Consumer
and
Business Banking		 Commercial
Banking		 Total
Beginning balance, January 1, 2019 $353,321
 $112,226
 $465,547
Acquisition of Enstream Capital Markets, LLC —
 150
 150
Ending balance, March 31, 2019 $353,321
 $112,376
 $465,697
 


Impairment Analysis

The Company performed its annual impairment analysis as of December 31, 2019, and concluded that there was 0 goodwill impairment as the fair value of all reporting units exceeded the carrying amount of their respective reporting unit. TheGiven the economic and market deterioration as a result of the COVID-19 outbreak and public health response to contain it, have resulted in economic and market deteriorations. Given this economic and market deterioration, as of March 31, 2020, wethe Company further evaluated our goodwill to assessby assessing if the fair value of all reporting units exceedexceeded the carrying amount of the respective reporting units. The Company performed itsunits by performing a goodwill impairment testanalysis as of March 31, 2020 and concluded that 0 impairment was warranted. While there is uncertainty in the duration of the COVID-19 impact and the reopening of the economy, the Company did not note further stressed macroeconomic conditions, adverse market conditions, deterioration of the Company’s financial performance, any other significant events, that negatively impacted the fair value of its reporting units during the three months ended June 30, 2020. Based on this, the Company concluded that there was 0 goodwill impairment for the three months ended March 31,as of June 30, 2020. Refer to Note 9 — Goodwill and Other Intangible Assets to the Consolidated Financial Statements of the Company’s 2019 Form 10-K for additional details related to the Company’s annual goodwill impairment analysis.



Core Deposit Intangibles

Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions and are included in Other assets on the Consolidated Balance Sheet. These intangibles are tested for impairment on an annual basis, or more frequently as events occur or current circumstances and conditions warrant. There were 0 impairment write-downs on the core deposit intangibles for each of the three and six months ended March 31,June 30, 2020 and 2019.

The following table presents the gross carrying amount of core deposit intangible assets and accumulated amortization as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Gross balance (1)
$86,099  $86,099  
Accumulated amortization (1)
(77,972) (76,088) 
Net carrying balance (1)
$8,127  $10,011  
 
($ in thousands) March 31, 2020 December 31, 2019
Gross balance (1)
 $86,099
 $86,099
Accumulated amortization (1)
 (77,041) (76,088)
Net carrying balance (1)
 $9,058
 $10,011
 
(1)Excludes fully amortized core deposit intangible assets.

(1)Excludes fully amortized core deposit intangible assets.
52

Amortization Expense

Amortization Expense

The Company amortizes the core deposit intangibles based on the projected useful lives of the related deposits. The amortization expense related to the core deposit intangible assets was $953$931 thousand and $1.2$1.1 million for the three months ended March 31,June 30, 2020 and 2019, respectively, and $1.9 million and $2.3 million for the six months ended June 30, 2020 and 2019, respectively.

The following table presents the estimated future amortization expense of core deposit intangibles as of March 31,June 30, 2020:
($ in thousands)Amount
Remainder of 2020$1,750  
20212,749  
20221,865  
20231,199  
2024553  
Thereafter11  
Total$8,127  
 
($ in thousands) Amount
Remainder of 2020 $2,681
2021 2,749
2022 1,865
2023 1,199
2024 553
Thereafter 11
Total $9,058
 


Note 10 — Commitments and Contingencies

Commitments to Extend Credit — In the normal course of business, the Company provides customers loan commitments on predetermined terms. These outstanding commitments to extend credit are not reflected in the accompanying Consolidated Financial Statements. While the Company does not anticipate losses as a result of these transactions, commitments to extend credit are included in determining the appropriate level of the allowance for unfunded credit commitments, and outstanding commercial and SBLCs.

The following table presents the Company’s credit-related commitments as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Loan commitments$5,131,120  $5,330,211  
Commercial letters of credit and SBLCs$2,005,402  $1,860,414  
 
($ in thousands) March 31, 2020 December 31, 2019
Loan commitments $4,914,602
 $5,330,211
Commercial letters of credit and SBLCs $1,863,072
 $1,860,414
 


Loan commitments are agreements to lend to customers provided that there are no violations of any conditions established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements.



Commercial letters of credit are issued to facilitate domestic and foreign trade transactions, while SBLCs are generally contingent upon the failure of the customers to perform according to the terms of the underlying contract with the third party. As a result, the total contractual amounts do not necessarily represent future funding requirements. The Company’s historical experience is that SBLCs typically expire without being funded. Additionally, in many cases, the Company holds collateral in various forms against these SBLCs. As part of its risk management activities, the Company monitors the creditworthiness of customers in conjunction with its SBLC exposure. Customers are obligated to reimburse the Company for any payment made on the customers’ behalf. If the customers fail to pay, the Company would, as applicable, liquidate the collateral and/or offset accounts. As of March 31,June 30, 2020, total letters of credit of $1.86$2.01 billion consisted of SBLCs of $1.81$1.93 billion and commercial letters of credit of $56.0$72.3 million.

The Company applies the same credit underwriting criteria to extend loans, commitments and conditional obligations to customers. Each customer’s creditworthiness is evaluated on a case-by-case basis. Collateral and financial guarantees may be obtained based on management’s assessment of a customer’s credit. Collateral may include cash, accounts receivable, inventory, property, plant and equipment, and income-producing commercial property.

Estimated exposure to loss from these commitments is included in the allowance for unfunded credit commitments and amounted to $20.8$28.9 million as of March 31,June 30, 2020 and $11.1 million as of December 31, 2019.

53

Guarantees — The Company sells or securitizes single-family and multifamily residential loans with recourse in the ordinary course of business. The recourse component of the loans sold or securitized with recourse is considered a guarantee. As the guarantor, the Company is obligated to repurchase up to the recourse component of the loans if the loans default. The following table presents the types of guarantees the Company had outstanding as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)Maximum Potential
Future Payments		Carrying Value
June 30, 2020December 31, 2019June 30, 2020December 31, 2019
Single-family residential loans sold or securitized with recourse$11,501  $12,578  $11,501  $12,578  
Multifamily residential loans sold or securitized with recourse15,682  15,892  30,152  40,708  
Total$27,183  $28,470  $41,653  $53,286  
 
($ in thousands) Maximum Potential
Future Payments		 Carrying Value
 March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019
Single-family residential loans sold or securitized with recourse $11,857
 $12,578
 $11,857
 $12,578
Multifamily residential loans sold or securitized with recourse 15,885
 15,892
 34,771
 40,708
Total $27,742
 $28,470
 $46,628
 $53,286
 


The Company’s recourse reserve related to these guarantees is included in the allowance for unfunded credit commitments and totaled $65$85 thousand and $76 thousand as of March 31,June 30, 2020 and December 31, 2019, respectively. The allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. The Company continues to experience minimal losses from the single-family and multifamily residential loan portfolios sold or securitized with recourse.

Litigation — The Company is a party to various legal actions arising in the course of its business. In accordance with ASC 450, Contingencies, the Company accrues reserves for outstanding lawsuits, claims and proceedings when a loss contingency is probable and can be reasonably estimated. The Company estimates the amount of loss contingencies using current available information from legal proceedings, advice from legal counsel and available insurance coverage. Due to the inherent subjectivity of the assessments and unpredictability of the outcomes of the legal proceedings, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s exposure and ultimate losses may be higher, and possibly significantly more than the amounts accrued.

Other Commitments — The Company has commitments to invest in qualified affordable housing partnerships, tax credit and other investments as discussed in Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities to the Consolidated Financial Statements in this Form 10-Q. As of March 31,June 30, 2020 and December 31, 2019, these commitments were $199.1$179.6 million and $193.8 million, respectively. These commitments are included in Accrued expenses and other liabilities on the Consolidated Balance Sheet.


53


Note 11 — Revenue from Contracts with Customers

The following tables present revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, and other noninterest income, segregated by operating segments for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30, 2020
Consumer and Business BankingCommercial BankingOtherTotal
Noninterest income:
Revenue from contracts with customers:
Deposit account fees:
Deposit service charges and related fee income$6,166  $3,904  $41  $10,111  
Card income639  122  —  761  
Wealth management fees2,691  400  —  3,091  
Total revenue from contracts with customers$9,496  $4,426  $41  $13,963  
Other sources of noninterest income (1)
4,447  29,461  10,766  44,674  
Total noninterest income$13,943  $33,887  $10,807  $58,637  
54

($ in thousands) Three Months Ended March 31, 2020($ in thousands)Three Months Ended June 30, 2019
Consumer
and
Business
Banking		 Commercial
Banking		 Other TotalConsumer and Business BankingCommercial BankingOtherTotal
Noninterest income:        Noninterest income:
Revenue from contracts with customers:        Revenue from contracts with customers:
Deposit account fees:        Deposit account fees:
Deposit service charges and related fee income $5,544
 $3,799
 $6
 $9,349
Deposit service charges and related fee income$5,397  $3,299  $10  $8,706  
Card income 898
 200
 —
 1,098
Card income747  154  —  901  
Wealth management fees 5,017
 340
 —
 5,357
Wealth management fees3,565  235  —  3,800  
Total revenue from contracts with customers $11,459
 $4,339
 $6
 $15,804
Total revenue from contracts with customers$9,709  $3,688  $10  $13,407  
Other sources of noninterest income (1)
 4,943
 28,117
 5,185
 38,245
Other sources of noninterest income (1)
4,794  29,968  4,590  39,352  
Total noninterest income $16,402
 $32,456
 $5,191
 $54,049
Total noninterest income$14,503  $33,656  $4,600  $52,759  
($ in thousands)Six Months Ended June 30, 2020
Consumer and
Business
Banking		Commercial
Banking		OtherTotal
Noninterest income:
Revenue from contracts with customers:
Deposit account fees:
Deposit service charges and related fee income$11,710  $7,703  $47  $19,460  
Card income1,537  322  —  1,859  
Wealth management fees7,704  740  —  8,444  
Total revenue from contracts with customers$20,951  $8,765  $47  $29,763  
Other sources of noninterest income (1)
9,394  57,578  15,951  82,923  
Total noninterest income$30,345  $66,343  $15,998  $112,686  
($ in thousands) Three Months Ended March 31, 2019($ in thousands)Six Months Ended June 30, 2019
Consumer
and
Business
Banking		 Commercial
Banking		 Other TotalConsumer and
Business
Banking		Commercial
Banking		OtherTotal
Noninterest income:        Noninterest income:
Revenue from contracts with customers:        Revenue from contracts with customers:
Deposit account fees:        Deposit account fees:
Deposit service charges and related fee income $5,233
 $3,274
 $16
 $8,523
Deposit service charges and related fee income$10,630  $6,573  $26  $17,229  
Card income 760
 185
 —
 945
Card income1,507  339  —  1,846  
Wealth management fees 3,706
 106
 —
 3,812
Wealth management fees7,233  341  —  7,574  
Total revenue from contracts with customers $9,699
 $3,565
 $16
 $13,280
Total revenue from contracts with customers$19,370  $7,253  $26  $26,649  
Other sources of noninterest income (1)
 4,073
 20,979
 3,799
 28,851
Other sources of noninterest income (1)
8,905  50,947  8,389  68,241  
Total noninterest income $13,772
 $24,544
 $3,815
 $42,131
Total noninterest income$28,275  $58,200  $8,415  $94,890  
(1)
(1)Primarily represents revenue from contracts with customers that are out of the scope of ASC 606, Revenue from Contracts with Customers.

Revenue from Contracts with Customers.

Generally, the Company recognizes revenue from contracts with customers when it satisfies its performance obligations. The Company’s performance obligations are typically satisfied as services are rendered. The Company generally records contract liabilities, or deferred revenue, when payments from customers are received or due in advance of providing services. The Company records contract assets when services are provided to customers before payment is received or before payment is due. Since the Company receives payments for its services during the period or at the time services are provided, there were 0 contract assets or contract liabilities as of both March 31,June 30, 2020 and December 31, 2019.


55

The major revenue streams by fee type that are within the scope of ASC 606 presented in the above tables are described in additional detail below:

Deposit Account Fees — Deposit Service Charges and Related Fee Income

The Company offers a range of deposit products to individuals and businesses, which includes savings, money market, checking and time deposit accounts. The deposit account services include ongoing account maintenance, as well as certain optional services such as automated teller machine usage, wire transfer services or check orders. In addition, treasury management and business account analysis services are offered to commercial deposit customers. The monthly account fees may vary with the amount of average monthly deposit balances maintained, or the Company may charge a fixed monthly account maintenance fee if certain average balances are not maintained. In addition, each time a deposit customer selects an optional service, the Company may earn transactional fees, generally recognized by the Company at the point when the transaction occurs. For business analysis accounts, commercial deposit customers receive an earnings credit based on their account balance, which can be used to offset the cost of banking and treasury management services. Business analysis accounts that are assessed fees in excess of earnings credits received are typically charged at the end of each month, after all transactions are known and the credits are calculated.

Deposit Account Fees — Card Income

Card income is comprised of merchant referral fees and interchange income. For merchant referral fees, the Company provides marketing and referral services to acquiring banks for merchant card processing services and earns variable referral fees based on transaction activities. The Company satisfies its performance obligation over time as the Company identifies, solicits, and refers business customers who are provided such services. The Company receives monthly fees net of consideration it pays to the acquiring bank performing the merchant card processing services. The Company recognizes revenue on a monthly basis when the uncertainty associated with the variable referral fees is resolved after the Company receives monthly statements from the acquiring bank. For interchange income, the Company, as a card issuer, has a stand ready performance obligation to authorize, clear, and settle card transactions. The Company earns, or pays, interchange fees, which are percentage-based on each transaction, and based on rates published by the corresponding payment network for transactions processed using their network. The Company measures its progress toward the satisfaction of its performance obligation over time, as services are rendered, and the Company provides continuous access to this service and settles transactions as its customer or the payment network requires. Interchange income is presented net of direct costs paid to the customer and entities in their distribution chain, which are transaction-based expenses such as rewards program expenses and certain network costs. Revenue is recognized when the net profit is determined by the payment networks at the end of each day.

Wealth Management Fees

The Company provides investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The fees the Company earns are variable and are generally received monthly. The Company recognizes revenue for the services performed at quarter-end based on actual transaction details received from the broker-dealer the Company engages.

Practical Expedients and Exemptions

The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose the value of unsatisfied performance obligations as the Company’s contracts with customers generally have a term that is less than one year, are open-ended with a cancellation period that is less than one year, or allow the Company to recognize revenue in the amount to which the Company has the right to invoice.

In addition, given the short-term nature of the contracts, the Company also applies the practical expedient in ASC 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component, if at contract inception, the period between when the entity transfers the goods or services and when the customer pays for that good or service is one year or less.

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Note 12 — Stock Compensation Plans

Pursuant to the Company’s 2016 Stock Incentive Plan, as amended, the Company may issue stocks, stock options, restricted stock, restricted stock units (“RSUs”), stock purchase warrants, stock appreciation rights, phantom stock and dividend equivalents to eligible employees, non-employee directors, consultants, and other service providers of the Company and its subsidiaries. There were 0 outstanding stock awards other than RSUs as of both March 31,June 30, 2020 and December 31, 2019.


The following table presents a summary of the total share-based compensation expense and the related net tax (deficiencies) benefits associated with the Company’s various employee share-based compensation plans for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Stock compensation costs$7,071  $8,081  $14,280  $15,525  
Related net tax (deficiencies) benefits for stock compensation plans$(9) $1  $(1,575) $4,708  
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Stock compensation costs $7,209
 $7,444
Related net tax (deficiencies) benefits for stock compensation plans $(1,566) $4,707
 


Restricted Stock Units — RSUs are granted under the Company’s long-term incentive plan at no cost to the recipient. RSUs cliff vest after three years of continued employment from the date of the grant and are authorized to settle predominantly in shares of the Company’s common stock. Certain RSUs will be settled in cash. RSUs entitle the recipient to receive cash dividend equivalents to any dividends paid on the underlying common stock during the period the RSUs are outstanding. The dividends are accrued during the vesting period and are paid at the time of vesting. While a portion of RSUs are time-vesting awards, others vest subject to the attainment of specified performance goals referred to as “performance-based RSUs.” Substantially all RSUs are subject to forfeiture until vested unless otherwise specified in the employment terms.

Performance-based RSUs are granted at the target amount of awards. Based on the Company’s attainment of specified performance goals and consideration of market conditions, the number of shares that vest can be adjusted to a minimum of 00% and to a maximum of 200% of the target. The amount of performance-based RSUs that are eligible to vest is determined at the end of each performance period and is then added together as the total number of performance shares to vest. Performance-based RSUs cliff vest three years from the date of each grant.

Compensation costs for the time-based awards that will be settled in shares of the Company’s common stock are based on the quoted market price of the Company’s common stock at the grant date. Compensation costs for certain time-based awards that will be settled in cash are adjusted to fair value based on changes in the share price of the Company’s common stock up to the settlement date. Compensation costs associated with performance-based RSUs are based on grant date fair value which considers both market and performance conditions, and is subject to subsequent adjustments based on the changes in the Company’s projected outcome of the performance criteria. Compensation costs of both time-based and performance-based awards are estimated based on awards ultimately expected to vest and recognized on a straight-line basis from the grant date until the vesting date of each grant.

The following table presents a summary of the activities for the Company’s time-based and performance-based RSUs that will be settled in shares for the threesix months ended March 31,June 30, 2020. The number of outstanding performance-based RSUs stated below assumes the associated performance targets will be met at the target level:
Time-Based RSUsPerformance-Based RSUs
SharesWeighted-Average
Grant Date
Fair Value		SharesWeighted-Average
Grant Date
Fair Value
Outstanding, January 1, 20201,139,868  $57.78  386,483  $60.13  
Granted657,461  40.51  165,084  39.79  
Vested(251,526) 54.47  (131,597) 56.59  
Forfeited(100,371) 54.33  —  —  
Outstanding, June 30, 20201,445,432  $50.74  419,970  $53.24  
 
  Time-Based RSUs Performance-Based RSUs
 Shares 
Weighted-Average
Grant Date
Fair Value
 Shares 
Weighted-Average
Grant Date
Fair Value
Outstanding, January 1, 2020 1,139,868
 $57.78
 386,483
 $60.13
Granted 606,327
 41.76
 165,084
 39.79
Vested (250,160) 54.47
 (131,597) 56.59
Forfeited (22,182) 52.82
 —
 —
Outstanding, March 31, 2020 1,473,853
 $51.83
 419,970
 $53.24
 

57



The following table presents a summary of the activities for the Company’s time-based RSUs that will be settled in cash for the threesix months ended March 31,June 30, 2020:
Shares
Outstanding, January 1, 202011,638
11,638 
Granted5,639
11,215 
Vested(600)(723)
Forfeited—
— 
Outstanding, March 31,June 30, 202016,677
22,130 


As of March 31,June 30, 2020, there were $35.3$31.4 million and $19.7$19.6 million of total unrecognized compensation costs related to unvested time-based and performance-based RSUs, respectively. These costs are expected to be recognized over a weighted-average period of 2.182.04 years and 2.232.07 years, respectively.

Note 13 — Stockholders’ Equity and Earnings Per Share

The following table presents the basic and diluted EPS calculations for the three and six months ended March 31,June 30, 2020 and 2019. For more information on the calculation of EPS, see Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Earnings Per Share to the Consolidated Financial Statements of the Company’s 2019 Form 10-K.
($ and shares in thousands, except per share data)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Basic:
Net income$99,352  $150,380  $244,176  $314,404  
Basic weighted-average number of shares outstanding141,486  145,546  143,150  145,402  
Basic EPS$0.70  $1.03  $1.71  $2.16  
Diluted:
Net income$99,352  $150,380  $244,176  $314,404  
Basic weighted-average number of shares outstanding (1)
141,486  145,546  143,150  145,402  
Diluted potential common shares (2)
341  506  410  614  
Diluted weighted-average number of shares outstanding (1)(2)
141,827  146,052  143,560  146,016  
Diluted EPS$0.70  $1.03  $1.70  $2.15  
 
($ and shares in thousands, except per share data) Three Months Ended March 31,
 2020 2019
Basic:    
Net income $144,824
 $164,024
Basic weighted-average number of shares outstanding 144,814
 145,256
Basic EPS $1.00
 $1.13
Diluted:    
Net income $144,824
 $164,024
Basic weighted-average number of shares outstanding (1)
 144,814
 145,256
Diluted potential common shares (2)
 471
 665
Diluted weighted-average number of shares outstanding (1)(2)
 145,285
 145,921
Diluted EPS $1.00
 $1.12
 
(1)The Company acquired MetroCorp Bancshares, Inc. (“MetroCorp”) on January 17, 2014. Prior to the acquisition, MetroCorp had outstanding warrants to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holders were converted into the rights to acquire 230,282 shares of East West’s common stock until January 16, 2019. All warrants were exercised on January 7, 2019.
(2)Includes dilutive shares from RSUs for the three and six months ended June 30, 2020 and 2019.

(1)The Company acquired MetroCorp Bancshares, Inc. (“MetroCorp”) on January 17, 2014. Prior to the acquisition, MetroCorp had outstanding warrants to purchase 771,429 shares of its common stock. Upon the acquisition, the rights of the warrant holders were converted into the rights to acquire 230,282 shares of East West’s common stock until January 16, 2019. All warrants were exercised on January 7, 2019.
(2)Includes dilutive shares from RSUs for the three months ended March 31, 2020 and 2019.

For the three and six months ended March 31,June 30, 2020, 1.2 million and 2019, 328 thousand and 263620 thousand weighted-average shares of anti-dilutive RSUs, respectively, were excluded from the diluted EPS computation.

 In comparison, 584 thousand and 239 thousand weighted-average shares of anti-dilutive RSUs, respectively, were excluded from the diluted EPS computation for the three and six months ended June 30, 2019.

Stock Repurchase Program — On March 3, 2020, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $500.0 million of the Company’s common stock. DuringFor the three months ended March 31,June 30, 2020, there were no share repurchases. For the six months ended June 30, 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the three and six months ended March 31,June 30, 2019.


57
58



Note 14 — Accumulated Other Comprehensive Income (Loss)

The following table presentstables present the changes in the components of AOCI balances for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)AFS
Debt Securities		Cash Flow Hedges
Foreign Currency Translation Adjustments (1)
Total
Balance, April 1, 2019$(23,810) $—  $(9,173) $(32,983) 
Net unrealized gains (losses) arising during the period30,046  —  (6,016) 24,030  
Amounts reclassified from AOCI(1,019) —  —  (1,019) 
Changes, net of tax29,027  —  (6,016) 23,011  
Balance, June 30, 2019$5,217  $—  $(15,189) $(9,972) 
Balance, April 1, 2020$25,034  $—  $(18,153) $6,881  
Net unrealized gains (losses) arising during the period24,606  (1,063) (230) 23,313  
Amounts reclassified from AOCI(6,790) (270) —  (7,060) 
Changes, net of tax17,816  (1,333) (230) 16,253  
Balance, June 30, 2020$42,850  $(1,333) $(18,383) $23,134  
($ in thousands) Available-
for-Sale
Debt
Securities		 
Foreign
Currency
Translation
Adjustments (1)
 Total($ in thousands)AFS
Debt Securities		Cash Flow Hedges
Foreign Currency Translation Adjustments (1)
Total
Balance, January 1, 2019 $(45,821) $(12,353) $(58,174)Balance, January 1, 2019$(45,821) $—  $(12,353) $(58,174) 
Net unrealized gains arising during the period 23,111
 3,180
 26,291
Net unrealized gains (losses) arising during the periodNet unrealized gains (losses) arising during the period53,157  —  (2,836) 50,321  
Amounts reclassified from AOCI (1,100) —
 (1,100)Amounts reclassified from AOCI(2,119) —  —  (2,119) 
Changes, net of tax 22,011
 3,180
 25,191
Changes, net of tax51,038  —  (2,836) 48,202  
Balance, March 31, 2019 $(23,810) $(9,173) $(32,983)
Balance, June 30, 2019Balance, June 30, 2019$5,217  $—  $(15,189) $(9,972) 
Balance, January 1, 2020 $(2,419) $(15,989) $(18,408)Balance, January 1, 2020$(2,419) $—  $(15,989) $(18,408) 
Net unrealized gains (losses) arising during the period 28,530
 (2,164) 26,366
Net unrealized gains (losses) arising during the period53,136  (1,063) (2,394) 49,679  
Amounts reclassified from AOCI (1,077) —
 (1,077)Amounts reclassified from AOCI(7,867) (270) —  (8,137) 
Changes, net of tax 27,453
 (2,164) 25,289
Changes, net of tax45,269  (1,333) (2,394) 41,542  
Balance, March 31, 2020 $25,034
 $(18,153) $6,881
Balance, June 30, 2020Balance, June 30, 2020$42,850  $(1,333) $(18,383) $23,134  
(1)Represents foreign currency translation adjustments related to the Company’s net investment in non-U.S. operations, including related hedges. The functional currency and reporting currency of the Company’s foreign subsidiary was RMB and USD, respectively.
(1)Represents foreign currency translation adjustments related to the Company’s net investment in non-U.S. operations, including related hedges. The functional currency and reporting currency of the Company’s foreign subsidiary was RMB and USD, respectively.

The following table presentstables present the components of other comprehensive income (loss), reclassifications to net income and the related tax effects for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Three Months Ended June 30,
20202019
Before-TaxTax EffectNet-of-TaxBefore-TaxTax EffectNet-of-Tax
AFS debt securities:
Net unrealized gains arising during the period$34,970  $(10,364) $24,606  $44,531  $(14,485) $30,046  
Net realized (gains) reclassified into net income (1)
(9,640) 2,850  (6,790) (1,447) 428  (1,019) 
Net change25,330  (7,514) 17,816  43,084  (14,057) 29,027  
Cash flow hedges
Net unrealized (losses) arising during the period(1,483) 420  (1,063) —  —  —  
Net realized (gains) reclassified into net income (2)
(377) 107  (270) —  —  —  
Net change(1,860) 527  (1,333) —  —  —  
Foreign currency translation adjustments, net of hedges:
Net unrealized (losses) arising during the period(379) 149  (230) (2,989) (3,027) (6,016) 
Net change(379) 149  (230) (2,989) (3,027) (6,016) 
Other comprehensive income (loss)$23,091  $(6,838) $16,253  $40,095  $(17,084) $23,011  
59

 
($ in thousands) Three Months Ended March 31,
 2020 2019
 Before-Tax Tax Effect Net-of-Tax Before-Tax Tax Effect Net-of-Tax
AFS debt securities:            
Net unrealized gains arising during the period $40,493
 $(11,963) $28,530
 $30,938
 $(7,827) $23,111
Net realized gains reclassified into net income (1)
 (1,529) 452
 (1,077) (1,561) 461
 (1,100)
Net change 38,964
 (11,511) 27,453
 29,377
 (7,366) 22,011
Foreign currency translation adjustments, net of hedges:            
Net unrealized (losses) gains arising during the period (1,766) (398) (2,164) 3,180
 —
 3,180
Net change (1,766) (398) (2,164) 3,180
 —
 3,180
Other comprehensive income (loss) $37,198
 $(11,909) $25,289
 $32,557
 $(7,366) $25,191
 
(1)
For the three months ended March 31, 2020 and 2019, pre-tax amounts were reported in Net gains on sales of AFS debt securities on the Consolidated Statement of Income.

($ in thousands)Six Months Ended June 30,
20202019
Before-TaxTax EffectNet-of-TaxBefore-TaxTax EffectNet-of-Tax
AFS debt securities:
Net unrealized gains arising during the period$75,463  $(22,327) $53,136  $75,469  $(22,312) $53,157  
Net realized (gains) reclassified into net income (1)
(11,169) 3,302  (7,867) (3,008) 889  (2,119) 
Net change64,294  (19,025) 45,269  72,461  (21,423) 51,038  
Cash flow hedges
Net unrealized (losses) arising during the period(1,483) 420  (1,063) —  —  —  
Net realized (gains) reclassified into net income (2)
(377) 107  (270) —  —  —  
Net change(1,860) 527  (1,333) —  —  —  
Foreign currency translation adjustments, net of hedges:
Net unrealized (losses) arising during the period(2,145) (249) (2,394) 191  (3,027) (2,836) 
Net change(2,145) (249) (2,394) 191  (3,027) (2,836) 
Other comprehensive income (loss)$60,289  $(18,747) $41,542  $72,652  $(24,450) $48,202  
(1)For the three and six months ended June 30, 2020 and 2019, pre-tax amounts were reported in Gains on sales of AFS debt securities on the Consolidated Statement of Income.
(2)For the three and six months ended June 30, 2020 and 2019, pre-tax amounts were reported in Interest expense on the Consolidated Statement of Income.

Note 15 — Business Segments

The Company organizes its operations into 3 reportable operating segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These segments are defined by the type of customers served, and the related products and services provided. The segments reflect how financial information is currently evaluated by management. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of certain balance sheet and income statement items. The information presented is not indicative of how the segments would perform if they operated as independent entities due to the interrelationships among the segments.

The Consumer and Business Banking segment primarily provides financial products and services to consumer and commercial customers through the Company’s domestic branch network. This segment offers consumer and commercial deposits, mortgage and home equity loans, and other products and services. It also originates commercial loans for small and medium-sized enterprises through the Company’s branch network. Other products and services provided by this segment include wealth management, treasury management and foreign exchange services.



The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction and land loans, affordable housing loans and letters of credit, asset-based lending, and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity risk hedging.

The remaining centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the 2 core segments, namely the Consumer and Business Banking and the Commercial Banking segments.

The Company utilizes an internal reporting process to measure the performance of the 3 operating segments within the Company. The internal reporting process derives operating segment results by utilizing allocation methodologies for revenue and expenses. Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for funding charges or credits through the Company’s internal funds transfer pricing (“FTP”) process. Noninterest income and noninterest expense directly attributable to a business segment are assigned to that segment. Indirect costs, including technology-related costs and corporate overhead, are allocated based on a segment’s estimated usage using factors including but not limited to, full-time equivalent employees, net interest income, and loan and deposit volume. Charge-offs are allocated to the segment directly associated with the loans charged off, and the remaining provision for credit losses is allocated to each segment based on loan volume. The Company’s internal reporting process utilizes a full-allocation methodology. Under this methodology, corporate expenses and indirect expenses incurred by the Other segment are allocated to the Consumer and Business Banking and the Commercial Banking segments, except certain corporate treasury-related expenses and insignificant unallocated expenses.

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The corporate treasury function within the Other segment is responsible for liquidity and interest rate management of the Company. The Company’s internal FTP process is also managed by the corporate treasury function within the Other segment. The process is formulated with the goal of encouraging loan and deposit growth that is consistent with the Company’s overall profitability objectives, as well as to provide a reasonable and consistent basis for the measurement of its business segments’ net interest margins and profitability. The FTP process charges a cost to fund loans (“FTP charges for loans”) and allocates credits for funds provided from deposits (“FTP credits for deposits”) using internal FTP rates. FTP charges for loans are determined based on a matched cost of funds, which is tied to the pricing and term characteristiccharacteristics of the loans. FTP credits for deposits are based on matched funding credit rates, which are tied to the implied or stated maturity of the deposits. FTP credits for deposits reflect the long-term value generated by the deposits. The net spread between the total internal FTP charges and credits is recorded as part of net interest income in the Other segment. The FTP process transfers the corporate interest rate risk exposure to the treasury function within the Other segment, where such exposures are centrally managed.

The Company’s internal FTP assumptions and methodologies are reviewed at least annually to ensure that the process is reflective of current market conditions. During the third quarter of 2019, the Company enhanced its FTP methodology related to deposits by setting a minimum floor rate using the short-term FHLB rate as a reference rate for the FTP credits paid for deposits in considerationevent of the flattened and inverted yield curve. This methodology has been retrospectively applied to segment financial results for the three and six months ended March 31, 2019.June 30, 2019, and the process is effectively reflecting the current market conditions as of June 30, 2020.

The following tables present the operating results and other key financial measures for the individual operating segments as of and for the three and six months ended March 31,June 30, 2020 and 2019:
($ in thousands)Consumer and
Business
Banking		Commercial
Banking		OtherTotal
Three Months Ended June 30, 2020
Net interest income before provision for credit losses$124,926  $183,796  $35,053  $343,775  
Provision for credit losses5,590  96,853  —  102,443  
Noninterest income13,943  33,887  10,807  58,637  
Noninterest expense80,164  64,900  42,632  187,696  
Segment income before income taxes53,115  55,930  3,228  112,273  
Segment net income$38,058  $40,178  $21,116  $99,352  
As of June 30, 2020
Segment assets$12,666,938  $26,984,013  $9,756,642  $49,407,593  
($ in thousands)($ in thousands)Consumer and
Business
Banking		Commercial
Banking		OtherTotal
Three Months Ended June 30, 2019Three Months Ended June 30, 2019
($ in thousands) Consumer
and
Business
Banking		 Commercial
Banking		 Other Total
Three months ended March 31, 2020        
Net interest income before provision for credit losses $152,591
 $183,501
 $26,615
 $362,707
Net interest income before provision for credit losses$180,911  $158,941  $27,474  $367,326  
Provision for credit losses 7,788
 66,082
 —
 73,870
Provision for credit losses1,616  17,629  —  19,245  
Noninterest income 16,402
 32,456
 5,191
 54,049
Noninterest income14,503  33,656  4,600  52,759  
Noninterest expense 86,964
 70,126
 21,786
 178,876
Noninterest expense83,656  67,303  26,704  177,663  
Segment income before income taxes 74,241
 79,749
 10,020
 164,010
Segment income before income taxes110,142  107,665  5,370  223,177  
Segment net income $53,195
 $57,131
 $34,498
 $144,824
As of March 31, 2020        
Segment net income (loss)Segment net income (loss)$78,741  $76,885  $(5,246) $150,380  
As of June 30, 2019As of June 30, 2019
Segment assets $11,894,691
 $26,412,726
 $7,641,128
 $45,948,545
Segment assets$11,013,898  $25,001,894  $6,876,566  $42,892,358  


 
($ in thousands) Consumer
and
Business
Banking		 Commercial
Banking		 Other Total
Three months ended March 31, 2019        
Net interest income before provision for credit losses $185,059
 $152,708
 $24,694
 $362,461
Provision for credit losses 3,013
 19,566
 —
 22,579
Noninterest income 13,772
 24,544
 3,815
 42,131
Noninterest expense 87,906
 70,544
 28,472
 186,922
Segment income before income taxes 107,912
 87,142
 37
 195,091
Segment net income $77,146
 $62,334
 $24,544
 $164,024
As of March 31, 2019        
Segment assets $10,902,961
 $23,964,592
 $7,223,880
 $42,091,433
 

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($ in thousands)Consumer and
Business
Banking		Commercial
Banking		OtherTotal
Six Months Ended June 30, 2020
Net interest income before provision for credit losses$277,517  $367,297  $61,668  $706,482  
Provision for credit losses13,378  162,935  —  176,313  
Noninterest income30,345  66,343  15,998  112,686  
Noninterest expense167,128  135,026  64,418  366,572  
Segment income before income taxes127,356  135,679  13,248  276,283  
Segment net income$91,253  $97,309  $55,614  $244,176  
As of June 30, 2020
Segment assets$12,666,938  $26,984,013  $9,756,642  $49,407,593  

($ in thousands)Consumer and
Business
Banking		Commercial
Banking		OtherTotal
Six Months Ended June 30, 2019
Net interest income before provision for credit losses$365,970  $311,649  $52,168  $729,787  
Provision for credit losses4,629  37,195  —  41,824  
Noninterest income28,275  58,200  8,415  94,890  
Noninterest expense171,562  137,847  55,176  364,585  
Segment income before income taxes218,054  194,807  5,407  418,268  
Segment net income$155,887  $139,219  $19,298  $314,404  
As of June 30, 2019
Segment assets$11,013,898  $25,001,894  $6,876,566  $42,892,358  

Note 16 — Subsequent Events

On April 16,July 23, 2020, the Company’s Board of Directors declared secondthird quarter 2020 cash dividends for the Company’s common stock. The common stock cash dividend of $0.275 per share is payable on May 15,August 17, 2020 to stockholders of record as of MayAugust 4, 2020.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Overview

The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”, “EWBC” or “we”), 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 ended December 31, 2019, filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on February 27, 2020 (the “Company’s 2019 Form 10-K”).

Company Overview

East West is a bank holding company incorporated in Delaware on August 26, 1998 and is registered under the Bank Holding Company Act of 1956, as amended. The Company commenced business on December 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 in California that has a strong focus on the financial service needs of the Chinese-American community. Through over 125 locations in the U.S. and Greater China, the Company provides a full range of consumer and commercial products and services through three business segments: Consumer and Business Banking, Commercial Banking, with the remaining operations included in Other. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primary source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and debt securities and interest paid on deposits and other funding sources. As of March 31,June 30, 2020, the Company had $45.95$49.41 billion in assets and approximately 3,3003,200 full-time equivalent employees. For additional information on products and services provided by the Bank, see Item 1. Business — Banking Services of the Company’s 2019 Form 10-K.

Corporate Strategy

We are committed to enhancing long-term shareholder value by executing on the fundamentals of growing loans, deposits and revenue, improving profitability, and investing for the future while managing risk, expenses and capital. Our business model is built on customer loyalty and engagement, understanding of our customers’ financial goals, and meeting our customers’ financial needs through our diverse products and services. The Company’s approach is concentrated on seeking out and deepening client relationships that meet our risk/return measures. This focus guides our decision-making across every aspect of our operations: the products we develop, the expertise we cultivate and the infrastructure we build to help our customers conduct business.businesses. We expect our relationship-focused business model to continue to generate organic growth and to expand our targeted customer bases. On an ongoing basis, we invest in technology related to critical business infrastructure and streamlining core processes, in the context of maintaining appropriate expense management. Our risk management activities are focused on ensuring that the Company identifies and manages risks to maintain safety and soundness while maximizing profitability.

Coronavirus Disease 2019 Global Pandemic
Impact of COVID-19

In DecemberThe Coronavirus Disease 2019 COVID-19 was reported in China, and rapidly spread to other countries, including(“COVID-19”) pandemic has caused significant, unprecedented disruption around the U.S. In March 2020, the World Health Organization (“WHO”) characterized COVID-19world, as a global pandemic and recommended containment and mitigation measures. On January 31, 2020, the U.S. declared a national public health emergency, and the President announced a National Emergency on March 13, 2020. Many states and municipalities have declared emergencieswell as well. The COVID-19 outbreak and public health response to contain it have resulted in economic and financial market deterioration, as of March 31, 2020, which did not exist at the beginning of the quarter.year. The recession resulting from government-mandated closures of certain businesses and “stay-at-home” orders has significantly impacted business investmentbusinesses, investments in those businesses and consumer spending, and heightened volatility in the global financial markets. These economic and operating conditions caused by the COVID-19 pandemic have created financial difficulties for many of the Company’s commercial and consumer customers and, as a result, some borrowers may not be able to satisfy their obligations. Becauseobligations to us. As many of the Company’s loans are secured by real estate, a potential decline in the real estate markets could also negatively impact the Company’s business, financial condition and the credit quality of the Company’s loan portfolio, potentially increasingportfolio. As a result of the level of loan charge-offs andongoing COVID-19 pandemic, the provision for credit losses. Inlosses was elevated during the firstsecond quarter of 2020, the impact of2020.

64

Regulatory Developments Relating to COVID-19 pandemic was not yet evident in the Company’s balance sheet growth trends or in most of our asset quality metrics. However, the broad-based response to combat COVID-19 pandemicPandemic

Coronavirus Aid, Relief, and resulting economic impact had a material impact on the Company’s first quarter 2020 provision for credit losses.



Economic Security Act — The Coronavirus Aid, Relief, and Economic Security Act (“CARES(the “CARES Act”) was enacted on March 27, 2020.2020 to address the economic impact to individuals and businesses as a result of the COVID-19 pandemic. As part of the CARES Act, passed by Congress, various initiatives to protect individuals, businesses and local economies, such as the SBASmall Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and the Main Street Lending Program were established.established in an effort to lessen the impact of COVID-19 on consumers and businesses. As part of our commitment to support our customers, the Bank participated as a lender in the PPP. During the second quarter of 2020, the Company funded over 7,200 SBA 7(a) approved PPP loans for customers with an outstanding loan balance totaling $1.75 billion as of June 30, 2020. The SBA guarantees 100% of the PPP loans made to eligible borrowers and if used for qualified expenditures, the PPP loans are forgivable. These loans are included in our commercial and industrial (“C&I”) portfolio, have an interest rate of 1% and a maturity of two or five years. The Board of Governors of the Federal Reserve system (“Federal Reserve”) has established the PPP Liquidity Facility (“PPPLF”) to enable Federal Reserve Banks (“FRB”) to extend credit to financial institutions that originate PPP loans, while taking the PPP loans as collateral. As of June 30, 2020, we have drawn down $1.43 billion from the Federal Reserve PPPLF and pledged the same amount in PPP loans as collateral. The Bank is also a participating lender in the Main Street Lending Program, which was established by the Federal Reserve system, to support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.

In addition, the CARES Act requires mortgage servicers to grant, on a borrower’s request, forbearance for up to 180 days (which can be extended for an additional 180 days) on a federally-backed single-family mortgage loan or forbearance up to 30 days (which can be extended for two additional 30-day periods) on a federally-backed multi-family mortgage loan when the borrowers experience financial hardship due to COVID-19.

Loan Modifications — The CARES Act also includes an option for financial institutions to suspend the U.S. generally accepted accounting principles (“GAAP”) requirements and regulatory determinations for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a troubled debt restructuring (“TDR”) from March 1, 2020, through the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or December 31, 2020. On April 7, 2020, the federal banking regulators issued the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”). The Interagency Statement also provides financial institutions the option to suspend the application of the TDR accounting guidance for short-term modifications (i.e., six months or less) made on a good faith basis in response to COVID-19 to borrowers who were current at the time of modification. Given that nonaccrual loans are more heavily risk-weighted for capital purposes, this TDR relief allows a capital benefit in the form of reduced risk-weighted assets since the aging of such loans were frozen at the time of modification. We are granting loan modifications to our customers in the form of maturity extensions, payment deferrals and forbearance. For a summary of the loans that we have modified in response to COVID-19, please refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Risk Management — Credit Risk Management in this Form 10-Q.

Regulatory Capital — On March 31, 2020, the U.S. federal banking agencies issued an interim final rule that provided the option to temporarily delay the effects of current expected credit losses (“CECL”) on regulatory capital for two years, followed by a three-year transition period (“CECL Capital Transition”). The Company participateshas elected to apply the CECL Capital Transition during the first quarter of 2020.

Reserve Requirements — On March 26, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent, eliminating the reserve requirement for all depository institutions, an action that provides liquidity in the banking system to support lending to households and businesses.

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Our Response to COVID-19

In response to the COVID-19 pandemic, we have been working diligently to protect employee safety while continuing to carry out our role as a provider of critical and essential services to the public. We have taken comprehensive steps to help our employees, customers and communities as follows:

•Employees:
For employees with jobs that are required to be performed on-site, we have taken significant actions to ensure employee safety by adopting social distancing measures, implementing an enhanced cleaning program and installing plexiglass panels and requiring temperature screenings and the wearing of masks for all employees physically at on-site locations. We have further provided support to our employees by granting an increase in flexibility by temporarily adjusting vacation policies.

•Customers:
We offered assistance to our commercial, consumer and small business clients affected by the COVID-19 pandemic, which includes payment deferrals, pausing foreclosures on certain residential mortgage loans and participation in the SBA PPP and intendsthe Main Street Lending Program under the CARES Act as discussed above.We intend to participateevaluate participation in additional new government-sponsored programs, as they are enacted. Through May 6,established.

Given the continuous unprecedented uncertainty and rapidly evolving socioeconomic impacts of the COVID-19 pandemic, the Company continues to closely monitor its impacts on the Company’s business and loan portfolio. The pandemic had a significant impact on the Company’s second quarter and first half of 2020 we funded over $1.84 billion of SBA-approved PPP loans to over 6,700 customers. In addition, to provide relief to customers during these turbulent times, we are providing payment accommodationsprovision for certain small-to medium-sized business, nonprofit organization and consumer customers impacted by COVID-19, and pausing action on collections and foreclosures on certain residential mortgage loans. credit losses. Although we are uncertain of the full magnitude and duration of the business and economic impact from the unprecedented public health efforts to contain and combat the spread of COVID-19, we could experience material declines in revenues, profitability and/or cash flows in one or more periods in 2020, compared to the corresponding prior-year periods and compared to our expectations at the beginning of the 2020 fiscal year. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided below under Part II, Item 1A - Risk Factorsin this Form 10-Q.
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Selected Financial Data
($ and shares in thousands, except per share, ratio and headcount data)Three Months EndedSix Months Ended
June 30,
2020		March 31,
2020		June 30,
2019		June 30,
2020		June 30,
2019
Summary of operations:
Interest and dividend income (1)
$398,776  $449,190  $474,844  $847,966  $938,155  
Interest expense55,001  86,483  107,518  141,484  208,368  
Net interest income before provision for credit losses343,775  362,707  367,326  706,482  729,787  
Provision for credit losses102,443  73,870  19,245  176,313  41,824  
Net interest income after provision for credit losses241,332  288,837  348,081  530,169  687,963  
Noninterest income58,637  54,049  52,759  112,686  94,890  
Noninterest expense (2)
187,696  178,876  177,663  366,572  364,585  
Income before income taxes112,273  164,010  223,177  276,283  418,268  
Income tax expense (3)
12,921  19,186  72,797  32,107  103,864  
Net income (1)(2)(3)
$99,352  $144,824  $150,380  $244,176  $314,404  
Per common share:
Basic earnings$0.70  $1.00  $1.03  $1.71  $2.16  
Diluted earnings$0.70  $1.00  $1.03  $1.70  $2.15  
Dividends declared$0.28  $0.28  $0.28  $0.55  $0.51  
Book value$35.25  $34.67  $32.53  $35.25  $32.53  
Non-GAAP tangible common equity per share (4)
$31.86  $31.27  $29.20  $31.86  $29.20  
Weighted-average number of shares outstanding:
Basic141,486  144,814  145,546  143,150  145,402  
Diluted141,827  145,285  146,052  143,560  146,016  
Common shares outstanding at period-end141,486  141,435  145,547  141,486  145,547  
At period end:
Total assets$49,407,593  $45,948,545  $42,892,358  $49,407,593  $42,892,358  
Total loans$37,233,287  $35,894,987  $33,734,256  $37,233,287  $33,734,256  
Available-for-sale (“AFS”) debt securities$3,884,574  $3,695,943  $2,592,913  $3,884,574  $2,592,913  
Total deposits$40,672,678  $38,686,958  $36,477,542  $40,672,678  $36,477,542  
Long-term debt and finance lease liabilities (5)
$1,580,442  $152,162  $152,506  $1,580,442  $152,506  
Federal Home Loan Bank (“FHLB”) advances$656,759  $646,336  $745,074  $656,759  $745,074  
Stockholders’ equity (6)
$4,987,243  $4,902,985  $4,734,593  $4,987,243  $4,734,593  
Non-GAAP tangible common equity (4)
$4,508,056  $4,422,519  $4,249,944  $4,508,056  $4,249,944  
Head count (full-time equivalent)3,249  3,285  3,261  3,249  3,261  
Performance metrics:
Return on average assets (“ROA”)0.83 %1.30 %1.45 %1.06 %1.54 %
Return on average equity (“ROE”)8.02 %11.60 %12.88 %9.82 %13.75 %
Net interest margin3.04 %3.44 %3.73 %3.24 %3.76 %
Efficiency ratio (7)
46.64 %42.92 %42.29 %44.75 %44.21 %
Non-GAAP efficiency ratio (4)
38.09 %38.54 %38.03 %38.31 %38.88 %
Credit quality metrics:
Allowance for loan losses$632,071  $557,003  $330,625  $632,071  $330,625  
Allowance for loan losses to loans held-for-investment1.70 %1.55 %0.98 %1.70 %0.98 %
Nonperforming assets to total assets0.41 %0.33 %0.28 %0.41 %0.28 %
Annualized net charge-offs to average loans held-for-investment0.21 %0.01 %0.09 %0.11 %0.14 %
Selected metrics:
Total average equity to total average assets10.33 %11.22 %11.28 %10.76 %11.21 %
Common dividend payout ratio39.72 %27.95 %26.95 %32.74 %23.63 %
Loan-to-deposit ratio91.54 %92.78 %92.48 %91.54 %92.48 %
EWBC capital ratios:
Common Equity Tier 1 (“CET1”) capital12.7 %12.4 %12.5 %12.7 %12.5 %
Tier 1 capital12.7 %12.4 %12.5 %12.7 %12.5 %
Total capital14.4 %13.9 %13.9 %14.4 %13.9 %
Tier 1 leverage capital9.7 %10.2 %10.4 %9.7 %10.4 %
Accounting Standards Update 2016-13 Adoption

(1)Includes $21.3 million of interest income related to PPP loans for the second quarter of 2020.
(2)Includes $8.7 million of securities sold under repurchase agreements’ (“repurchase agreements”) extinguishment cost for the second quarter of 2020.
(3)Includes $30.1 million of additional tax expense to reverse certain previously claimed tax credits related to the DC Solar tax credit investments (“DC Solar”) during the second quarter of 2019.
(4)For a discussion of tangible common equity, tangible common equity per share and non-GAAP efficiency ratio, refer to Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.
(5)Includes $1.43 billion of advances from the PPPLF.
(6)On January 1, 2020, the Company adopted Accounting Standards UpdateCodification (“ASU”) 2016-13,2016-13, Financial Instruments Instruments — Credit Losses, often referred to as (Topic 326): Measurement of Credit Losses on Financial Instruments using the current expected credit loss ("CECL") model, which establishes a single allowance framework for all financial assets carried at amortized cost, and for certain off-balance sheet exposures. Replacing the prior incurred loss model, this framework requires that management estimate credit losses over the full remaining expected life of a loan, and consider expected future changes in macroeconomic conditions.modified retrospective approach. The adoption of CECL increased the allowance for loan losses by $125.2 million, and the allowance for unfunded credit commitments by $10.5 million. As a result, the Company recorded an after-tax decrease to opening retained earnings of $98.0 million onas of January 1, 2020.

(7)The efficiency ratio is noninterest expense divided by total revenue (net interest income before provision for credit losses and noninterest income).

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67


Selected Financial Data
 
($ and shares in thousands, except per share, ratio and headcount data) Three Months Ended
 March 31,
2020		 December 31,
2019		 March 31,
2019
Summary of operations:      
Interest and dividend income $449,190
 $467,233
 $463,311
Interest expense 86,483
 99,014
 100,850
Net interest income before provision for credit losses 362,707
 368,219
 362,461
Provision for credit losses 73,870
 18,577
 22,579
Net interest income after provision for credit losses 288,837
 349,642
 339,882
Noninterest income 54,049
 63,013
 42,131
Noninterest expense 178,876
 193,373
 186,922
Income before income taxes 164,010
 219,282
 195,091
Income tax expense 19,186
 31,067
 31,067
Net income $144,824
 $188,215
 $164,024
Per common share:      
Basic earnings $1.00
 $1.29
 $1.13
Diluted earnings $1.00
 $1.29
 $1.12
Dividends declared $0.28
 $0.28
 $0.23
Book value $34.67
 $34.46
 $31.56
Non-U.S. generally accepted accounting principles (“GAAP”) tangible common equity per share (1)
 $31.27
 $31.15
 $28.21
Weighted-average number of shares outstanding:      
Basic 144,814
 145,624
 145,256
Diluted 145,285
 146,318
 145,921
Common shares outstanding at period-end 141,435
 145,625
 145,501
At period end:      
Total assets $45,948,545
 $44,196,096
 $42,091,433
Total loans $35,894,987
 $34,778,973
 $32,863,286
Available-for-sale (“AFS”) debt securities $3,695,943
 $3,317,214
 $2,640,158
Total deposits $38,686,958
 $37,324,259
 $36,273,972
Long-term debt and finance lease liabilities $152,162
 $152,270
 $152,433
Federal Home Loan Bank (“FHLB”) advances $646,336
 $745,915
 $344,657
Stockholders’ equity (2)
 $4,902,985
 $5,017,617
 $4,591,930
Non-GAAP tangible common equity (1)
 $4,422,519
 $4,535,841
 $4,105,124
Head count (full-time equivalent) 3,285
 3,294
 3,241
Performance metrics:      
Return on average assets (“ROA”) 1.30% 1.68% 1.63%
Return on average equity (“ROE”) 11.60% 15.00% 14.66%
Net interest margin 3.44% 3.47% 3.79%
Efficiency ratio (3)
 42.92% 44.84% 46.20%
Non-GAAP efficiency ratio (1)
 38.54% 38.33% 39.75%
Credit quality metrics:      
Allowance for loan losses $557,003
 $358,287
 $317,894
Allowance for loan losses to loans held-for-investment 1.55% 1.03% 0.97%
Nonperforming assets to total assets 0.33% 0.27% 0.33%
Annualized net charge-offs to average loans held-for-investment 0.01% 0.10% 0.18%
Selected metrics:      
Total average equity to total average assets 11.22% 11.19% 11.14%
Common dividend payout ratio 27.95% 21.52% 20.59%
Loan-to-deposit ratio 92.78% 93.18% 90.60%
EWBC Capital ratios:      
Common Equity Tier 1 (“CET1”) capital 12.4% 12.9% 12.4%
Tier 1 capital 12.4% 12.9% 12.4%
Total capital 13.9% 14.4% 13.9%
Tier 1 leverage capital 10.2% 10.3% 10.2%
 
(1)
Tangible common equity, tangible common equity per share and adjusted efficiency ratio are non-GAAP financial measures. For a discussion of these measures, refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q.
(2)
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using the modified retrospective approach. The Company recorded an after-tax decrease to opening retained earnings of $98.0 million as of January 1, 2020.
(3)The efficiency ratio is noninterest expense divided by total revenue (net interest income before provision for credit losses and noninterest income).


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Financial Highlights

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Noteworthy items about the Company’s performance for the second quarter and first half of 2020 included:

•Earnings: Second quarter2020 net income was $99.4 million or $0.70 in diluted earnings per share (“EPS”), compared with second quarter of 2019 net income of $150.4 million or diluted EPS of $1.03, a decrease of $51.0 million or 34% in net income. Net income for the first half of 2020 was $244.2 million or $1.70 in diluted EPS, compared with net income of $314.4 million or $2.15 in diluted EPS for the first half of 2019, a decrease of $70.2 million or 22% in net income. These decreases in both periods were primarily due to higher provision for credit losses resulting from the deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic and the recently adopted CECL methodology, and lower net interest income resulting from lower interest rates, partially offset by a decrease in income tax expense. Provision for credit losses of $176.3 million for the first half of 2020 increased by 322% compared to the same period a year ago.

•Adjusted Earnings: There were no adjustments for non-recurring items during the second quarter and first half of 2020 that affected non-GAAP net income and diluted EPS. Non-GAAP net income and non-GAAP diluted EPS for the second quarter of 2019 were $180.5 million and $1.24, respectively. Non-GAAP net income and non-GAAP diluted EPS for the first half of 2019 were $349.4 million and $2.39, respectively. During the first and second quarters of 2019, the Company recorded a $7.0 million pre-tax impairment charge and reversed $30.1 million of certain previously claimed tax credits related to the DC Solar, respectively. Refer to reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.

•Revenue: Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $402.4 million for the second quarter of 2020, included:compared with $420.1 million for the second quarter of 2019, a decrease of $17.7 million or 4%. Revenue for the first half of 2020 was $819.2 million, compared with $824.7 million for the first half of 2019, a decrease of $5.5 million or 1%. These decreases were primarily due to lower net interest income, partially offset by an increase in noninterest income.

•
Earnings: First quarterof2020 net income was $144.8 million or $1.00 in diluted earnings per share (“EPS”), compared with first quarter of 2019 net income of $164.0 million or diluted EPS of $1.12. The $19.2 million or 12% decrease in net income was primarily due to higher provision for credit losses resulting from the newly adopted CECL methodology and the deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic.

•
Adjusted Earnings: There were no adjustments for non-recurring items during the first quarter of 2020 that affected non-GAAP net income and diluted EPS. During the first quarter of 2019, the Company recorded a $7.0 million pre-tax or $4.9 million after-tax, impairment charge related to DC Solar and affiliates (“DC Solar”). (Refer to Item 2. MD&A — Results of Operations — Income Taxes in this Form 10-Q for a discussion related to the Company’s investment in DC Solar and see reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q.) First quarter 2019 non-GAAP net income was $168.9 million and non-GAAP diluted EPS was $1.16.

•
Revenue: Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $416.8 million for the first quarter of 2020, compared with $404.6 million for the first quarter of 2019, an increase of $12.2 million or 3%. This increase was primarily due to increased noninterest income.

•
Net Interest Income and Net Interest Margin: Firstquarter of 2020 net interest income was $362.7 million, compared with first quarter of 2019 net interest income of $362.5 million. First quarter of 2020 net interest margin was 3.44%, a 35 basis point decrease from 3.79% for the first quarter of 2019. The decrease in the net interest margin reflected materially lower interest rates year-over-year, including a cumulative 225 basis points of cuts to the fed funds target rate in the second half of 2019 and in the first quarter of 2020.

•
Operating Efficiency: Efficiency ratio, calculated as noninterest expense divided by revenue, was 42.92% and 46.20% for the first quarters of 2020 and 2019, respectively. Adjusting for amortization of tax credit and other investments, and core deposit intangibles, non-GAAP efficiency ratio for the first quarter of 2020 was 38.54%, a 121 basis point improvement from 39.75% for the first quarter of 2019. (See reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q.)


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•Net Interest Income and Net Interest Margin: Secondquarter 2020 net interest income was $343.8 million, compared with second quarter 2019 net interest income of $367.3 million, a decrease of $23.5 million or 6%. Second quarter 2020 net interest margin was 3.04%, a 69 basis point decrease from 3.73% for the second quarter of 2019. Net interest income for the first half of 2020 was $706.5 million, compared with $729.8 million for the first half of 2019, a decrease of $23.3 million or 3%. Net interest margin was 3.24% for the first half of 2020, a decrease of 52 basis points from 3.76% for the first half of 2019. The decreases in the net interest income and net interest margin reflected lower interest rates year-over-year, including a cumulative 225 basis point reduction of the federal funds target rate from the second half of 2019 through the second quarter of 2020.

•
Tax: Income tax expense was $19.2
•Operating Efficiency: Efficiency ratio, calculated as noninterest expense divided by revenue, was 46.64% and 42.29% for the second quarters of 2020 and 2019, respectively. The efficiency ratio was 44.75% for the first half of 2020, compared with 44.21% for the first half of 2019. Adjusting for the amortization of tax credit and other investments, amortization of core deposit intangibles, and repurchase agreements’ extinguishment cost, non-GAAP efficiency ratio for the second quarter of 2020 was 38.09%, a six basis point increase from 38.03% for the second quarter of 2019. For the first half of 2020, non-GAAP efficiency ratio was 38.31%, a 57 basis point improvement from 38.88% for the first half of 2019. For additional detail, see the reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.

•Tax: Income tax expense was $12.9 million and the effective tax rate was 11.5% for the second quarter of 2020, compared with income tax expense of $72.8 million and an effective tax rate of 32.6% for the second quarter of 2019. Income tax expense was $32.1 million and the effective tax rate was 11.6% for the first half of 2020, compared with income tax expense of $103.9 million and an effective tax rate of 24.8% for the first half of 2019.

•Profitability: ROA for the second quarters of 2020 and 2019 were 0.83% and 1.45%, respectively. ROA for the first half of 2020 and 2019 were 1.06% and 1.54%, respectively. ROE for the second quarters of 2020 and 2019 were 8.02% and 12.88%, respectively. ROE for the first half of 2020 and 2019 were 9.82% and 13.75%, respectively. Adjusting for non-recurring items related to DC Solar which occurred in 2019, non-GAAP ROA and non-GAAP ROE for the second quarter of 2019 were 1.74% and 15.45%, respectively. Non-GAAP ROA and non-GAAP ROE for the first half of 2019 were 1.71% and 15.28%, respectively. For additional detail, see the reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.)

•Loans: Total loans were $37.23 billion as of June 30, 2020, an increase of $2.45 billion or 7% from $34.78 billion as of December 31, 2019. Loan growth was well-diversified across each of the Company’s major loan portfolios, with the strongest growth from C&I, driven by PPP loan funding, commercial real estate (“CRE”) and single-family residential loans.

•Deposits: Total deposits were $40.67 billion as of June 30, 2020, an increase of $3.35 billion or 9% from $37.32 billion as of December 31, 2019. This increase was primarily driven by growth in noninterest-bearing demand deposits and money market accounts, partially offset by a decrease in time deposits.

•Asset Quality Metrics: The allowance for loan losses was $632.1 million or 1.70% of loans held-for-investment, as of June 30, 2020, compared with $358.3 million or 1.03% of loans held-for-investment, as of December 31, 2019. The increase in the allowance for loan losses was primarily due to the deteriorating macroeconomic conditions and outlook as a result of the effective tax rate was 11.7% for the first quarter of 2020, compared with an income tax expense of $31.1 million and an effective tax rate of 15.9% for the first quarter of 2019.

•
Profitability: First quarter of 2020 ROA was 1.30% and first quarter of 2019 ROA was 1.63%. First quarter of 2020 ROE was 11.60% and first quarter of 2019 ROE was 14.66%. Adjusting for non-recurring items, which occurred only in the first quarter of 2019, non-GAAP ROA and non-GAAP ROE for the first quarter of 2019 were 1.68% and 15.10%, respectively. (See reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures in this Form 10-Q.)

•
Loans: Total loans were $35.89 billion as of March 31, 2020, an increase of $1.12 billion or 3% from $34.78 billion as of December 31, 2019. Growth was well-diversified across commercial and industrial (“C&I”), total commercial real estate (“CRE”) and residential mortgage loans.

•
Deposits: Total deposits were $38.69 billion as of March 31, 2020, an increase of $1.36 billion or 4% from $37.32 billion as of December 31, 2019. This increase was primarily driven by growth in noninterest-bearing demand deposits and money market accounts.

•
Asset Quality Metrics: The allowance for loan losses was $557.0 million or 1.55% of loans held-for-investment, as of March 31, 2020, compared with $358.3 million or 1.03% of loans held-for-investment, as of December 31, 2019. The increase in the allowance for loan losses was due to the adoption of ASU 2016-13, which increased the allowance for loan losses by $125.2 million; deteriorating macroeconomic conditions and outlook as a result of the
COVID-19 pandemic,pandemic; and the adoption of ASU 2016-13, which increased the allowance for loan growth.losses by $125.2 million. Nonperforming assets were $150.9$202.2 million or 0.33%0.41% of total assets, as of March 31,June 30, 2020, an increase from $121.5 million, or 0.27% of total assets, as of December 31, 2019. FirstSecond quarter 2020 net charge-offs were $898 thousand,$19.2 million, or an annualized 0.01%0.21% of average loans held-for-investment, compared with $14.4$7.6 million, or an annualized 0.09% of average loans held-for-investment for the second quarter of 2019. For the first half of 2020, net charge-offs were $20.1 million or annualized 0.18%0.11% of average loans held-for-investment, compared with $22.1 million or annualized 0.14% of average loans held-for-investment for the first half of 2019.

•Capital Levels: Our capital levels are strong. As of June 30, 2020, all of the Company’s and the Bank’s regulatory capital ratios were well above the regulatory requirements to be considered well-capitalized. See Item 2. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-Q for more information regarding capital. On March 3, 2020, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $500.0 million of the Company’s common stock. During the first quarter of 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. There were no share repurchases during the second quarter of 2020 or the full year 2019.

•
Capital Levels: Our capital levels are strong. As of March 31, 2020, all of the Company’s and the Bank’s regulatory capital ratios were well above the regulatory requirements to be considered well-capitalized. See Item 2. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios in this Form 10-Q for more information regarding capital. During the three months ended March 31, 2020, the Company repurchased 4,471,682 shares at an average price of $32.64 per share and a total cost of $146.0 million. The Company did not repurchase any shares during the three months ended March 31, 2019.

•
Cash Dividend: The quarterly cash common stock dividend for the first quarter of 2020 was $0.275 per share, an increase of $0.045 or 20% from $0.23 per share for the first quarter of 2019. The Company returned $40.5 million in cash dividends to stockholders during the first quarter of 2020, compared with $33.8 million during the same period in 2019.

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•Cash Dividends: The quarterly cash common stock dividend for both the second quarters of 2020 and 2019 was $0.275 per share. Cash dividends of $39.5 million during the second quarter of 2020 and $79.9 million the first half of 2020 were retuned to stockholders, compared with $40.5 million and $74.3 million during the same periods in 2019, respectively.

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 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, volume of noninterest-bearing sources of funds, and asset quality.
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FirstSecond quarter 2020 net interest income was $343.8 million, a decrease of $23.5 million or 6%, compared with $367.3 million for the second quarter of 2019. For the first half of 2020, net interest income was $362.7$706.5 million, an increasea decrease of $246 thousand$23.3 million or 0.07%3%, compared with $362.5$729.8 million for the first quarterhalf of 2019. This slight increaseThe decreases in net interest income reflected loan growth andwere due to a decrease in interest-earning asset yields which reflected the drop in the average Prime and London Interbank Offered Rates (“LIBOR”), partially offset by decreases in the cost of funds, whichfunds. Second quarter 2020 net interest margin was nearly offset by3.04%, a 69 basis point decrease from 3.73% for the year-over-year decline in interest-earning asset yields. Firstsecond quarter of 2019. For the first half of 2020, net interest margin was 3.44%3.24%, a 3552 basis point decrease from 3.79%3.76% for the first quarterhalf of 2019.

The average loan yield for the firstsecond quarter of 2020 was 4.71%3.98%, a 59130 basis point decrease from 5.30%5.28% for the second quarter of 2019. For the first half of 2020, the average loan yield was 4.34%, a 95 basis point decrease from 5.29% for the first quarterhalf of 2019. This decrease,These decreases, compared with the same period a year ago,periods in 2019, reflected the downward repricing of the Company’s loan portfolio in response to materially lower interest rates. Asrates, which resulted from a cumulative 225 basis point reduction of March 31, 2020, approximately 69%the federal funds target rate. Approximately 65% and 70% of total loans were comprised of variable-rate or hybrid loans that were in theirthe adjustable rate period. Firstperiod as of June 30, 2020 and 2019, respectively. Second quarter of 2020 average loans were $35.15$37.14 billion, an increase of $2.74$4.16 billion or 8%13% from $32.41$32.98 billion for the second quarter of 2019. For the first half of 2020, average loans were $36.15 billion, an increase of $3.45 billion or 11% from $32.70 billion for the first quarterhalf of 2019. Average loanThe year-over-year increase stemmed from broad-based growth was broad-based across all commercial loan categoriesCRE, C&I, and single-family residential loans.
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FirstSecond quarter of 2020 average interest-earning assets were $42.36was $45.41 billion, an increase of $3.62$5.95 billion or 9%15% from $38.75$39.46 billion for the firstsecond quarter of 2019. This was primarily due to increases of $2.74$4.16 billion in average loans and $632.4$1.17 billion in AFS debt securities. For the first half of 2020, average interest-earning assets was $43.89 billion, an increase of $4.78 billion or 12% from $39.11 billion for first half of 2019. This was primarily due to increases of $3.45 billion in average loans and $900.4 million in AFS debt securities.

Deposits are an important source of funds and impact both net interest income and net interest margin. Average noninterest-bearing demand deposits totaled $11.12$13.53 billion for the firstsecond quarter of 2020, compared with $10.07$10.24 billion for the firstsecond quarter of 2019, an increase of $1.05$3.29 billion or 10%32%. Average noninterest-bearing demand deposits comprised 30%34% and 29% of average total deposits for the second quarters of 2020 and 2019, respectively. Average noninterest-bearing demand deposits was $12.33 billion for the first quartershalf of 2020, compared with $10.16 billion for the first half of 2019, an increase of $2.17 billion or 21%. Average noninterest-bearing demand deposits made up 32% and 29% of average total deposits for first half of 2020 and 2019, respectively. Average interest-bearing deposits of $26.37 billion for the second quarter of 2020 increased by $1.28 billion or 5% from $25.09 billion for the second quarter of 2019. Average interest-bearing deposits of $26.36 billion for the first quarterhalf of 2020 increased by $1.50$1.39 billion or 6%, from $24.85$24.97 billion for the first quarterhalf of 2019.

The average cost of funds was 0.90%0.53% for the firstsecond quarter of 2020, a decrease of 2566 basis points from 1.15%1.19% for the second quarter of 2019. For the first half of 2020, the average cost of funds was 0.71%, a decrease of 46 basis points from 1.17% for the first quarterhalf of 2019. The decreasedecreases in the average cost of funds reflectsreflected the cumulative 225 basis pointspoint reduction of cuts to the target fedfederal funds rate infrom the second half of 2019 and inthrough the firstsecond quarter of 2020. The average cost of deposits was 0.82%0.47% for the firstsecond quarter of 2020, a decrease of 2564 basis points from 1.07%1.11% for the firstsecond quarter of 2019. The average cost of deposits was 0.64% for the first half of 2020, a decrease of 45 basis points from 1.09% for the first half of 2019.

The average cost of interest-bearing deposits was 0.71% for the second quarter of 2020, a decrease of 86 basis points from 1.57% for the second quarter of 2019. For the first half of 2020, the average cost of interest-bearing deposits decreased 3359 basis points to 1.17%0.94%, from 1.53% for the first quarter of 2020, from 1.50% for the first quarterhalf of 2019. Other sources of funding included in the calculation of the average cost of funds consist of short-term borrowings, FHLB advances, securities sold under repurchase agreements (“repurchase agreements”) and long-term debt.

The Company utilizes various tools to manage interest rate risk. Refer to 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 second quarters of 2020 and 2019:
($ in thousands)Three Months Ended June 30,
20202019
Average
Balance		Interest
Average
Yield/
Rate (1)
Average
Balance		Interest
Average
Yield/
Rate (1)
ASSETS
Interest-earning assets:
Interest-bearing cash and deposits with banks$3,435,920  $4,564  0.53 %$2,852,060  $16,800  2.37 %
Securities purchased under resale agreements (“Resale agreements”) (2)
1,037,473  5,514  2.14 %999,835  7,404  2.98 %
AFS debt securities (3)(4)
3,719,209  21,004  2.27 %2,551,383  15,685  2.47 %
Loans (5)(6)
37,141,773  367,393  3.98 %32,981,374  434,450  5.28 %
Restricted equity securities78,867  301  1.54 %76,449  505  2.65 %
Total interest-earning assets$45,413,242  $398,776  3.53 %$39,461,101  $474,844  4.83 %
Noninterest-earning assets:
Cash and due from banks498,908  439,449  
Allowance for loan losses(566,473) (321,335) 
Other assets2,883,237  1,966,226  
Total assets$48,228,914  $41,545,441  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Checking deposits$4,687,178  $5,404  0.46 %$5,221,110  $15,836  1.22 %
Money market deposits9,893,816  8,093  0.33 %7,856,055  28,681  1.46 %
Savings deposits2,149,965  1,445  0.27 %2,106,626  2,477  0.47 %
Time deposits9,634,696  31,457  1.31 %9,904,726  50,970  2.06 %
Short-term borrowings242,185  265  0.44 %35,575  361  4.07 %
FHLB advances653,665  3,343  2.06 %533,841  4,011  3.01 %
Repurchase agreements (2)
418,681  3,540  3.40 %50,000  3,469  27.83 %
Long-term debt and finance lease liabilities682,432  1,454  0.86 %152,608  1,713  4.50 %
Total interest-bearing liabilities$28,362,618  $55,001  0.78 %$25,860,541  $107,518  1.67 %
Noninterest-bearing liabilities and stockholders’ equity:
Demand deposits13,534,873  10,237,868  
Accrued expenses and other liabilities1,348,977  762,684  
Stockholders’ equity4,982,446  4,684,348  
Total liabilities and stockholders’ equity$48,228,914  $41,545,441  
Interest rate spread2.75 %3.16 %
Net interest income and net interest margin$343,775  3.04 %$367,326  3.73 %
(1)Annualized.
(2)There was no netting of repurchase agreements against resale agreements for the second quarter of 2020. Average balances of resale and repurchase agreements for the three months ended June 30, 2019 have been reported net, pursuant to Accounting Standards Codification (“ASC”) 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 2.14% and 2.71% for the second quarters of 2020 and 2019, respectively. The weighted-average interest rates of gross repurchase agreements were 3.40% and 4.93% for the second quarters of 2020 and 2019, respectively.
(3)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
(4)Includes the amortization of premiums on debt securities of $5.9 million and $2.9 million for the second quarters of 2020 and 2019, respectively.
(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 $21.1 million and $8.8 million for the second quarters of 2020 and 2019, respectively.

72

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 quartershalf of 2020 and 2019:
($ in thousands)Six Months Ended June 30,
20202019
Average
Balance		Interest
Average
Yield/
Rate (1)
Average
Balance		Interest
Average
Yield/
Rate (1)
ASSETS
Interest-earning assets:
Interest-bearing cash and deposits with banks$3,204,463  $15,672  0.98 %$2,716,128  $32,210  2.38 %
Resale agreements (2)
959,807  11,139  2.33 %1,017,320  15,310  3.03 %
AFS debt securities (3)(4)
3,496,974  41,146  2.37 %2,596,590  31,433  2.44 %
Loans (5)(6)
36,147,871  779,262  4.34 %32,699,644  857,984  5.29 %
Restricted equity securities78,771  747  1.91 %75,348  1,218  3.26 %
Total interest-earning assets$43,887,886  $847,966  3.89 %$39,105,030  $938,155  4.84 %
Noninterest-earning assets:
Cash and due from banks504,710  453,725  
Allowance for loan losses(529,385) (317,909) 
Other assets2,629,000  1,903,306  
Total assets$46,492,211  $41,144,152  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Checking deposits$4,844,425  $15,650  0.65 %$5,245,845  $30,091  1.16 %
Money market deposits9,453,599  30,341  0.65 %7,967,831  58,915  1.49 %
Savings deposits2,113,118  3,262  0.31 %2,099,058  4,704  0.45 %
Time deposits9,949,351  73,549  1.49 %9,658,181  96,259  2.01 %
Short-term borrowings151,081  821  1.09 %47,939  977  4.11 %
FHLB advances673,511  7,509  2.24 %436,475  6,990  3.23 %
Repurchase agreements (2)
375,549  7,531  4.03 %50,000  6,961  28.07 %
Long-term debt and finance lease liabilities417,345  2,821  1.36 %152,485  3,471  4.59 %
Total interest-bearing liabilities$27,977,979  $141,484  1.02 %$25,657,814  $208,368  1.64 %
Noninterest-bearing liabilities and stockholders’ equity:
Demand deposits12,326,291  10,155,079  
Accrued expenses and other liabilities1,185,715  720,028  
Stockholders’ equity5,002,226  4,611,231  
Total liabilities and stockholders’ equity$46,492,211  $41,144,152  
Interest rate spread2.87 %3.20 %
Net interest income and net interest margin$706,482  3.24 %$729,787  3.76 %
(1)Annualized.
(2)Average balances of resale and repurchase agreements have been reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 2.32% and 2.77% for the first half of 2020 and 2019, respectively. The weighted-average interest rates of gross repurchase agreements were 3.76% and 4.97% for the first half of 2020 and 2019, respectively.
(3)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
(4)Includes the amortization of premiums on debt securities of $9.2 million and $6.0 million for the first half of 2020 and 2019, respectively.
(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 $29.1 million and $16.8 million for the first half of 2020 and 2019, respectively.
73
 
($ in thousands) Three Months Ended March 31,
 2020 2019
 
Average
Balance
 Interest 
Average
Yield/
Rate (1)
 Average
Balance		 Interest 
Average
Yield/
Rate (1)
ASSETS            
Interest-earning assets:            
Interest-bearing cash and deposits with banks $2,973,006
 $11,168
 1.51% $2,578,686
 $15,470
 2.43%
Securities purchased under resale agreements (“Resale agreements”) (2)
 882,142
 5,565
 2.54% 1,035,000
 7,846
 3.07%
AFS debt securities (3)(4)
 3,274,740
 20,142
 2.47% 2,642,299
 15,748
 2.42%
Loans (5)(6)
 35,153,968
 411,869
 4.71% 32,414,785
 423,534
 5.30%
Restricted equity securities 78,675
 446
 2.28% 74,234
 713
 3.90%
Total interest-earning assets $42,362,531
 $449,190
 4.26% $38,745,004
 $463,311
 4.85%
Noninterest-earning assets:            
Cash and due from banks 510,512
     468,159
    
Allowance for loan losses (492,297)     (314,446)    
Other assets 2,374,763
     1,839,687
    
Total assets $44,755,509
     $40,738,404
    
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Interest-bearing liabilities:            
Checking deposits $5,001,672
 $10,246
 0.82% $5,270,855
 $14,255
 1.10%
Money market deposits 9,013,381
 22,248
 0.99% 8,080,848
 30,234
 1.52%
Savings deposits 2,076,270
 1,817
 0.35% 2,091,406
 2,227
 0.43%
Time deposits 10,264,007
 42,092
 1.65% 9,408,897
 45,289
 1.95%
Federal funds purchased and other short-term borrowings 59,978
 556
 3.73% 60,442
 616
 4.13%
FHLB advances 693,357
 4,166
 2.42% 338,027
 2,979
 3.57%
Repurchase agreements (2)
 332,417
 3,991
 4.83% 50,000
 3,492
 28.32%
Long-term debt and finance lease liabilities 152,259
 1,367
 3.61% 152,360
 1,758
 4.68%
Total interest-bearing liabilities $27,593,341
 $86,483
 1.26% $25,452,835
 $100,850
 1.61%
Noninterest-bearing liabilities and stockholders’ equity:            
Demand deposits 11,117,710
     10,071,370
    
Accrued expenses and other liabilities 1,022,453
     676,898
    
Stockholders’ equity 5,022,005
     4,537,301
    
Total liabilities and stockholders’ equity $44,755,509
     $40,738,404
    
Interest rate spread     3.00%     3.24%
Net interest income and net interest margin   $362,707
 3.44%   $362,461
 3.79%
 
(1)Annualized.
(2)
Average balances of resale and repurchase agreements have been reported net, pursuant to Accounting Standards Codification (“ASC”) 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yields of gross resale agreements were 2.54% and 2.80% for the first quarters of 2020 and 2019, respectively. The weighted-average interest rates of gross repurchase agreements were 4.10% and 5.01% for the first quarters of 2020 and 2019, respectively.
(3)Yields on tax-exempt securities are not presented on a tax-equivalent basis.
(4)Includes the amortization of premiums on debt securities of $3.3 million and $3.0 million for the first quarters of 2020 and 2019, respectively.
(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 $8.0 million for both the first quarters of 2020 and 2019.


68



The following table summarizes the extent to which changes in (1) interest rates; and (2) 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 interest rates. Changes that are not solely due to either volume or rate are allocated proportionally based on the absolute value of the change related to average volume and average rate.
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020 vs. 20192020 vs. 2019
Total
Change		Changes Due toTotal
Change		Changes Due to
VolumeYield/RateVolumeYield/Rate
Interest-earning assets:
Interest-bearing cash and deposits with banks$(12,236) $2,882  $(15,118) $(16,538) $4,994  $(21,532) 
Resale agreements(1,890) 269  (2,159) (4,171) (826) (3,345) 
AFS debt securities5,319  6,642  (1,323) 9,713  10,702  (989) 
Loans(67,057) 49,689  (116,746) (78,722) 85,564  (164,286) 
Restricted equity securities(204) 15  (219) (471) 54  (525) 
Total interest and dividend income$(76,068) $59,497  $(135,565) $(90,189) $100,488  $(190,677) 
Interest-bearing liabilities:
Checking deposits$(10,432) $(1,479) $(8,953) $(14,441) $(2,146) $(12,295) 
Money market deposits(20,588) 5,958  (26,546) (28,574) 9,511  (38,085) 
Savings deposits(1,032) 50  (1,082) (1,442) 32  (1,474) 
Time deposits(19,513) (1,360) (18,153) (22,710) 2,859  (25,569) 
Short-term borrowings(96) 473  (569) (156) 956  (1,112) 
FHLB advances(668) 775  (1,443) 519  3,074  (2,555) 
Repurchase agreements71  5,491  (5,420) 570  11,069  (10,499) 
Long-term debt and finance lease liabilities(259) 2,033  (2,292) (650) 3,024  (3,674) 
Total interest expense$(52,517) $11,941  $(64,458) $(66,884) $28,379  $(95,263) 
Change in net interest income$(23,551) $47,556  $(71,107) $(23,305) $72,109  $(95,414) 
 
($ in thousands) Three Months Ended March 31,
 2020 vs. 2019
 
Total
Change
 Changes Due to
  Volume Yield/Rate
Interest-earning assets:      
Interest-bearing cash and deposits with banks $(4,302) $2,163
 $(6,465)
Resale agreements (2,281) (1,045) (1,236)
AFS debt securities 4,394
 4,002
 392
Loans (1)
 (11,665) 35,890
 (47,555)
Restricted equity securities (267) 42
 (309)
Total interest and dividend income $(14,121) $41,052
 $(55,173)
Interest-bearing liabilities:      
Checking deposits $(4,009) $(683) $(3,326)
Money market deposits (7,986) 3,277
 (11,263)
Savings deposits (410) (15) (395)
Time deposits (3,197) 4,052
 (7,249)
Federal funds purchased and other short-term borrowings (60) (4) (56)
FHLB advances 1,187
 2,395
 (1,208)
Repurchase agreements 499
 5,529
 (5,030)
Long-term debt (391) (1) (390)
Total interest expense $(14,367) $14,550
 $(28,917)
Change in net interest income $246
 $26,502
 $(26,256)
 

(1) Includes nonaccrual loans.

Noninterest Income

The following table presents the components of noninterest income for the second quarter and first quartershalf of 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
20202019% Change20202019% Change
Lending fees$21,946  $16,423  34 %$37,719  $31,392  20 %
Deposit account fees10,872  9,607  13 %21,319  19,075  12 %
Foreign exchange income4,562  7,286  (37)%12,381  12,301  1 %
Wealth management fees3,091  3,800  (19)%8,444  7,574  11 %
Interest rate contracts and other derivative income6,107  10,398  (41)%13,180  13,614  (3)%
Net gains on sales of loans132  15  780 %1,082  930  16 %
Gains on sales of AFS debt securities9,640  1,447  566 %11,169  3,008  271 %
Other investment income966  706  37 %2,887  1,908  51 %
Other income1,321  3,077  (57)%4,505  5,088  (11)%
Total noninterest income$58,637  $52,759  11 %$112,686  $94,890  19 %
74
 
($ in thousands) Three Months Ended March 31,
 2020 2019 % Change
Lending fees $15,773
 $14,969
 5%
Deposit account fees 10,447
 9,468
 10%
Foreign exchange income 7,819
 5,015
 56%
Wealth management fees 5,357
 3,812
 41%
Interest rate contracts and other derivative income 7,073
 3,216
 120%
Net gains on sales of loans 950
 915
 4%
Net gains on sales of AFS debt securities 1,529
 1,561
 (2%)
Other investment income 1,921
 1,202
 60%
Other income 3,180
 1,973
 61%
Total noninterest income $54,049
 $42,131
 28%
 


Noninterest income comprised 13%15% and 10%14% of total revenue for the second quarter and the first quartershalf of 2020, respectively, compared with 13% and 12% for the second quarter and the first half of 2019, respectively. FirstSecond quarter of 2020 noninterest income was $54.0$58.6 million, an increase of $11.9$5.9 million or 28%11%, compared with $42.1$52.8 million for the same period in 2019. This increase was primarily due to increases in gains on sale of AFS debt securities and lending fees, partially offset by decreases in interest rate contracts and other derivative income, foreign exchange income wealth managementand other income. First half 2020 noninterest income was $112.7 million, an increase of $17.8 million or 19%, compared with $94.9 million for the first half of 2019. This increase was primarily due to increases in gains on sale of AFS debt securities and lending fees, partially offset by decreases in other income and interest rate contracts and other derivative income. The following discussion provides the composition of the major changes in noninterest income.income:


Lending fees increased by $5.5 million or 34% to $21.9 million for the second quarter of 2020, and increased by $6.3 million or 20% to $37.7 million for the first half of 2020, as compared with the same periods in 2019. These increases primarily reflected an increase in the valuation of warrants received as part of lending relationships.

Foreign exchange income increaseddecreased by $2.8$2.7 million or 56% from37% to $4.6 million for the firstsecond quarter of 2019 to $7.82020, and was essentially flat at $12.4 million for the first half of 2020, as compared with the same periods in 2019. The decrease in the second quarter of 2020. The increase2020 was primarily driven by the favorableunfavorable revaluation of certain foreign currency-denominated balance sheet items partially offset by losses on foreign exchangeand a decrease in customer-driven transactions.

Wealth management fees increased by $1.5 million or 41% from the first quarter of 2019 to $5.4 million for the first quarter of 2020. The increase was driven by higher customer activity.

Interest rate contracts and other derivative income increased $3.9decreased $4.3 million or 120%41% to $7.1$6.1 million for the firstsecond quarter of 2020. This increase reflected strong customer demand for interest rate swaps in response2020, and decreased by $434 thousand or 3% to interest rate volatility, partially offset by a negative credit valuation adjustment related to interest rate derivative contracts, reflecting the year-over-year decline in long-term interest rates.

Other income increased by $1.2 million or 61% from the first quarter of 2019 to $3.2$13.2 million for the first half of 2020, as compared with the same periods in 2019. These decreases primarily reflected the impact of negative credit valuation adjustments due to higher loss probabilities for borrowers impacted by COVID-19.

Gains on sales of AFS debt securities increased by $8.2 million or 566% to $9.6 million for the second quarter of 2020, and increased by $8.2 million or 271% to $11.2 million for the first half of 2020, as compared with the same periods in 2019. These increases were primarily driven by $131.6 million in sales of municipal bonds during the second quarter of 2020. The increase was driven

Other income decreased by a gain$1.8 million or 57% to $1.3 million for the second quarter of 2020, and decreased by $583 thousand or 11% to $4.5 million for the first half of 2020, as compared with the same periods in 2019. These decreases primarily reflected losses recognized on the cash surrender value of bank ownedbank-owned life insurance policies.

Noninterest Expense

The following table presents the components of noninterest expense for the second quarters and first quartershalf of 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
20202019% Change20202019% Change
Compensation and employee benefits$96,955  $100,531  (4)%$198,915  $202,830  (2)%
Occupancy and equipment expense16,217  17,362  (7)%33,293  34,680  (4)%
Deposit insurance premiums and regulatory assessments3,700  2,919  27 %7,127  6,007  19 %
Legal expense1,530  2,355  (35)%4,727  4,580  3 %
Data processing4,480  3,460  29 %8,306  6,617  26 %
Consulting expense1,413  2,069  (32)%2,630  4,128  (36)%
Deposit related expense3,353  3,338  0 %6,916  6,842  1 %
Computer software expense7,301  6,211  18 %13,467  12,289  10 %
Other operating expense19,248  22,679  (15)%40,367  44,968  (10)%
Amortization of tax credit and other investments24,759  16,739  48 %42,084  41,644  1 %
Repurchase agreements’ extinguishment cost8,740  —  100 %8,740  —  100 %
Total noninterest expense$187,696  $177,663  6 %$366,572  $364,585  1 %
75

 
($ in thousands) Three Months Ended March 31,
 2020 2019 % Change
Compensation and employee benefits $101,960
 $102,299
 —%
Occupancy and equipment expense 17,076
 17,318
 (1%)
Deposit insurance premiums and regulatory assessments 3,427
 3,088
 11%
Legal expense 3,197
 2,225
 44%
Data processing 3,826
 3,157
 21%
Consulting expense 1,217
 2,059
 (41)%
Deposit related expense 3,563
 3,504
 2%
Computer software expense 6,166
 6,078
 1%
Other operating expense 21,119
 22,289
 (5)%
Amortization of tax credit and other investments 17,325
 24,905
 (30)%
Total noninterest expense $178,876
 $186,922
 (4)%
 

FirstSecond quarter 2020 noninterest expense was $178.9$187.7 million, a decreasean increase of $8.0$10.0 million or 4%6%, compared with $186.9$177.7 million for the same period in 2019. This decreaseincrease was primarily due to decreases inrepurchase agreements’ extinguishment cost and the amortization of tax credit and other investments, partially offset by decreases in compensation and employee benefits and other operating expense.expenses. First half 2020 noninterest expense was $366.6 million, an increase of $2.0 million or 1%, compared with $364.6 million for the first half of 2019. This increase was primarily due to repurchase agreements’ extinguishment cost and additional data processing expense, partially offset by decreases in other operating expenses and compensation and employee benefits.

Compensation and employee benefits decreased by $3.6 million or 4% to $97.0 million for the second quarter of 2020, and decreased by $3.9 million or 2% to $198.9 million for the first half of 2020, as compared with the same periods in 2019. These decreases were primarily driven by increased deferred loan costs as a result of increased loan originations and a reduction in bonus accruals, partially offset by annual merit increases and greater temporary staffing costs.

Data processing increased by $1.0 million or 29% to $4.5 million for the second quarter of 2020, and increased by $1.7 million or 26% to $8.3 million for the first half of 2020, as compared with the same periods in 2019. These increases were primarily driven by an increase in electronic data processing fees.

Other operating expense primarily consists of telecommunications and postage, loan related expenses, marketing, telecommunications and postage, travel, charitable contributions, marketing, travel, and other miscellaneous expense categories. The $1.2Other operating expense decreased by $3.4 million or 5% decrease15% to $21.1$19.2 million for the second quarter of 2020, and decreased by $4.6 million or 10% to $40.4 million for the first quarterhalf of 2020, wasas compared with the same periods in the 2019. These decreases were primarily driven by decreases in travel, marketing and other miscellaneous expense categories, largely due to decreases in marketing, other miscellaneous and travel expenses, partially offset by an increase in loan related expenses.

COVID-19.

Amortization of tax credit and other investments decreased $7.6increased $8.0 million or 30%48% to $17.3$24.8 million for the firstsecond quarter of 2020, compared with the firstsecond quarter of 2019, and increased by $440 thousand or 1% to $42.1 million for the first half of 2020, as compared with the same periods in 2019. These increases were mainly attributable to a reduction in value for investments accounted for under the equity method and an increase in amortization expense from tax credit investments placed in service in 2020, partially offset by a decrease in impairment charges. In the first quarter of 2019, the Company fully wrote off the tax credit investments related to DC Solar and recorded a $7.0 million impairment charge, which was included in Amortizationcharge. In the second quarter of 2019, the Company recorded $2.9 million of other-than-temporary impairment (“OTTI”) charges related to a historic tax credit investment and other investments. There was no sucha Community Reinvestment Act investment. In comparison, $624 thousand and $474 thousand of impairment charges net of recoveries were recorded in the current period.second quarter and first half of 2020, respectively.


During the second quarter of 2020, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million. No such expense was incurred in the second quarter and first half of 2019.

Income Taxes



($ in thousands)
Three Months Ended March 31,($ in thousands)Three Months Ended June 30,Six Months Ended June 30,

2020 2019 % Change20202019% Change20202019% Change
Income before income taxes
$164,010

$195,091

(16)%Income before income taxes$112,273  $223,177  (50)%$276,283  $418,268  (34)%
Income tax expense
$19,186

$31,067

(38%)Income tax expense$12,921  $72,797  (82 %)$32,107  $103,864  (69 %)
Effective tax rate
11.7%
15.9%


Effective tax rate11.5 %32.6 %(65 %)11.6 %24.8 %(53 %)





The income tax expense was $19.2$12.9 million and the effective tax rate was 11.7%11.5% in the firstsecond quarter of 2020, compared with an income tax expense of $31.1$72.8 million and an effective tax rate of 15.9%32.6% for the same period in 2019. The income tax expense was $32.1 million and the effective tax rate was 11.6% in the first half of 2020, compared with an income tax expense of $103.9 million and an effective tax rate of 24.8% for the same period in 2019. The higher effective tax rates of 32.6% and 24.8% during the second quarter and first half of 2019. A2019, respectively, were primarily due to $30.1 million of additional income tax expense recorded to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar. Excluding this $30.1 million of additional income tax expense, non-GAAP effective tax rates for the second quarter and first half of 2019 were 19.1% and 17.6%, respectively. For more details, see reconciliations of non-GAAP measures presented under Item 2. MD&A — Supplemental Information — Explanation of GAAP to Non-GAAP Financial Measures in this Form 10-Q.The year-over-year decrease in the effective tax rate was primarily due to the decreases in pre-tax income during the second quarter and first half of 2020, as compared with the same periods of 2019, combined with a year-over-year increase in tax credits recognized from investments in renewable energy and solar tax credit projects, and a decrease in income before income taxes contributed to the lower effective tax rate during the three months ended March 31, 2020.

Impact of Investment in DC Solar Tax Credit Funds

projects.
The Company invested in four solar energy tax credit funds in the years 2014, 2015, 2017 and 2018 as a limited member. These tax credit funds engaged in the acquisition and leasing of mobile solar generators through DC Solar entities. Investors in DC Solar funds, including the Company, received tax credits for making renewable energy investments. Between 2014 and 2018, the Company had claimed energy tax credits of approximately $53.9 million, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact of $48.2 million to the Consolidated Financial Statements. During the first quarter of 2019, the Company fully wrote off its tax credit investments related to DC Solar and recorded a $7.0 million other-than-temporary impairment (“OTTI”) charge within Amortization of tax credit and other investments on the Consolidated Statement of Income. The Company concluded at that time that there would be no material future cash flows related to these investments, in part because DC Solar has ceased operations and its bankruptcy case had been converted from Chapter 11 to Chapter 7 on March 22, 2019. During the second quarter of 2019, the Company concluded that a portion of the previously claimed tax credits would be recaptured, and reversed $33.6 million of the $53.9 million previously claimed tax credits, and $3.5 million out of the $5.7 million deferred tax liability, resulting in $30.1 million of additional tax expense. For additional information related to DC solar, refer to Note 8 — Investments in Qualified Affordable Housing Partnerships, Tax Credit and Other Investments, Net and Variable Interest Entities and Note 14 — Income Taxes to the Consolidated Financial Statements in the Company’s 2019 Form 10-K.
Tax Impact of CARES Act
76

On March 27, 2020, the President signed the CARES Act, a $2.2 trillion economic stimulus bill to help individuals and businesses that have been negatively impacted by the COVID-19 outbreak. Among other provisions, the CARES Act allows net operating losses, which were modified with the Tax Cuts and Jobs Act of 2017, to be carried back five years. It also modifies the useful lives of qualified leasehold improvements, relaxing the excess loss limitations on pass-through and increasing the interest expense limitation. The Company does not expect the CARES Act to have a material tax impact on the Company’s Consolidated Financial Statements.

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 15 — Business Segments to the Consolidated Financial Statements in this Form 10-Q.

Net interest income before provision for credit losses of each segment represents the difference between actual interest income earned on loans and interest expense paid on customer deposits of the segment, adjusted for funding charges for loans or funding credits for deposits through the Company’s internal funds transfer pricing (“FTP”) process. During the third quarter of 2019, the Company enhanced its FTP methodology related to deposits by setting a minimum floor rate for the FTP credits for deposits in consideration of the flattened and inverted yield curve. This methodology has been retrospectively applied to the segment financial results for the second quarter and first quarterhalf of 2019.



The following tables present the selected segment information for the second quarter and first quartershalf of 2020 and 2019:
($ in thousands)Three Months Ended June 30, 2020
Consumer and
Business
Banking		Commercial
Banking		OtherTotal
Net interest income before provision for credit losses$124,926  $183,796  $35,053  $343,775  
Provision for credit losses5,590  96,853  —  102,443  
Noninterest income13,943  33,887  10,807  58,637  
Noninterest expense80,164  64,900  42,632  187,696  
Segment income before income taxes53,115  55,930  3,228  112,273  
Segment net income$38,058  $40,178  $21,116  $99,352  
Average loans$12,011,203  $25,130,570  $—  $37,141,773  
Average deposits$27,004,689  $10,642,686  $2,253,153  $39,900,528  
($ in thousands)Three Months Ended June 30, 2019
Consumer and
Business
Banking		Commercial
Banking		OtherTotal
Net interest income before provision for credit losses$180,911  $158,941  $27,474  $367,326  
Provision for credit losses1,616  17,629  —  19,245  
Noninterest income14,503  33,656  4,600  52,759  
Noninterest expense83,656  67,303  26,704  177,663  
Segment income before income taxes110,142  107,665  5,370  223,177  
Segment net income (loss)$78,741  $76,885  $(5,246) $150,380  
Average loans$10,529,143  $22,452,231  $—  $32,981,374  
Average deposits$25,010,526  $8,350,204  $1,965,655  $35,326,385  

77

($ in thousands) Three Months Ended March 31, 2020($ in thousands)Six Months Ended June 30, 2020
Consumer
and
Business
Banking
 
Commercial
Banking
 Other TotalConsumer and
Business
Banking		Commercial
Banking		OtherTotal
Net interest income before provision for credit losses $152,591
 $183,501
 $26,615
 $362,707
Net interest income before provision for credit losses$277,517  $367,297  $61,668  $706,482  
Provision for credit losses 7,788
 66,082
 —
 73,870
Provision for credit losses13,378  162,935  —  176,313  
Noninterest income 16,402
 32,456
 5,191
 54,049
Noninterest income30,345  66,343  15,998  112,686  
Noninterest expense 86,964
 70,126
 21,786
 178,876
Noninterest expense167,128  135,026  64,418  366,572  
Segment income before income taxes 74,241
 79,749
 10,020
 164,010
Segment income before income taxes127,356  135,679  13,248  276,283  
Segment net income $53,195
 $57,131
 $34,498
 $144,824
Segment net income$91,253  $97,309  $55,614  $244,176  
Average loans $11,269,489
 $23,884,479
 $—
 $35,153,968
Average loans$11,640,346  $24,507,525  $—  $36,147,871  
Average deposits $25,593,064
 $9,175,430
 $2,704,546
 $37,473,040
Average deposits$26,298,876  $9,909,058  $2,478,850  $38,686,784  

($ in thousands) Three Months Ended March 31, 2019($ in thousands)Six Months Ended June 30, 2019
Consumer
and
Business
Banking
 
Commercial
Banking
 Other TotalConsumer and
Business
Banking		Commercial
Banking		OtherTotal
Net interest income before provision for credit losses $185,059
 $152,708
 $24,694
 $362,461
Net interest income before provision for credit losses$365,970  $311,649  $52,168  $729,787  
Provision for credit losses 3,013
 19,566
 —
 22,579
Provision for credit losses4,629  37,195  —  41,824  
Noninterest income 13,772
 24,544
 3,815
 42,131
Noninterest income28,275  58,200  8,415  94,890  
Noninterest expense 87,906
 70,544
 28,472
 186,922
Noninterest expense171,562  137,847  55,176  364,585  
Segment income before income taxes 107,912
 87,142
 37
 195,091
Segment income before income taxes218,054  194,807  5,407  418,268  
Segment net income $77,146
 $62,334
 $24,544
 $164,024
Segment net income$155,887  $139,219  $19,298  $314,404  
Average loans $10,351,770
 $22,063,015
 $—
 $32,414,785
Average loans$10,440,946  $22,258,698  $—  $32,699,644  
Average deposits $25,048,532
 $8,020,698
 $1,854,146
 $34,923,376
Average deposits$25,029,425  $8,186,361  $1,910,208  $35,125,994  

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 through the Company’s branch network. Other products and services provided by this segment include wealth management, treasury management and foreign exchange services.

FirstThe Consumer and Business Banking segment reported net income of $38.1 million for the second quarter of 2020, compared with $78.7 million for the same period in 2019. The decrease in segment net income of $40.6 million or 52% was primarily due to a decrease in net interest income before provision for credit losses.

Second quarter 2020 net interest income before provision for credit losses for this segment was $152.6$124.9 million, a decrease of $32.5$56.0 million or 18%31%, compared with $185.1$180.9 million for the same period in 2019. Year-over-year, interestInterest income earned on loans increaseddecreased by 1%3%, driven by average loan growth that was nearly entirely offset by a decrease in average loan yields;yields, partially offset by average loan growth; interest expense paid on deposits decreased by 19%52%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the loans FTP rate, and FTP credits received for deposits also decreased, reflecting a decline in the deposits FTP rate. Combined, these factors contributed to a 31% decrease in segment net interest income before provision for credit losses, with the largest driver of the unfavorable result being lower FTP credits received for deposits.

Second quarter 2020 average loans for this segment were $12.01 billion, an increase of $1.48 billion or 14% from $10.53 billion for the same period in 2019, primarily driven by an increase in single-family residential portfolio. Second quarter 2020 average deposits for this segment were $27.00 billion, an increase of $1.99 billion or 8% from $25.01 billion for the same period in 2019, primarily driven by increases in noninterest-bearing demand and money market deposits.

The Consumer and Business Banking segment reported net income of $91.3 million for the first half of 2020, compared with $155.9 million for the same period in 2019. The decrease in segment net income of $64.6 million or 41% was primarily due to a decrease in net interest income before provision for credit losses.

78

First half 2020 net interest income before provision for credit losses for this segment was $277.5 million, a decrease of $88.5 million or 24%, compared with $366.0 million for the same period in 2019. Interest income earned on loans remained relatively flat; interest expense paid on deposits decreased by 36%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the loans FTP rate, and FTP credits received for deposits also decreased, reflecting a decline in the deposits FTP rate. Combined, these factors drove the 18% year-over-yeara 24% decrease in segment net interest income before provision for credit losses, with the largest driver of the negative varianceunfavorable result being lower FTP credits received for deposits.

AverageFirst half 2020 average loans for this segment were $11.27$11.64 billion, an increase of $917.7 million$1.20 billion or 9%11% from $10.35$10.44 billion for the same period in 2019, primarily driven by an increase in single-family residential loans. Averageportfolio. First half 2020 average deposits for this segment were $25.59$26.30 billion, essentially flat compared with average depositsan increase of $25.05$1.27 billion or 5% from $25.03 billion for the same period in 2019.2019, primarily driven by increases in noninterest-bearing demand and money market deposits.



Commercial Banking

The Commercial Banking segment primarily generates commercial loans and deposits. Commercial loan products include commercial business loans and lines of credit, trade finance loans and letters of credit, CRE loans, construction and land lending, affordable housing loans and letters of credit, asset-based lending, and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity risk hedging.

The Commercial Banking segment reported segment net income of $57.1$40.2 million for the firstsecond quarter of 2020, compared with $62.3$76.9 million for the same period in 2019. The $5.2 million or 8% decrease in segment net income of $36.7 million or 48% reflected an increase in provision for credit losses, partially offset by an increase in net interest income before provision for credit losses. Second quarter 2020 provision for credit losses was $96.9 million, an increase of $79.3 million or 449%, compared with $17.6 million for the same period in 2019. This increase was primarily due to deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, as well as due to loan risk rating downgrades.

Second quarter 2020 net interest income before provision for credit losses for this segment was $183.8 million, an increase of $24.9 million or 16% compared with $158.9 million for the same period in 2019. Interest income earned on loans decreased by 21%, driven by a decrease in average loan yields, which more than offset the income growth driven by the average loan growth; interest expense paid on deposits decreased by 46%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the FTP rate on loans, and FTP credits received for deposits also decreased, reflecting a decline in the FTP rate on deposits. Combined, these factors contributed to an increase of 16% in segment net interest income before provision for credit losses, which were primarily driven by lower FTP funding charges assessed for loans.

Second quarter 2020 average loans for this segment were $25.13 billion, an increase of $2.68 billion or 12% from $22.45 billion for the same period in 2019, primarily driven by the growth in CRE and C&I loan portfolios. Second quarter 2020 average deposits were $10.64 billion, an increase of $2.29 billion or 27% from $8.35 billion for the same period in 2019, primarily driven by an increase in noninterest-bearing demand deposits.

The Commercial Banking segment reported segment net income of $97.3 million for the first half of 2020, compared with $139.2 million for the same period in 2019. The decrease in segment net income of $41.9 million or 30% reflected an increase in provision for credit losses, partially offset by increases in net interest income before provision for credit losses and noninterest income. First quarterhalf 2020 provision for credit losses was $66.1$162.9 million, an increase of $46.5$125.7 million or 238%338%, compared with $19.6$37.2 million for the same period in 2019. This increase was primarily due to the deterioration indeteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, during the first quarter of 2020.as well as due to loan risk rating downgrades.

Net
79

First half 2020 net interest income before provision for credit losses for this segment was $183.5$367.3 million, an increase of $30.8$55.7 million or 20%18% compared with $152.7$311.6 million for the same period in 2019. Year-over-year, interestInterest income earned on loans decreased by 5% 13%, driven bywhich was primarily attributable to a decrease in average loan yields, which more than offset income growth fromdriven by average loan growth; interest expense paid on deposits decreased by 14% 31%, driven by a decline in the average cost of deposits; FTP funding charges assessed for loans decreased, reflecting a decline in the loans FTP rate andon loans; FTP credits received for deposits also decreased, reflecting a decline in the deposits FTP rate.rate on deposits. Combined, these factors drove the 20% year-over-yearan increase of 18% in segment net interest income before provision for credit losses, with the largest driver of the positive variance beingwhich were primarily driven by lower FTP funding charges assessed for loans.

Average loans for this segment were $23.88 billion, an increase of $1.82 billion or 8% from $22.06 billion for the same period in 2019, primarily driven by growth in CRE loans. Average deposits for this segment were $9.18 billion, an increase of $1.16 billion or 14% from $8.02 billion for the same period in 2019, primarily driven by growth in time deposits and noninterest-bearing demand deposits.

First quarterhalf 2020 noninterest income was $32.5$66.3 million, an increase of $8.0$8.1 million or 32%14%, compared with $24.5$58.2 million for the same period in 2019. This increase was mainly attributable to increases in interest rate contracts and other derivative income and foreign exchange income. Thean increase in interest rate contracts and other derivative income was driven by strong customer demandthe valuation of warrants received as part of lending relationships.

First half 2020 average loans for interest rate swapsthis segment were $24.51 billion, an increase of $2.25 billion or 10% from $22.26 billion for the same period in response to manage risk associated with increased interest rate volatility, partially offset by a negative credit valuation adjustment of related derivative products. The increase in foreign exchange income was2019, primarily driven by favorable revaluationthe growth in CRE and C&I loan portfolios. First half 2020 average deposits for this segment were $9.91 billion, an increase of certain foreign currency-denominated balance sheet items$1.72 billion or 21% from $8.19 billion for the same period in 2019, primarily driven by increases in noninterest-bearing demand and an increased volume of foreign exchange transactions.

time deposits.
Other
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 Other segment reported segment income before income taxes of $10.0$3.2 million and segment net income of $34.5$21.1 million for the firstsecond quarter of 2020, reflecting an income tax benefit of $24.5$17.9 million. In comparison, the Other segment reported segment income before income taxes of $5.4 million and segment net loss of $5.2 million for the second quarter of 2019, reflecting an income tax expense of $10.6 million.

The decrease in second quarter 2020 segment income before income taxes was primarily driven by an increase in noninterest expense, partially offset by increases in net interest income before provision for credit losses and noninterest income. Noninterest expense was $42.6 million, an increase of $15.9 million or 60%, compared with $26.7 million for the same period in 2019. The increase was mainly attributable to a reduction in value for investments accounted for under the equity method and an increase in amortization expense from tax credit investments placed in service in 2020. In addition, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million during the second quarter of 2020. Second quarter 2020 net interest income before provision for credit losses was $35.1 million, an increase of $7.6 million or 28%, compared with $27.5 million for the same period in 2019. The increase mainly reflected a 67% decrease in interest expense paid on deposits, driven by a decline in average cost of deposits and an increase in FTP net spread. FTP net spread is the difference between the total internal FTP charges and credits and is recorded as part of net interest income in the Other segment. The favorable impact on net interest income before provision for credit losses was partially offset by a decrease in interest income on investment. Second quarter 2020 noninterest income was $10.8 million, an increase of $6.2 million or 135%, compared with $4.6 million for the same period in 2019, driven by an increase in gains on sales of municipal bonds during the second quarter of 2020.

The Other segment reported segment income before income taxes of $37 thousand$13.2 million and segment net income of $24.5$55.6 million for the first quarterhalf of 2020, reflecting an income tax benefit of $42.4 million. In comparison, the Other segment reported segment income before income taxes of $5.4 million and segment net income of $19.3 million for the first half of 2019, reflecting an income tax benefit of $24.5$13.9 million.

The increase in segment income before income taxes was primarily driven by a decreaseincreases in net interest income before provision for credit losses and noninterest income, partially offset by an increase in noninterest expense. First quarterhalf 2020 net interest income before provision for credit losses was $61.7 million, an increase of 2020 noninterest expense was $21.8 million, a decrease of $6.7$9.5 million or 23%18%, compared with $28.5$52.2 million for the same period in 2019. The increase reflected a 42% decrease in interest expense paid on deposits, driven by a decline in the average cost of deposits and an increase in FTP net spread. The favorable impact on net interest income before provision for credit losses was partially offset by a decrease in interest income on investments. First half 2020 noninterest income was $16.0 million, an increase of $7.6 million or 90%, compared with $8.4 million for the same period in 2019, primarily driven by the aforementioned sales of municipal bonds during the second quarter of 2020. First half 2020 noninterest expense was $64.4 million, an increase of $9.2 million or 17%, compared with $55.2 million for the same period in 2019. The increase was primarily due to a decrease in amortizationthe aforementioned debt extinguishment cost of tax credit and other investments, which was elevated by a nonrecurring pre-tax impairment charge of $7.0$8.7 million related to DC Solar during the firstsecond quarter of 2019.2020.

80

The income tax expense or benefit in the Other segment consists of the remaining unallocated income tax expense or benefit after allocating income tax expense to the two core segments. Income tax expense is allocated to the Consumer and Business Banking and the Commercial Banking segments by applying statutory income tax rates to the segment income before income taxes.


73


Balance Sheet Analysis

The following table presents a discussion of the significant changes between March 31,June 30, 2020 and December 31, 2019:

Selected Consolidated Balance Sheet Data
($ in thousands)June 30, 2020December 31, 2019Change
$%
(Unaudited)
ASSETS
Cash and cash equivalents$4,533,502  $3,261,149  $1,272,353  39 %
Interest-bearing deposits with banks531,591  196,161  335,430  171 %
Resale agreements1,260,000  860,000  400,000  47 %
AFS debt securities, at fair value (amortized cost of $3,823,714 in 2020)3,884,574  3,317,214  567,360  17 %
Restricted equity securities, at cost78,963  78,580  383  0 %
Loans held-for-sale3,875  434  3,441  793 %
Loans held-for-investment (net of allowance for loan losses of $632,071 in 2020 and $358,287 in 2019)36,597,341  34,420,252  2,177,089  6 %
Investments in qualified affordable housing partnerships, net201,888  207,037  (5,149) (2)%
Investments in tax credit and other investments, net251,318  254,140  (2,822) (1)%
Premises and equipment, net110,709  118,364  (7,655) (6)%
Goodwill465,697  465,697  —  — %
Operating lease right-of-use assets94,898  99,973  (5,075) (5)%
Other assets1,393,237  917,095  476,142  52 %
TOTAL$49,407,593  $44,196,096  $5,211,497  12 %
LIABILITIES
Noninterest-bearing$13,940,420  $11,080,036  $2,860,384  26 %
Interest-bearing26,732,258  26,244,223  488,035  2 %
Total deposits40,672,678  37,324,259  3,348,419  9 %
Short-term borrowings252,851  28,669  224,182  782 %
FHLB advances656,759  745,915  (89,156) (12)%
Repurchase agreements300,000  200,000  100,000  50 %
Long-term debt and finance lease liabilities (1)
1,580,442  152,270  1,428,172  938 %
Operating lease liabilities102,708  108,083  (5,375) (5)%
Accrued expenses and other liabilities854,912  619,283  235,629  38 %
Total liabilities44,420,350  39,178,479  5,241,871  13 %
STOCKHOLDERS’ EQUITY4,987,243  5,017,617  (30,374) (1)%
TOTAL$49,407,593  $44,196,096  $5,211,497  12 %
 
($ in thousands) March 31, 2020 December 31, 2019 Change
   $ %
  (Unaudited)      
ASSETS        
Cash and cash equivalents $3,080,042
 $3,261,149
 $(181,107) (6)%
Interest-bearing deposits with banks 293,509
 196,161
 97,348
 50 %
Resale agreements 860,000
 860,000
 —
 —%
AFS debt securities, at fair value (amortized cost of $3,660,413 in 2020) 3,695,943
 3,317,214
 378,729
 11 %
Restricted equity securities, at cost 78,745
 78,580
 165
 0%
Loans held-for-sale 1,594
 434
 1,160
 267%
Loans held-for-investment (net of allowance for loan losses of $557,003 in 2020 and $358,287 in 2019) 35,336,390
 34,420,252
 916,138
 3%
Investments in qualified affordable housing partnerships, net 198,653
 207,037
 (8,384) (4)%
Investments in tax credit and other investments, net 268,330
 254,140
 14,190
 6 %
Premises and equipment 115,393
 118,364
 (2,971) (3)%
Goodwill 465,697
 465,697
 —
 —%
Operating lease right-of-use assets 101,381
 99,973
 1,408
 1%
Other assets 1,452,868
 917,095
 535,773
 58%
TOTAL $45,948,545
 $44,196,096
 $1,752,449
 4%
LIABILITIES        
Noninterest-bearing $11,833,397
 $11,080,036
 $753,361
 7 %
Interest-bearing 26,853,561
 26,244,223
 609,338
 2%
Total deposits 38,686,958
 37,324,259
 1,362,699
 4%
Short-term borrowings 66,924
 28,669
 38,255
 133 %
FHLB advances 646,336
 745,915
 (99,579) (13)%
Repurchase agreements 450,000
 200,000
 250,000
 125%
Long-term debt and finance lease liabilities 152,162
 152,270
 (108) (0)%
Operating lease liabilities 109,356
 108,083
 1,273
 1%
Accrued expenses and other liabilities 933,824
 619,283
 314,541
 51%
Total liabilities 41,045,560
 39,178,479
 1,867,081
 5%
STOCKHOLDERS’ EQUITY 4,902,985
 5,017,617
 (114,632) (2)%
TOTAL $45,948,545
 $44,196,096
 $1,752,449
 4%
 
(1)Includes $1.43 billion of advances from the Federal Reserve’s PPPLF.

As of March 31,June 30, 2020, total assets were $45.95$49.41 billion, an increase of $1.75$5.21 billion or 4%12% from December 31, 2019, primarily due toto loan growth and an increaseincreases in cash equivalents, AFS debt securities.securities, resale agreements and interest-bearing deposits with banks. The loan growth wascame from each of the Company’s major loan portfolios, with the strongest growth from C&I, driven by strong increases in C&I,PPP loan growth. CRE as well asand single-family residential loans.loans contributed to the growth as well. The increase in cash and cash equivalents was primarily driven by deposit growth and advances from PPPLF.

81

As of March 31,June 30, 2020, total liabilities were $41.05$44.42 billion, an increase of $1.87$5.24 billion or 5%13% from December 31, 2019, primarily due to an increases in deposits and long-term debt. The increase in deposits which was largely driven by increases in noninterest-bearing demand and money market accounts.accounts, partially offset by a decrease in time deposits. Deposit growth was attributable to strong growth from consumer and small business commercial customers, as well as to PPP funds held in deposit accounts, partially offset by intentional run-off of higher-cost balances. The increase in long-term debt was primarily driven by advances from PPPLF.

As of March 31,June 30, 2020, total stockholders’ equity was $4.90$4.99 billion, a decrease of $114.6$30.4 million or 2%1% from December 31, 2019. This decrease was primarily driven by stock repurchase transactions, cash dividends declared on common stock and a cumulative-effect adjustment to retained earnings due to the adoption of ASU 2016-13, partially offset by first quarter ofhalf 2020 net income.


74


Debt Securities

The Company maintains a debt securities portfolio that consists of high quality and liquid securities with relatively short durations to minimize overall interest rate and liquidity risks. The Company’s AFS 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.


Available-for-Sale Debt Securities

As of March 31,June 30, 2020 and December 31, 2019, the Company’s AFS debt securities portfolio primarily consisted of mortgage-backed securities and debt securities issued by U.S. government agency and U.S. government-sponsored enterprises, foreign bonds, collateralized loan obligations (“CLOs”), andnon-agency mortgage-backed securities, U.S. Treasury securities.securities, municipal securities, and foreign bonds. Debt securities classified as AFS are carried at their fair value with the corresponding changes in fair value recorded in Accumulated other comprehensive loss, net of tax, as a component of Stockholders’ equity on the Consolidated Balance Sheet.

The following table presents the amortized cost and fair value of AFS debt securities by major categories as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
AFS debt securities:
U.S. Treasury securities$250,494  $251,201  $177,215  $176,422  
U.S. government agency and U.S. government-sponsored enterprise debt securities433,923  442,644  584,275  581,245  
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities2,074,538  2,139,335  1,598,261  1,607,368  
Municipal securities208,333  215,184  101,621  102,302  
Non-agency mortgage-backed securities261,870  265,706  133,439  135,098  
Corporate debt securities31,254  30,826  11,250  11,149  
Foreign bonds (1)
204,540  204,080  354,481  354,172  
Asset-backed securities64,762  61,619  66,106  64,752  
CLOs294,000  273,979  294,000  284,706  
Total AFS debt securities$3,823,714  $3,884,574  $3,320,648  $3,317,214  
 
($ in thousands) March 31, 2020 December 31, 2019
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
AFS debt securities:        
U.S. Treasury securities $50,606
 $51,428
 $177,215
 $176,422
U.S. government agency and U.S. government-sponsored enterprise debt securities 511,176
 518,408
 584,275
 581,245
U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities 1,993,653
 2,050,315
 1,598,261
 1,607,368
Municipal securities 300,551
 309,626
 101,621
 102,302
Non-agency mortgage-backed securities 149,955
 149,248
 133,439
 135,098
Corporate debt securities 11,250
 10,963
 11,250
 11,149
Foreign bonds (1)
 283,822
 284,521
 354,481
 354,172
Asset-backed securities 65,400
 61,556
 66,106
 64,752
CLOs 294,000
 259,878
 294,000
 284,706
Total AFS debt securities $3,660,413
 $3,695,943
 $3,320,648
 $3,317,214
 
(1)There were no securities of a single non-governmental agency issuer that exceeded 10% of stockholder’s equity as of both March 31,June 30, 2020 and December 31, 2019.

82

The fair value of AFS debt securities totaled $3.70$3.88 billion as of March 31,June 30, 2020, compared with $3.32 billion as of December 31, 2019. The $378.7$567.4 million or 11%17% increase was primarily attributable to the purchases of U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, municipal securities, U.S. Treasury securities, and municipalnon-agency mortgage-backed securities; partially offset by the sales, repayments, calls, and maturities of U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, U.S. government agency and U.S. government-sponsored enterprise debt securities, foreign bonds, municipal securities and U.S treasuryTreasury securities.

The Company’s debt securities portfolio had an effective duration of 2.72.6 years as of March 31,June 30, 2020 which shortened from 3.1 years as of December 31, 2019, primarily due to thea decline in interest rates. In addition, the spread between central government-guaranteed securities and private issuers widened, as relatively higher risk premiums were paid for securities issued by private entities. As of March 31,June 30, 2020 and December 31, 2019, 96%94% and 97%, respectively, of the carrying value of the Company’s debt securities portfolio was rated “AA-” or “Aa3” or higher by nationally recognized credit rating agencies. Credit ratings of BBB- or higher by Standard and Poor’s (“S&P”) and Fitch Ratings (“Fitch”), or Baa3 or higher by Moody’s Investors Service (“Moody’s”), are considered investment grade.



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 income (loss) on the Consolidated Statement of Comprehensive Income. If a credit loss exists, the Company records impairment related to credit losses through allowance for credit losses with a corresponding Provision for credit losses on the Consolidated Statement of Income. Pre-tax net unrealized gains on AFS debt securities were $35.5$60.9 million as of March 31,June 30, 2020, which improved from net unrealized losses of $3.4 million as of December 31, 2019. This change was primarily due to the decrease in interest rates during the period, partially offset by increased spreads.

Gross unrealized losses on AFS debt securities totaled $48.8$29.7 million as of March 31,June 30, 2020, compared with $23.2 million as of December 31, 2019. Of the securities with gross unrealized losses, substantially all were rated investment grade as of both March 31,June 30, 2020 and December 31, 2019, as classified primarily based upon the lowest of the credit ratings issued by S&P, Moody’s, or Fitch. The Company believes that the gross unrealized losses were due to non-credit related factors and the gross unrealized losses across all major security types were primarily attributable to widened spreads arising from the negative outlook and uncertainty as a result of the COVID-19 pandemic, and yield curve movement. The Company believes that the credit support levels of the AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received, even if the credit performance deteriorates from the impact of the COVID-19 pandemic. The debt securities issued by the U.S. Treasury and U.S. government agencies are backed by the full faith and credit of the U.S. government, and the U.S. government-sponsored debt securities have the implicit guarantee of the U.S. government. Further, the Company’s portfolio of debt securities issued by supranational organizations are AAA-rated and have strong financial profiles. Based on current assessments and economic outcome expectations, the Company believes that the private entity issuers of CLOs, corporate bonds and asset-backed securities continue to have strong credit profiles or have issued securities with strong credit profiles, and that the securities issued by municipalities continue to have strong credit profiles.

As of March 31,June 30, 2020, the Company had no intention to sell securities with unrealized losses and believed it is more-likely-than-not that it would not be required to sell such securities before recovery of their amortized cost.costs. The Company assesses individual securities for credit losses for each reporting period. There were no credit losses recognized in earnings for the second quarter and first quarterhalf of 2020, and no OTTI credit losses recognized in earnings for the first quartersame periods of 2019. For additional information of the Company’s accounting policies, valuation and composition, see 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.


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The following table presents the weighted-average yields and contractual maturity distribution, excluding periodic principal payments, of the Company’s debt securities as of March 31,June 30, 2020 and December 31, 2019. Actual maturities of mortgage-backed securities can differ from contractual maturities as the borrowers have the right to prepay obligations with or without prepayment penalties. In addition, factors such as prepayments and interest rates may affect the yields on the carrying values of mortgage-backed securities.
($ in thousands)June 30, 2020December 31, 2019
Amortized
Cost		Fair
Value
Yield (1)
Amortized
Cost		Fair
Value
Yield (1)
AFS debt securities:
U.S. Treasury securities:
Maturing in one year or less$199,985  $199,986  0.13 %$—  $—  — %
Maturing after one year through five years50,509  51,215  1.26 %177,215  176,422  1.33 %
Total250,494  251,201  0.36 %177,215  176,422  1.33 %
U.S. government agency and U.S. government- sponsored enterprise debt securities:
Maturing in one year or less204,966  205,571  2.52 %328,628  326,341  2.62 %
Maturing after one year through five years157,963  162,504  2.69 %158,490  156,431  2.69 %
Maturing after five years through ten years27,450  28,905  2.51 %44,908  45,189  2.38 %
Maturing after ten years43,544  45,664  2.75 %52,249  53,284  2.78 %
Total433,923  442,644  2.61 %584,275  581,245  2.63 %
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:
Maturing in one year or less—  —  — %112  113  2.72 %
Maturing after one year through five years22,326  23,271  2.60 %23,144  23,289  2.29 %
Maturing after five years through ten years139,193  146,545  2.38 %85,970  88,261  2.72 %
Maturing after ten years1,913,019  1,969,519  2.47 %1,489,035  1,495,705  2.66 %
Total2,074,538  2,139,335  2.47 %1,598,261  1,607,368  2.66 %
Municipal securities (2):
Maturing in one year or less43,330  43,586  2.72 %37,136  37,291  2.67 %
Maturing after one year through five years15,549  15,888  2.50 %18,699  18,948  2.52 %
Maturing after five years through ten years69,112  72,240  2.83 %12,151  12,451  3.15 %
Maturing after ten years80,342  83,470  3.26 %33,635  33,612  2.63 %
Total208,333  215,184  2.95 %101,621  102,302  2.69 %
Non-agency mortgage-backed securities:
Maturing in one year or less7,920  7,889  2.08 %—  —  — %
Maturing after one year through five years—  —  — %7,920  7,914  3.78 %
Maturing after five years through ten years32,064  31,988  2.99 %—  —  — %
Maturing after ten years221,886  225,829  2.98 %125,519  127,184  3.21 %
Total261,870  265,706  2.95 %133,439  135,098  3.24 %
Corporate debt securities:
Maturing in one year or less1,250  1,251  4.53 %1,250  1,262  5.20 %
Maturing after one year through five years20,000  19,523  4.69 %10,000  9,887  4.00 %
Maturing after five years through ten years10,004  10,052  5.23 %—  —  — %
Total31,254  30,826  4.85 %11,250  11,149  4.13 %
Foreign bonds:
Maturing in one year or less104,484  104,586  1.90 %354,481  354,172  2.22 %
Maturing after one year through five years100,056  99,494  2.11 %—  —  — %
Total204,540  204,080  2.00 %354,481  354,172  2.22 %
Asset-backed securities:
Maturing after ten years64,762  61,619  1.03 %66,106  64,752  2.65 %
CLOs:
Maturing after ten years294,000  273,979  3.07 %294,000  284,706  3.08 %
Total AFS debt securities$3,823,714  $3,884,574  2.42 %$3,320,648  $3,317,214  2.60 %
Total aggregated by maturities:
Maturing in one year or less$561,935  $562,869  1.57 %$721,607  $719,179  2.43 %
Maturing after one year through five years366,403  371,895  2.43 %395,468  392,891  2.11 %
Maturing after five years through ten years277,823  289,730  2.68 %143,029  145,901  2.65 %
Maturing after ten years2,617,553  2,660,080  2.58 %2,060,544  2,059,243  2.76 %
Total AFS debt securities$3,823,714  $3,884,574  2.42 %$3,320,648  $3,317,214  2.60 %
(1)Weighted-average yields are computed based on amortized cost balances.
(2)Yields on tax-exempt securities are not presented on a tax-equivalent basis.

84
 
($ in thousands) March 31, 2020 December 31, 2019
 Amortized
Cost		 
Fair
Value
 
Yield (1)
 Amortized
Cost		 
Fair
Value
 
Yield (1)
AFS debt securities:            
U.S. Treasury securities:            
Maturing after one year through five years $50,606
 $51,428
 1.26% $177,215
 $176,422
 1.33%
U.S. government agency and U.S. government- sponsored enterprise debt securities:            
Maturing in one year or less 288,314
 289,634
 2.86% 328,628
 326,341
 2.62%
Maturing after one year through five years 161,997
 165,790
 2.69% 158,490
 156,431
 2.69%
Maturing after five years through ten years 27,469
 28,310
 2.51% 44,908
 45,189
 2.38%
Maturing after ten years 33,396
 34,674
 2.87% 52,249
 53,284
 2.78%
Total 511,176
 518,408
 2.79% 584,275
 581,245
 2.63%
U.S. government agency and U.S. government- sponsored enterprise mortgage-backed securities:            
Maturing in one year or less 67
 67
 2.65% 112
 113
 2.72%
Maturing after one year through five years 21,784
 22,664
 2.57% 23,144
 23,289
 2.29%
Maturing after five years through ten years 100,151
 104,356
 2.70% 85,970
 88,261
 2.72%
Maturing after ten years 1,871,651
 1,923,228
 2.57% 1,489,035
 1,495,705
 2.66%
Total 1,993,653
 2,050,315
 2.58% 1,598,261
 1,607,368
 2.66%
Municipal securities (2):
            
Maturing in one year or less 61,375
 61,670
 2.74% 37,136
 37,291
 2.67%
Maturing after one year through five years 15,569
 15,803
 2.50% 18,699
 18,948
 2.52%
Maturing after five years through ten years 112,946
 119,391
 2.87% 12,151
 12,451
 3.15%
Maturing after ten years 110,661
 112,762
 3.44% 33,635
 33,612
 2.63%
Total 300,551
 309,626
 3.04% 101,621
 102,302
 2.69%
Non-agency mortgage-backed securities:            
Maturing in one year or less 7,920
 7,859
 2.82% —
 —
 —%
Maturing after one year through five years —
 —
 —% 7,920
 7,914
 3.78%
Maturing after ten years 142,035
 141,389
 3.13% 125,519
 127,184
 3.21%
Total 149,955
 149,248
 3.11% 133,439
 135,098
 3.24%
Corporate debt securities:            
Maturing in one year or less 1,250
 1,250
 5.01% 1,250
 1,262
 5.20%
Maturing after one year through five years 10,000
 9,713
 4.00% 10,000
 9,887
 4.00%
Total 11,250
 10,963
 4.11% 11,250
 11,149
 4.13%
Foreign bonds:            
Maturing in one year or less 229,466
 229,981
 2.04% 354,481
 354,172
 2.22%
Maturing after one year through five years 54,356
 54,540
 2.29% —
 —
 —%
Total 283,822
 284,521
 2.08% 354,481
 354,172
 2.22%
Asset-backed securities:            
Maturing after ten years 65,400
 61,556
 2.16% 66,106
 64,752
 2.65%
CLOs:            
Maturing after ten years 294,000
 259,878
 3.07% 294,000
 284,706
 3.08%
Total AFS debt securities $3,660,413
 $3,695,943
 2.65% $3,320,648
 $3,317,214
 2.60%
             
Total aggregated by maturities:            
Maturing in one year or less $588,392
 $590,461
 2.53% $721,607
 $719,179
 2.43%
Maturing after one year through five years 314,312
 319,938
 2.42% 395,468
 392,891
 2.11%
Maturing after five years through ten years 240,566
 252,057
 2.76% 143,029
 145,901
 2.65%
Maturing after ten years 2,517,143
 2,533,487
 2.69% 2,060,544
 2,059,243
 2.76%
Total AFS debt securities $3,660,413
 $3,695,943
 2.65% $3,320,648
 $3,317,214
 2.60%
 
(1)Weighted-average yields are computed based on amortized cost balances.
(2)Yields on tax-exempt securities are not presented on a tax-equivalent basis.


77



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, and 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, including loans held-for-sale, were $35.34$36.60 billion as of March 31,June 30, 2020, an increase of $917.3 million$2.18 billion or 3%6% from $34.42 billion as of December 31, 2019. This was primarily driven by increases of $439.8 million$1.27 billion or 4%10% in C&I loans $403.8driven by PPP loan growth, $623.7 million or 4%6% in CRE loans and $296.3$554.9 million or 4%8% in single-family residential loans. The composition of the loan portfolio as of March 31,June 30, 2020 was similar to the composition as of December 31, 2019.

The following table presents the composition of the Company’s total loan portfolio by loan type as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Amount (1)
%
Amount (1)
%
Commercial:
C&I (2)
$13,422,691  36 %$12,150,931  35 %
CRE:
CRE10,902,114  29 %10,278,448  30 %
Multifamily residential3,032,385  8 %2,856,374  8 %
Construction and land567,716  2 %628,499  2 %
Total CRE14,502,215  39 %13,763,321  40 %
Total commercial27,924,906  75 %25,914,252  75 %
Consumer:
Residential mortgage:
Single-family residential7,660,094  21 %7,108,590  20 %
HELOCs1,461,951  4 %1,472,783  4 %
Total residential mortgage9,122,045  25 %8,581,373  24 %
Other consumer182,461  0 %282,914  1 %
Total consumer9,304,506  25 %8,864,287  25 %
Total loans held-for-investment37,229,412  100 %34,778,539  100 %
Allowance for loan losses(632,071) (358,287) 
Loans held-for-sale (3)
3,875  434  
Total loans, net$36,601,216  $34,420,686  
(1)On January 1, 2020, the Company adopted ASU 2016-13. Total loans include net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(72.1) million and $(43.2) million as of June 30, 2020 and December 31, 2019, respectively. Net origination fees related to PPP loans were $(25.4) million as of June 30, 2020.
(2)Includes $1.75 billion of PPP loans as of June 30, 2020.
(3)Consists of single-family residential loans as of both June 30, 2020 and December 31, 2019.

Actions to Support Customers during the COVID-19

In response to the COVID-19 pandemic, the Company provided assistance to customers faced with financial difficulties by offering SBA PPP loans and also provided customers with payment relief through various loan modification programs. For a summary of the loans that the Company has modified in response to COVID-19, please refer to Item 2. MD&A — Risk Management — Credit Risk Management in this Form 10-Q.

85

 
($ in thousands) March 31, 2020 December 31, 2019
 
Amount (1)
 % 
Amount (1)
 %
Commercial:        
C&I $12,590,764
 35% $12,150,931
 35%
CRE:   

    
CRE 10,682,242
 30% 10,278,448
 30%
Multifamily residential 2,902,601
 8% 2,856,374
 8%
Construction and land 606,209
 2% 628,499
 2%
Total CRE 14,191,052
 40% 13,763,321
 40%
Total commercial 26,781,816
 75% 25,914,252
 75%
Consumer:        
Residential mortgage:        
Single-family residential 7,403,723
 20% 7,108,590
 20%
HELOCs 1,452,862
 4% 1,472,783
 4%
Total residential mortgage 8,856,585
 24% 8,581,373
 24%
Other consumer 254,992
 1% 282,914
 1%
Total consumer—
9,111,577
 25% 8,864,287
 25%
Total loans held-for-investment $35,893,393
 100% $34,778,539
 100%
Allowance for loan losses (557,003)   (358,287)  
Loans held-for-sale (2)
 1,594
   434
  
Total loans, net $35,337,984
   $34,420,686
  
 
In April 2020, the Company started accepting PPP applications and began to originate loans to qualified small businesses under the PPP established by the CARES Act. These loans are included in the C&I portfolio, carrying an interest rate of 1%, and are 100% guaranteed by the SBA. No allowance for loan losses were recorded for these loans as of June 30, 2020. The Company has funded over 7,200 PPP loans for customers with an outstanding loan balance totaling $1.75 billion as of June 30, 2020. The majority of the Company’s PPP loans have a term of two years. The SBA pays the Company fees for processing PPP loans in the following amounts: (1) five percent for loans of not more than $350,000; (2) three percent for loans of more than $350,000 and less than $2,000,000; and (3) one percent for loans of at least $2,000,000. Loan processing fees paid to the Company by the SBA are accounted for as loan origination fees, where net deferred fees are recognized over the estimated life of the loan as a yield adjustment on the loans. Payments by borrowers on PPP loans begin ten months after the loan forgiveness covered period. Under the terms of the PPP, such loans are eligible to be forgiven if certain conditions are satisfied, in which case the SBA will make payments to the Company for the forgiven amounts. If a loan is paid off or forgiven by the SBA prior to its projected estimated life, the remaining unamortized deferred fees will be recognized as interest income in that period. The PPP was originally set to expire on June 30, 2020. On July 4, 2020, the President signed legislation extending the PPP to August 8, 2020. The Company will continue to originate loans to qualified small businesses through the latest extension date.
(1)On January 1, 2020, the Company adopted ASU 2016-13. Total loans include net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(50.3) million and $(43.2) million as of March 31, 2020 and December 31, 2019, respectively.
(2)Consists of single-family residential loans as of both March 31, 2020 and December 31, 2019.

Commercial

The commercial loan portfolio which comprised 75% of total loans as of both March 31,June 30, 2020 and December 31, 2019, is discussed as follows.2019. Given the widespread impact of the COVID-19 pandemic on the U.S. and the global economy, a number of industries have been or will be adversely impacted. The Company continues to actively evaluate and monitor all industries and its entire commercial portfolio for elevated levels of credit risk. During the second quarter of 2020, we undertook a review of our loan portfolio to evaluate credit exposures for sensitivity to prospective weakening of economic conditions and reviewed certain C&I and CRE loans, with a particular focus on sectors that we believe are of higher risk during the COVID-19 pandemic.

Commercial — Commercial and Industrial Loans. C&I loans totaled $12.59$13.42 billion and $12.15 billion, which accounted for 36% and 35% of total loans held-for-investment, as of March 31,June 30, 2020 and December 31, 2019, respectively, and accounted for 35%respectively. The $1.27 billion or 10% increase in C&I loans was primarily due to the funding of totalPPP loans asduring the second quarter of both dates.2020. The majority of the C&I loans haveare variable interest rates.rate loans. The C&I loan portfolio includes loans and financing for businesses in a wide spectrum of industries, and includes asset-based lending, equipment financing and leasing, project-based finance, revolving lines of credit, SBA lending, structured finance, term loans and trade finance. The Company also had a portfolio of broadly syndicated C&I loans, comprised primarily of Term B loans, which totaled $962.1$960.8 million and $894.6 million as of March 31,June 30, 2020 and December 31, 2019, respectively.



The C&I portfolio is well-diversified by industry. The Company monitors the concentrations within the C&I loan portfolio by customer exposure and industry classification, setting diversification targets and limits for specialized underwriting portfolios. The Company’s exposureExposures to various industries within our C&I borrowers thatportfolio are potentially more impacted by the economic disruption stemming from COVID-19 pandemic include thoseshown in the travel and leisure, hospitality, restaurant and restaurant supply industries. These exposures are included in the Other C&I category in the graphs below. Combined, these industries represented 4% of total C&I loansfollowing charts as of both March 31,June 30, 2020 and December 31, 2019. There were no industry concentrations exceedingGiven the uncertainty and rapidly evolving socioeconomic impacts of the COVID-19 pandemic, the Company is actively monitoring its loan portfolio, assessing the financial conditions of borrowers and guarantors, and the valuation of collateral.

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Oil & gas loans comprised 10% of C&I loans and 3% of total loans held-for-investment as of both March 31,June 30, 2020. There were $1.27 billion in oil & gas loans outstanding and $346.9 million in unfunded commitments as of June 30, 2020. Based on total commitment as of June 30, 2020, the oil & gas portfolio consisted of 62% exploration & production (“E&P”) companies, 32% midstream and December 31, 2019.
chart-e584a6ac13b4514c89b.jpgchart-f6df384b4b7857e092d.jpg
downstream companies, and 6% oilfield services and other companies. Oil & gas loans comprised 11% of C&I loans and 4% of total loans held-for-investment as of both March 31, 2020 and December 31, 2019. As of March 31, 2020,There were $1.33 billion in oil & gas total loans outstanding were $1.37 billion and total exposure, including$477.6 million in unfunded commitments amounted to $1.77 billion.as of December 31, 2019. Based on total exposure, 64%commitment as of December 31, 2019, the oil & gas portfolio was reserve-based lending to upstream (exploration and production)consisted of 64% E&P companies, 27% was to29% midstream and downstream companies, and 9% was to companies in7% oilfield services and other. The oil & gas lending portfolio is geographically diversified. The production mix of upstream borrowers was approximately 61% oil, 29% gas and 10% natural gas liquids in 2019. The majority of the upstream borrowers had commodity hedges in place for 2020 to hedge against the fluctuation in oil and gas prices. other companies. The COVID-19 pandemic, as well as the high volatility and downward pressure on oil and& gas prices, hashave unfavorably impacted the credit risk of the oil & gas industry sector. Accordingly, the Company increased its allowance for loan loss coverage against the oil & gas portfolio to 8%9% as of March 31,June 30, 2020, up from 5% as of December 31, 2019.

Commercial — Total Commercial Real Estate Portfolio. The total CRE loan portfolio, which consists of income-producing CRE, multifamily residential, and construction and land loans, totaled $14.19$14.50 billion and $13.76 billion, which accounted for 39% and 40% of total loans held-for-investment as of March 31,June 30, 2020 and December 31, 2019, respectively, accounting for 40% of total loans as of both dates.respectively.

As of March 31, 2020, the average loan size of total CRE loans was $2.3 million and the weighted-average loan-to-value (“LTV”) ratio was 51%. As of December 31, 2019, the average loan size of total CRE loans was $2.1 million and the weighted-average LTV ratio was 50%. The consistency of the Company’s low LTV underwriting standards have resulted in historically lower levels of credit losses in the income-producing CRE and multifamily residential loans.



The Company’s total CRE portfolio is broadly diversified by property type, which serves to mitigate some of the geographical concentration in California. The following table summarizes the Company’s total CRE loan portfolio by property type as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands) March 31, 2020 December 31, 2019($ in thousands)June 30, 2020December 31, 2019
Amount % Amount %Amount%Amount%
Property types:        Property types:
Retail $3,398,714
 24% $3,300,106
 24%Retail$3,435,612  24 %$3,300,106  24 %
Multifamily 2,902,601
 20% 2,856,374
 21%Multifamily3,032,385  21 %2,856,374  21 %
Offices 2,496,013
 18% 2,375,087
 17%Offices2,573,520  18 %2,375,087  17 %
Industrial 2,240,375
 16% 2,163,769
 16%Industrial2,345,757  16 %2,163,769  16 %
Hospitality 1,970,060
 14% 1,865,031
 14%Hospitality1,946,437  13 %1,865,031  14 %
Construction and land 606,209
 4% 628,499
 4%Construction and land567,716  4 %628,499  4 %
Other 577,080
 4% 574,455
 4%Other600,788  4 %574,455  4 %
Total CRE loans $14,191,052
 100% $13,763,321
 100%Total CRE loans$14,502,215  100 %$13,763,321  100 %

Approximately 90% of our total CRE loans had a loan-to-value (“LTV”) ratio of 65% or lower as of June 30, 2020, compared to 85% as of December 31, 2019. The weighted averageweighted-average LTV ratios of total CRE loans were 52% and 50% as of June 30, 2020 and December 31, 2019, respectively. The low LTV ratio of retailwas consistent across the various CRE loan was 49% as of March 31, 2020, and theproperty types. The average loan size was $2.1 million. A high percentage of the retailtotal CRE loans have personal guarantees from individuals with substantial net worth. Restaurants are a subset of retail CRE portfolio,was $2.3 million and totaled $206.8 million or 6% of retail CRE as of March 31, 2020. The weighted average LTV ratio of restaurant loans was 53% and the average loan size was less than $1.0$2.1 million as of March 31, 2020. The weighted average LTV ratio of hospitality CRE loans was 49% as of March 31,June 30, 2020 and December 31, 2019, respectively. The consistency of the average loan size was $8.3 million.Company���s low LTV underwriting standards has resulted in historically lower levels of credit losses in the income-producing CRE and multifamily residential loans.

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The following tables provide a summary of the Company’s CRE, multifamily residential, and construction and land loans by geography as of March 31,June 30, 2020 and December 31, 2019:
 
($ in thousands) March 31, 2020
 CRE % Multifamily
Residential		 % Construction
and Land		 % Total CRE %
Geographic markets:                
Southern California $5,676,895
   $1,755,651
   $269,590
   $7,702,136
  
Northern California 2,476,697
   629,468
   179,652
   3,285,817
  
California 8,153,592
 76% 2,385,119
 82% 449,242
 74% 10,987,953
 77%
New York 689,547
 6% 123,989
 4% 84,042
 14% 897,578
 6%
Texas 662,119
 6% 129,458
 5% 8,525
 1% 800,102
 6%
Washington 308,878
 3% 65,521
 2% 31,332
 5% 405,731
 3%
Arizona 162,359
 2% 11,946
 0% —
 —% 174,305
 1%
Nevada 103,696
 1% 138,766
 5% 39
 0% 242,501
 2%
Other markets 602,051
 6% 47,802
 2% 33,029
 6% 682,882
 5%
Total loans $10,682,242
 100% $2,902,601
 100% $606,209
 100% $14,191,052
 100%
 


($ in thousands)June 30, 2020
CRE%Multifamily
Residential		%Construction
and Land		%Total CRE%
Geographic markets:
Southern California$5,798,259  $1,821,098  $265,759  $7,885,116  
Northern California2,517,384  664,186  168,257  3,349,827  
California8,315,643  77 %2,485,284  82 %434,016  77 %11,234,943  77 %
New York690,064  6 %125,408  4 %85,183  15 %900,655  6 %
Texas696,290  6 %137,376  4 %6,831  1 %840,497  6 %
Washington330,964  3 %84,842  3 %14,931  3 %430,737  3 %
Arizona147,789  1 %12,156  0 %—  — %159,945  1 %
Nevada92,773  1 %138,632  5 %7,917  1 %239,322  2 %
Other markets628,591  6 %48,687  2 %18,838  3 %696,116  5 %
Total loans$10,902,114  100 %$3,032,385  100 %$567,716  100 %$14,502,215  100 %
($ in thousands)December 31, 2019
CRE%Multifamily
Residential		%Construction
and Land		%Total CRE%
Geographic markets:
Southern California$5,446,786  $1,728,086  $247,170  $7,422,042  
Northern California2,359,808  603,135  203,706  3,166,649  
California7,806,594  76 %2,331,221  82 %450,876  72 %10,588,691  77 %
New York701,902  7 %116,923  4 %79,962  13 %898,787  7 %
Texas628,576  6 %124,646  4 %8,604  1 %761,826  6 %
Washington306,247  3 %55,913  2 %37,552  6 %399,712  3 %
Arizona149,151  1 %37,208  1 %6,951  1 %193,310  1 %
Nevada102,891  1 %138,577  5 %40  0 %241,508  2 %
Other markets583,087  6 %51,886  2 %44,514  7 %679,487  4 %
Total loans (1)
$10,278,448  100 %$2,856,374  100 %$628,499  100 %$13,763,321  100 %

(1)Loans net of ASC 310-30 discount.
Changes
As the majority of these loans are concentrated in the California geographic market, changes in California’s economy and real estate values could have a significant impact on the collectability of these loans and the required level of allowance for loan losses. A high percentage of the Company’s commercial real estate borrowers have provided substantial equity into their CRE loans and/or provided the Company with personal guarantees.

Commercial — Income-Producing Commercial Real Estate Loans. Income-producing CRE loans totaled $10.68 billion and $10.28 billion as of March 31, 2020 and December 31, 2019, respectively, and accounted for 30% of total loans as of both dates. 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. Loans are underwritten with conservative standards for cash flows, debt service coverage and LTV.

As Income-producing CRE loans totaled $10.90 billion and $10.28 billion, which accounted for 29% and 30% of March 31,total loans held-for-investment as of June 30, 2020 and December 31, 2019, 19% and respectively.

20%, respectively, of the income-producing CRE loans were owner occupied properties; theproperties as of June 30, 2020 and December 31, 2019. The remainder were non-owner occupiednon-owner-occupied properties, where 50% or more of the debt service for the loan is primarily provided by unaffiliated rental income from a third party. Interest rates on CRE loans may be fixed, variable or hybrid. The distribution of the CRE loan portfolio reflects the Company’s geographical footprint, with a primary concentration in California, accountingwhich accounted for 77% and 76% of the CRE loan portfolio as of both March 31,June 30, 2020 and December 31, 2019, respectively.

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Commercial — Multifamily Residential Loans. Multifamily residential loans totaled $2.90 billion and $2.86 billion as of March 31, 2020 and December 31, 2019, respectively, and accounted for 8% of total loans as of both dates. The multifamily residential loan portfolio is largely comprised of loans secured by residential properties with five or more units. As of both March 31, 2020 and December 31, 2019, 82% of the Company’s multifamily residential loans were concentrated in California. 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 seven years. Multifamily residential loans totaled $3.03 billion and $2.86 billion as of June 30, 2020 and December 31, 2019, respectively, and accounted for 8% of total loans held-for-investment as of both dates. As of June 30, 2020 and December 31, 2019, 82% of the Company’s multifamily residential loans were concentrated in California.

Commercial — Construction and Land Loans. Construction and land loans provide financing for multifamily residential, hotels, offices and industrial structures. These loans totaled $606.2$567.7 million and $628.5 million as of March 31,June 30, 2020 and December 31, 2019, respectively, and accounted for 2% of total loans held-for-investment as of both dates.periods. Included in the portfolio were construction loans of $544.1$516.8 million with additional unfunded commitments of $326.4 million as of March 31, 2020, and construction loans of $558.2 million, with additional unfunded commitments of $365.4 million and $351.4 million, as of June 30, 2020 and December 31, 2019. The construction loans provide financing for multifamily residential, hotels, offices, industrial and retail structures. Based on total commitment, the construction and land loans had a weighted average LTV of 54% as of March 31, 2020.2019, respectively. Similar to CRE and multifamily residential loans, the Company has a geographic concentration of construction and land loans in California.



Consumer

The following tables summarize the Company’s single-family residential and HELOCs loan portfolios by geography as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020
Single-
Family
Residential		%HELOCs%Total Residential Mortgage%
Geographic markets:
Southern California$3,264,997  $686,880  $3,951,877  
Northern California1,081,863  320,074  1,401,937  
California4,346,860  57 %1,006,954  69 %5,353,814  59 %
New York1,966,455  26 %235,546  16 %2,202,001  24 %
Washington622,626  8 %144,985  10 %767,611  8 %
Massachusetts242,388  3 %34,591  2 %276,979  3 %
Texas190,795  2 %—  — %190,795  2 %
Other markets290,970  4 %39,875  3 %330,845  4 %
Total$7,660,094  100 %$1,461,951  100 %$9,122,045  100 %
Lien priority:
First mortgage$7,660,093  100 %$1,226,845  84 %$8,886,938  97 %
Junior lien mortgage1  0 %235,106  16 %235,107  3 %
Total$7,660,094  100 %$1,461,951  100 %$9,122,045  100 %
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($ in thousands)December 31, 2019
Single-
Family
Residential		%HELOCs%Total Residential Mortgage%
Geographic markets:
Southern California$3,081,368  $702,915  $3,784,283  
Northern California1,038,945  309,883  1,348,828  
California4,120,313  58 %1,012,798  69 %5,133,111  60 %
New York1,657,732  23 %257,344  17 %1,915,076  22 %
Washington630,307  9 %133,625  9 %763,932  9 %
Massachusetts235,393  3 %31,310  2 %266,703  3 %
Texas188,838  3 %—  — %188,838  2 %
Other markets276,007  4 %37,706  3 %313,713  4 %
Total (1)
$7,108,590  100 %$1,472,783  100 %$8,581,373  100 %
Lien priority:
First mortgage$7,108,588  100 %$1,238,186  84 %$8,346,774  97 %
Junior lien mortgage2  0 %234,597  16 %234,599  3 %
Total (1)
$7,108,590  100 %$1,472,783  100 %$8,581,373  100 %
(1)Loans net of ASC 310-30 discount.
 
($ in thousands) March 31, 2020
 
Single-
Family
Residential
 % HELOCs % Total Residential Mortgage %
Geographic markets:            
Southern California $3,168,482
   $699,131
   $3,867,613
  
Northern California 1,058,009
   312,227
   1,370,236
  
California 4,226,491
 57% 1,011,358
 69% 5,237,849
 59%
New York 1,838,248
 25% 240,583
 17% 2,078,831
 23%
Washington 623,223
 8% 132,146
 9% 755,369
 9%
Massachusetts 237,897
 3% 30,848
 2% 268,745
 3%
Texas 189,498
 3% —
 —% 189,498
 2%
Other markets 288,366
 4% 37,927
 3% 326,293
 4%
Total $7,403,723
 100% $1,452,862
 100% $8,856,585
 100%
Lien priority:            
First mortgage $7,403,722
 100% $1,216,294
 84% $8,620,016
 97%
Junior lien mortgage 1
 0% 236,568
 16% 236,569
 3%
Total $7,403,723
 100% $1,452,862
 100% $8,856,585
 100%
 
 
($ in thousands) December 31, 2019
 Single-
Family
Residential		 % HELOCs % Total Residential Mortgage %
Geographic markets:            
Southern California $3,081,368
   $702,915
   $3,784,283
  
Northern California 1,038,945
   309,883
   1,348,828
  
California 4,120,313
 58% 1,012,798
 69% 5,133,111
 60%
New York 1,657,732
 23% 257,344
 17% 1,915,076
 22%
Washington 630,307
 9% 133,625
 9% 763,932
 9%
Massachusetts 235,393
 3% 31,310
 2% 266,703
 3%
Texas 188,838
 3% —
 —% 188,838
 2%
Other markets 276,007
 4% 37,706
 3% 313,713
 4%
Total (1)
 $7,108,590
 100% $1,472,783
 100% $8,581,373
 100%
Lien priority:            
First mortgage $7,108,588
 100% $1,238,186
 84% $8,346,774
 97%
Junior lien mortgage 2
 0% 234,597
 16% 234,599
 3%
Total (1)
 $7,108,590
 100% $1,472,783
 100% $8,581,373
 100%
 
(1)Loans net of ASC 310-30 discount.

Consumer — Single-Family Residential Loans. Single-family residential loans totaled $7.40 billion and $7.11 billion as of March 31, 2020 and December 31, 2019, respectively, and accounted for 20% of total loans as of both dates. The Company was in a first lien position for virtually all single-family residential loans as of both March 31, 2020 and December 31, 2019. Many of these loans are reduced documentation loans where a substantial down payment is required, resulting in a low LTV ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and loss rates. As of March 31, 2020 and December 31, 2019, 57% and 58% of the Company’s single-family residential loans, respectively, were concentrated in California. 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 annually after an initial fixed rate period.


Consumer — Home Equity Lines of Credit. HELOCs Single-family residential loans totaled $1.45$7.66 billion and $1.47$7.11 billion, which accounted for 21% and 20% of total loans held-for-investment as of March 31,June 30, 2020 and December 31, 2019, respectively, and accounted for 4% of total loans as of both dates.respectively. The Company was in a first lien position for 84% of total HELOCsvirtually all single-family residential loans as of both March 31,June 30, 2020 and December 31, 2019. Many of thethese loans within this portfolio arewere reduced documentation loans where a substantial down payment iswas required, resulting in a low LTV ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and loss rates. As of June 30, 2020 and December 31, 2019, 57% and 58% of the Company’s single-family residential loans, respectively, were concentrated in California.

Consumer — Home Equity Lines of Credit. HELOCs totaled $1.46 billion and $1.47 billion as of June 30, 2020 and December 31, 2019, respectively, and accounted for 4% of total loans held-for-investment as of both Marchperiods. The Company was in a first lien position for 84% of total HELOCs as of June 30, 2020 and December 31, 2019. Many of the loans within this portfolio were reduced documentation loans, where a substantial down payment was required, resulting in a low LTV ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and loss rates. As of June 30, 2020 and December 31, 2019, 69% of the Company’s HELOCs were concentrated in California. The HELOC portfolio is comprised largely of variable-rate loans.

All commercial and consumer loans originated 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.

Purchased Credit-DeterioratedCredit Deteriorated Loans

The Company adopted ASU 2016-13 using the prospective transition approach for purchased financial assets with credit deterioration (“PCD”) loans that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. On January 1, 2020, the amortized cost basis of the PCDpurchased credit deteriorated (“PCD”) loans was adjusted to reflect the $1.2 million addition of allowance for loan losses. The Company did not acquire any PCD loans during the first and second quarter of 2020. For additional details regarding PCD loans, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies and Note 7 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-Q. Prior to the adoption of ASU 2016-13, the carrying value of PCI loans totaled $222.9 million as of December 31, 2019.

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Loans Held-for-Sale

As of March 31,June 30, 2020 and December 31, 2019, loans held-for-sale totaled $1.6$3.9 million and $434 thousand, respectively, and consisted of single-family residential loans. At the time of commitment to originate or purchase a loan, a loan is determined to be held-for-investment if it is the Company’s intent to hold the loan to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s evaluation processes, including liquidity and credit risk management. If the Company subsequently changes its intent to hold certain loans, those loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value.

Loan Purchases, Transfers and Sales

All loans originated by the Company are underwritten pursuant to the Company’s policies and procedures. Although the Company’s primary focus is on directly originated loans, in certain circumstances, the Company also purchases loans and participates in loans with other banks. The Company also participates out interests in commercial loans to other financial institutions and sells loans in the normal course of business.

The following tables provide information on loan purchases, transfers and sales during the second quarter and first quartershalf of 2020 and 2019:
 
($ in thousands) Three Months Ended March 31, 2020
 Commercial ConsumerTotal
 C&I CRE Residential Mortgage
  CRE 
Multifamily
Residential
 Single-Family
Residential		 
Loans purchased $130,583
 $—
 $1,513
 $1,084
 $133,180
Loans transferred from held-for-investment to held-for-sale $102,973
 $7,250
 $—
 $—
 $110,223
Loans sold:          
Originated loans:          
Amount $102,973
 $7,250
 $—
 $4,642
 $114,865
Net gains $235
 $665
 $—
 $50
 $950
 


 
($ in thousands) Three Months Ended March 31, 2019
 Commercial ConsumerTotal
 C&I CRE Residential Mortgage
  CRE 
Multifamily
Residential
 Single-Family
Residential		 
Loans purchased $107,194
 $—
 $4,218
 $36,402
 $147,814
Loans transferred from held-for-investment to held-for-sale $75,573
 $16,655
 $—
 $—
 $92,228
Write-downs to allowance for loan losses $(73) $—
 $—
 $—
 $(73)
Loans sold:          
Originated loans:          
Amount $57,409
 $16,655
 $—
 $2,442
 $76,506
Net gains $131
 $753
 $—
 $31
 $915
Purchased loans:          
Amount $18,237
 $—
 $—
 $—
 $18,237
 
(1)Net gains on sales of purchased loans in the first quarter of 2019 were insignificant.

Deposits and Other Sources of Funds

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 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 of March 31, 2020 and December 31, 2019:
 
($ in thousands) March 31, 2020 December 31, 2019 Change
 Amount % Amount % $ %
Deposits            
Noninterest-bearing demand $11,833,397
 30% $11,080,036
 30% $753,361
 7%
Interest-bearing checking 5,467,508
 14% 5,200,755
 14% 266,753
 5%
Money market 9,302,246
 24% 8,711,964
 23% 590,282
 7%
Savings 2,117,274
 6% 2,117,196
 6% 78
 0%
Time deposits 9,966,533
 26% 10,214,308
 27% (247,775) (2)%
Total deposits $38,686,958
 100% $37,324,259
 100% $1,362,699
 4%
Other Funds            
Short-term borrowings $66,924
   $28,669
   $38,255
 133%
FHLB advances 646,336
   745,915
   (99,579) (13)%
Repurchase agreements 450,000
   200,000
   250,000
 125%
Long-term debt 147,169
   147,101
   68
 0%
Total other funds $1,310,429
   $1,121,685
   $188,744
 17%
Total sources of funds $39,997,387
   $38,445,944
   $1,551,443
 4%
 

Deposits

The Company offers a wide variety of deposit products2019. Refer to both consumer and commercial customers. The Company’s deposit strategy is to grow and retain relationship-based deposits, which provides a stable and low-cost source of funding and liquidity to the Company.



Total deposits were $38.69 billion as of March 31, 2020, an increase of $1.36 billion or 4% from $37.32 billion as of December 31, 2019.This growth was primarily due to a $753.4 million or 7% increase in noninterest-bearing demand and a $590.3 million or 7% increase in money market, partially offset by a $247.8 million or 2% decrease in time deposits. Noninterest-bearing demand deposits comprised 30% of total deposits as of both March 31, 2020 and December 31, 2019. Additional information regarding the impact of deposits on net interest income and a comparison of average deposit balances and rates are provided in Item 2. MD&A — Results of Operations — Net Interest Income in this Form 10-Q.

Other Funds

The Company’s other sources of funding consist of short-term borrowings, FHLB advances, repurchase agreements and long-term debt.

The Company had $66.9 million of short-term borrowings outstanding as of March 31, 2020, compared with $28.7 million as of December 31, 2019. This funding was entered into by the Company’s subsidiary, East West Bank (China) Limited, and will mature in 2020 and the first quarter of 2021. As of March 31, 2020, short-term borrowings had fixed interest rates ranging from 3.65% to 3.73%.

FHLB advances were $646.3 million as of March 31, 2020, a decrease of $99.6 million or 13% from $745.9 million as of December 31, 2019. As of March 31, 2020, FHLB advances had fixed and floating interest rates ranging from 1.18% to 2.34% with remaining maturities between 1.1 years and 2.6 years.

Gross repurchase agreements totaled $450.0 million as of both March 31, 2020 and December 31, 2019. Resale and repurchase agreements are reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of March 31, 2020, the Company did not have gross resale agreements that were eligible for netting pursuant to ASC 210-20-45-11. In comparison, net repurchase agreements totaled $200.0 million as of December 31, 2019, after netting $250.0 million of gross repurchase agreements against gross resale agreements. As of March 31, 2020, gross repurchase agreements had interest rates ranging from 3.23% to 4.06%, original terms between 4.0 years and 9.0 years and remaining maturities between 2.6 years and 3.4 years.

Repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the securities are sold. As of March 31, 2020, the collateral for the repurchase agreements was comprised of U.S. Treasury securities and U.S. government agency and U.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 47 — Securities Purchased under Resale AgreementsLoans Receivable and Sold under Repurchase AgreementsAllowance for Credit Losses to the Consolidated Financial Statements in this Form 10-Q.10-Q for additional information of loan purchases and transfers.

($ in thousands)Three Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential Mortgage
CREMultifamily
Residential		Construction
and Land		Single-Family
Residential
Loans sold:
Originated loans:
Amount$33,060  $—  $—  $—  $13,708  $46,768  
Net gains$—  $—  $—  $—  $132  $132  
The Company uses long-term debt to provide funding to acquire interest-earning assets, as well as to enhance liquidity and regulatory capital. Long-term debt totaled $147.2 million and $147.1 million as
($ in thousands)Three Months Ended June 30, 2019
CommercialConsumerTotal
C&ICREResidential Mortgage
CREMultifamily ResidentialConstruction and LandSingle-Family
Residential
Loans sold:
Originated loans:
Amount$52,972  $—  $—  $1,573  $1,172  $55,717  
Net gains$—  $—  $—  $—  $15  $15  
Purchased loans:
Amount$23,059  $—  $—  $—  $—  $23,059  
91


($ in thousands)Six Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential Mortgage
CREMultifamily
Residential		Construction
and Land		Single-Family
Residential
Loans sold:
Originated loans:
Amount$136,033  $7,250  $—  —  $18,350  $161,633  
Net gains$235  $665  $—  —  $182  $1,082  
($ in thousands)Six Months Ended June 30, 2019
CommercialConsumerTotal
C&ICREResidential Mortgage
CREMultifamily
Residential		Construction
and Land		Single-Family
Residential
Loans sold:
Originated loans:
Amount$110,381  $16,655  $—  $1,573  $3,614  $132,223  
Net gains$131  $753  $—  $—  $46  $930  
Purchased loans (1):
Amount$41,296  $—  $—  $—  $—  $41,296  
(1)Net gains on sales of March 31, 2020 and December 31, 2019, respectively. Long-term debt is comprised of junior subordinated debt, which qualifies as Tier 2 capital for regulatory purposes. The junior subordinated debt was issuedpurchased loans in connection with the Company’s various pooled trust preferred securities offerings and includes the value of the common stock issued by six wholly-owned subsidiaries of the Company in conjunction with these offerings. The junior subordinated debt had a weighted-average interest rate of 3.13% and 4.30% for the first quartershalf of 2020 and 2019 respectively, with remaining maturities ranging between 14.7 years and 17.5 years as of March 31, 2020.were insignificant.


85


Foreign Outstandings

The Company’s overseas offices, which include the branch in Hong Kong and the subsidiary bank in China, are subject to the general risks inherent in conducting business in foreign countries, such as regulations, or economic and political uncertainties. In addition, the Company’s financial assets held in the Hong Kong branch and the subsidiary bank in China may be affected by fluctuations in currency exchange rates or other factors. The Company’s country risk exposure is largely concentrated in China and Hong Kong. The following table presents the major financial assets held in the Company’s overseas offices as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands) March 31, 2020 December 31, 2019($ in thousands)June 30, 2020December 31, 2019
Amount 
% of Total
Consolidated
Assets
 Amount 
% of Total
Consolidated
Assets
Amount% of Total
Consolidated
Assets		Amount% of Total
Consolidated
Assets
Hong Kong branch:        Hong Kong branch:
Cash and cash equivalents $294,054
 1% $511,639
 1%Cash and cash equivalents$445,595  1 %$511,639  1 %
AFS debt securities (1)
 $204,942
 0% $204,948
 0%
AFS debt securities (1)
$298,041  1 %$204,948  0 %
Loans held-for-investment (2)
 $542,697
 1% $573,305
 1%
Loans held-for-investment (2)
$637,129  1 %$573,305  1 %
Total assets $1,132,054
 2% $1,361,652
 3%Total assets$1,456,836  3 %$1,361,652  3 %
Subsidiary bank in China:        Subsidiary bank in China:
Cash and cash equivalents $544,860
 1% $548,930
 1%Cash and cash equivalents$661,325  1 %$548,930  1 %
Interest-bearing deposits with banks $219,517
 0% $142,587
 0%Interest-bearing deposits with banks$197,520  0 %$142,587  0 %
Loans held-for-investment (2)
 $745,553
 2% $819,110
 2%
Loans held-for-investment (2)
$621,378  1 %$819,110  2 %
Total assets $1,562,179
 3% $1,520,627
 3%Total assets$1,579,361  3 %$1,520,627  3 %
(1)Comprised of U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, foreign bonds, and U.S. Treasury securities as of March 31, 2020 andJune 30, 2020; comprised of foreign bonds and U.S. Treasury securities as of December 31, 2019.
(2)Primarily comprised of C&I loans as of both March 31,June 30, 2020 and December 31, 2019.

92

The following table presents the total revenue generated by the Company’s overseas offices for the second quarters and first quartershalf of 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Amount% of Total
Consolidated
Revenue		Amount% of Total
Consolidated
Revenue		Amount% of Total
Consolidated
Revenue		Amount% of Total
Consolidated
Revenue
Hong Kong branch:
Total revenue$7,261  2 %$8,851  2 %$14,190  2 %$17,748  2 %
Subsidiary bank in China:
Total revenue$5,606  1 %$9,107  2 %$12,785  2 %$16,191  2 %

 
($ in thousands) Three Months Ended March 31,
 2020 2019
 Amount 
% of Total
Consolidated
Revenue
 Amount 
% of Total
Consolidated
Revenue
Hong Kong branch:        
Total revenue $6,929
 2% $8,897
 2%
Subsidiary bank in China:        
Total revenue $7,179
 2% $7,084
 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.

In March 2020, the Company authorized the repurchase of up to $500.0 million of the Company’s common stock. This $500.0 million repurchase authorization is inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The Company determines the timing and amount of repurchases, based on its assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the economic environment. The Company repurchased 4,471,682 shares at a total cost of $146.0 million during the first quarter of 2020. The Company did not repurchase shares during the second quarter of 2020. The Company's total remaining available share repurchase authorization as of March 31,June 30, 2020 was $354.0 million.



The Company’s stockholders’ equity was $4.90$4.99 billion as of March 31,June 30, 2020, a $114.6$30.4 million or 2%1% decrease from $5.02 billion as of December 31, 2019. The decrease in the Company’s stockholders’ equity was primarily due to share repurchase activity of $146.0 million;million during the first quarter of 2020; a decrease in opening retained earnings of $98.0 million as a result of the adoption of ASU 2016-13, and cash dividends declared of $40.5$79.9 million during the first quarterhalf of 2020, partially offset by first quarterhalf of 2020 net income of $144.8$244.2 million. For other factors that contributed to the changes in stockholders’ equity, refer to Item 1. Consolidated Financial Statements — Consolidated Statement of Changes in Stockholders’ Equity in this Form 10-Q.

Book value was $34.67$35.25 per common share as of March 31,June 30, 2020, compared with $34.46 per common share as of December 31, 2019. The Company paid a quarterly cash dividend of $0.275 for both first and $0.230second quarter of 2020, and $0.23 and $0.275 per common share for the first quartersand second quarter of 2020 and 2019, respectively. In AprilJuly 2020, the Company’s Board of Directors declared secondthird quarter 2020 cash dividends of $0.275 per common share. The dividend will be paidis payable on May 15,August 17, 2020 to stockholders of record as of MayAugust 4, 2020.

93

Deposits and Other Sources of Funds

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 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 of June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019Change
Amount%Amount%$%
Deposits
Noninterest-bearing demand$13,940,420  34 %$11,080,036  30 %$2,860,384  26 %
Interest-bearing checking5,280,887  13 %5,200,755  14 %80,132  2 %
Money market10,002,624  25 %8,711,964  23 %1,290,660  15 %
Savings2,186,199  5 %2,117,196  6 %69,003  3 %
Time deposits9,262,548  23 %10,214,308  27 %(951,760) (9)%
Total deposits$40,672,678  100 %$37,324,259  100 %$3,348,419  9 %
Other Funds
Short-term borrowings (1)
$252,851  $28,669  $224,182  782 %
FHLB advances656,759  745,915  (89,156) (12)%
Repurchase agreements300,000  200,000  100,000  50 %
Long-term debt (2)
1,575,653  147,101  1,428,552  971 %
Total other funds$2,785,263  $1,121,685  $1,663,578  148 %
Total sources of funds$43,457,941  $38,445,944  $5,011,997  13 %
(1)Includes $200.0 million of FRB discount window borrowing.
(2)Includes $1.43 billion of advances from the Federal Reserve’s PPPLF.

Deposits

The Company offers a wide variety of deposit products to both consumer and commercial customers. The Company’s deposit strategy is to grow and retain relationship-based deposits, which provides a stable and low-cost source of funding and liquidity to the Company.

Total deposits were $40.67 billion as of June 30, 2020, an increase of $3.35 billion or 9% from $37.32 billion as of December 31, 2019. This growth was primarily due to a $2.86 billion or 26% increase in noninterest-bearing demand and a $1.29 billion or 15% increase in money market, partially offset by a $951.8 million or 9% decrease in time deposits. The increase in noninterest-bearing demand deposits was attributable to strong growth from consumer and small business commercial demand accounts, as well as PPP funds held in deposit accounts. Noninterest-bearing demand deposits comprised 34% and 30% of total deposits as of June 30, 2020 and December 31, 2019, respectively. Additional information regarding the impact of deposits on net interest income and a comparison of average deposit balances and rates are provided in Item 2. MD&A — Results of Operations — Net Interest Income in this Form 10-Q.

Other Sources of Funding

Short-term borrowings were comprised of FRB discount window borrowing and short-term borrowings entered into by the Company’s subsidiary, East West Bank (China) Limited. The Company had $252.9 million of short-term borrowings outstanding as of June 30, 2020, compared with $28.7 million as of December 31, 2019. During the second quarter of 2020, the Company borrowed $200.0 million from the FRB discount window with a term of 90 days at a rate of 0.25%. Short-term borrowings entered by East West Bank (China) Limited was $52.9 million and $28.7 million as of June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020, short-term borrowings entered by East West Bank (China) Limited had fixed interest rates ranging from 3.68% to 3.73%, and will mature between the third quarter of 2020 and the first quarter of 2021.

FHLB advances were $656.8 million as of June 30, 2020, a decrease of $89.2 million or 12% from $745.9 million as of December 31, 2019. As of June 30, 2020, FHLB advances had fixed and floating interest rates ranging from zero to 2.34% with remaining maturities between 0.3 years and 2.4 years.
94

Gross repurchase agreements totaled $300.0 million and $450.0 million as of June 30, 2020 and December 31, 2019, respectively. The decrease was primarily due to the extinguishment of $150.0 million in the second quarter of 2020. Resale and repurchase agreements are reported net, pursuant to ASC 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. As of June 30, 2020, the Company did not have gross resale agreements that were eligible for netting pursuant to ASC 210-20-45-11. In comparison, net repurchase agreements totaled $200.0 million as of December 31, 2019, after netting $250.0 million of gross repurchase agreements against gross resale agreements. As of June 30, 2020, gross repurchase agreements had interest rates ranging from 2.55% to 3.26%, original terms between 4.0 years and 8.5 years and remaining maturities between 3.1 years and 3.2 years.

Repurchase agreements are accounted for as collateralized financing transactions and recorded as liabilities based on the values at which the securities are sold. As of June 30, 2020, the collateral for the repurchase agreements was comprised of U.S. Treasury securities and U.S. government agency and U.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 — Securities 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, as well as to enhance liquidity and regulatory capital. Long-term debt totaled $1.58 billion and $147.1 million as of June 30, 2020 and December 31, 2019, respectively. Long-term debt is comprised of PPPLF and junior subordinated debt. During the second quarter of 2020, the Company participated in the PPPLF and added $1.43 billion to long-term debt funding at a rate of 0.35%. Junior subordinated debt 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 and includes the value of the common stock issued by six wholly-owned subsidiaries of the Company in conjunction with these offerings. The junior subordinated debt had a weighted-average interest rate of 2.67% and 4.21% for the first half of 2020 and 2019, respectively, with remaining maturities ranging between 15.2 years and 17.2 years as of June 30, 2020.

Regulatory Capital and Ratios

The federal banking agencies have risk-based capital adequacy guidelines intended to ensure that banking organizations maintain capital that is commensurate with the degree of risk associated with a banking organization’s operations. See Item 1. Business — Supervision and Regulation — Capital Requirements of the Company’s 2019 Form 10-K for additional details.

The Company adopted ASU 2016-13 on January 1, 2020. The Company has elected the phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital for two years and phases the impact over three years beginning in 2022. In April 2020, in recognition of CARES Act requirements, and to facilitate the use of the PPPLF, the U.S banking agencies issued an interim final rule that banking organizations may exclude from leverage and risk-based capital requirements any eligible assets sold or pledged to the Federal Reserve on a non-recourse basis as part of these programs. The interim final rule states that PPP covered loans originated by a banking organization under PPP will be risk-weighted at zero percent for regulatory capital purposes. As a result, the March 31,June 30, 2020 capital ratios exclude the impact of the increased allowance for credit losses. loan losses and risk weighted PPP loans at zero percent.
95

The following table presents the Company’s and the Bank’s capital ratios as of March 31,June 30, 2020 and December 31, 2019 under the Basel III Capital Rules, and those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
Basel III Capital Rules
June 30, 2020December 31, 2019Minimum
Regulatory
Requirements
Fully
Phased-in
Minimum
Regulatory
Requirements (2)
Well-
Capitalized
Requirements
CompanyEast
West
Bank		CompanyEast
West
Bank
Risk-Based Capital Ratios:
CET1 capital12.7 %11.9 %12.9 %12.9 %4.5 %7.0 %6.5 %
Tier 1 capital12.7 %11.9 %12.9 %12.9 %6.0 %8.5 %8.0 %
Total capital14.4 %13.1 %14.4 %13.9 %8.0 %10.5 %10.0 %
Tier 1 leverage (1)
9.7 %9.1 %10.3 %10.3 %4.0 %4.0 %5.0 %
 
  Basel III Capital Rules
 March 31, 2020 December 31, 2019 
Minimum
Regulatory
Requirements
 
Fully
Phased-in
Minimum
Regulatory
Requirements (2)
 
Well-
Capitalized
Requirements
 Company East
West
Bank		 Company East
West
Bank		   
Risk-Based Capital Ratios:              
CET1 capital 12.4% 12.3% 12.9% 12.9% 4.5% 7.0% 6.5%
Tier 1 capital 12.4% 12.3% 12.9% 12.9% 6.0% 8.5% 8.0%
Total capital 13.9% 13.4% 14.4% 13.9% 8.0% 10.5% 10.0%
Tier 1 leverage (1)
 10.2% 10.1% 10.3% 10.3% 4.0% 4.0% 5.0%
 
(1)The Tier 1 leverage well-capitalized requirement applies to the Bank only because there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank-holding company.
(1)The Tier 1 leverage well-capitalized requirement applies to the Bank only because there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank-holding company.
(2)As of January 1, 2019, the 2.5% capital conservation buffer above the minimum capital ratios is required in order to avoid limitations on distributions, including dividend payments and certain discretionary bonus payments to executive officers.
(2)As of January 1, 2019, the 2.5% capital conservation buffer above the minimum capital ratios was required in order to avoid limitations on distributions, including dividend payments and certain discretionary bonus payments to executive officers.

The Company is committed to maintaining strong capital levels to assure the Company’s investors, customers and regulators that the Company and the Bank are financially sound. As of March 31,June 30, 2020 and December 31, 2019, both the Company and the Bank continued to exceed all “well-capitalized” capital requirements and the fully phased-in required minimum capital requirements under the Basel III Capital Rules. Total risk-weighted assets were $36.55$36.20 billion as of March 31,June 30, 2020, an increase of $1.41$1.06 billion or 4%3% from $35.14 billion as of December 31, 2019. The increase in the risk-weighted assets was primarily due to loan growth and an increase in derivative fair values.growth.


87


Other Matters

LIBOR Transition

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”),LIBOR, announced that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021. Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including to the Company. The Company’s commercial and consumer businesses issue, trade, and hold various products that are currently indexed to LIBOR. A portion of the Company’s loans, derivatives, debt securities, resale agreements, FHLB advances, and deposits, as well as junior subordinated debt and repurchase agreements are indexed to LIBOR and mature after 2021. The volume of the Company’s products that are indexed to LIBOR is significant, and if not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks.

The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR. In early 2019, the ARRC released final recommended fallback contract language for new issuances of LIBOR indexed bilateral business loans, syndicated loans, floating-rate notes, securitizations and securitizations.residential adjustable rate mortgages. During 2020, the ARRC has continued to provide guidance on fallback language, SOFR adoption and spread adjustment methodology. The International Swaps and Derivatives Association, Inc. is in the process of developing detailed guidance on fallback contract language.language and amendments to the 2006 International Swaps and Derivatives Association Definitions and related protocols.

The Company has been closely monitoring the impact of COVID-19 and any potential delay in the cessation of LIBOR. Although the Financial Conduct Authority has expressed that it is assessingcontinues to assess the potential impactsevolving impact of COVID-19 on firms’ LIBOR transition timelines,efforts, the target LIBOR cessation date currently remains unchanged.

96

Due to the uncertainty surrounding the future of LIBOR, the transition is anticipated to span several reporting periods through the end of 2021, unless there is a delay in the cessation of LIBOR due to impacts of COVID-19.2021. Certain actions already taken by the Company related to the transition of LIBOR include (1) establishing a cross-functional team to identify, assess and monitor risks associated with the transition of LIBOR and other benchmark rates, (2) developingcompleting an inventory of LIBOR indexed products, and (3) implementing more robust fallback contract language for new loans, which identifies LIBOR cessation trigger events, provides for an alternative index and permits an adjustment to the margin as applicable.applicable, and (4) creating an entity-wide transition project plan, to ensure an effective transition away from LIBOR. The Company continues to monitor this activity and evaluate the related risks. The Company’s cross-functional team also manages communication of the Company’s transition plans with both internal and external stakeholders and ensures that the Company appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruption during and after the LIBOR transition. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s business, seeItem 1A. Risk Factorsin the Company’s 2019 Form 10-K.

Off-Balance Sheet Arrangements

In the course of the Company’s business, the Company may enter into or be a party to transactions that are not recorded on the Consolidated Balance Sheet and are considered to be off-balance sheet arrangements. Off-balance sheet arrangements are any contractual arrangements to which a nonconsolidated entity is a party and under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in a nonconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.

Commitments to Extend Credit

As a financial service provider, the Company routinely enters into commitments to extend credit such as loan commitments, commercial letters of credit for foreign and domestic trade, standby letters of credit (“SBLCs”) and financial guarantees to meet the financing needs of our customers. Many of these commitments to extend credit may expire without being drawn upon. The credit policies used in underwriting loans to customers are also used to extend these commitments. Under some of these contractual agreements, the Company may also have liabilities contingent upon the occurrence of certain events. The Company’s liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of its lending activities. Information about the Company’s loan commitments, commercial letters of credit and SBLCs is provided in Note 10 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.



Guarantees

In the ordinary course of business, the Company enters into various guarantee agreements in which the Company sells or securitizes loans with recourse. Under these guarantee arrangements, the Company is contingently obligated to repurchase the recourse component of the loans when the loans default. Additional information regarding guarantees is provided in Note 10 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.

A discussion of significant contractual arrangements under which the Company may be held contingently liable is included in Note 10 — Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q. In addition, the Company has commitments and obligations under post-retirement benefit plans as described in Note 17 — Employee Benefit Plans to the Consolidated Financial Statements of the Company’s 2019 Form 10-K, and has contractual obligations for future payments on debts, borrowings and lease obligations as detailed in Item 7. MD&A — Off-Balance Sheet Arrangements and Contractual Obligations of the Company’s 2019 Form 10-K.

97

Risk Management

Overview

Overview

In the course of conducting its businesses, 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 approvedBoard-approved enterprise risk management (“ERM”) framework, which outlines its 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 capital risk, strategic risk, credit risk, liquidity risk, market risk, operational risk, reputational risk, and legal and compliance risk.

The Board of Directors monitors the ERM program to ensure independent review and 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 analyses of each major risk area are included in the following sub-sections of Risk Management.

Credit Risk Management

Credit risk is the risk that a borrower or counterparty will fail to perform according to terms and conditions of a loan or investment and expose the Company to loss. Credit risk exists with many of our assets and exposures such as loans and certain derivatives. The majority of our credit risk is associated with lending activities.

The Risk Oversight Committee has primary oversight responsibility of identifying enterprise risk categories including credit risk. The Risk Oversight Committee monitors management’s assessment of asset quality and credit risk trends, credit quality administration and underwriting standards, portfolio credit risk management and processes to enable management to control credit risk including diversification and liquidity. At the management level, the Credit Risk Management Committee has primary oversight responsibility for credit risk. The Senior Credit Supervision function manages credit policy and provides the resources to manage 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 reports on the overall credit risk portfolio to senior management and the Risk Oversight Committee. The Independent Asset Review function supports a strong credit risk management culture by providing independent and objective assessments of the quality of underwriting and documentation, reporting directly to the Board’s Risk Oversight Committee. A key tofocus of our credit risk management is adherence to a well-controlled underwriting process.



A meaningful way to assessThe company assesses overall credit quality performance of our held-for-investment portfolio is through an integrate analysis of specific performance ratios. This approach forms the basis of the discussion in the sections immediately following: Non-performingNonperforming Assets, Troubled Debt Restructurings (“TDRs”),TDRs and Allowance for Credit Losses.

Nonperforming Assets

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, other real estate owned (“OREO”), and other nonperforming assets. OREO and other nonperforming assets are repossessed assets and properties 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 — Loans Held-for-InvestmenHeld-for-Investmentt to the Consolidated Financial Statements of the Company’s 2019 Form 10-K.
98

The following table presents information regarding nonperforming assets as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Nonaccrual LoansNon-PCI
Nonaccrual Loans
Commercial:
C&I$84,823  $74,835  
CRE:
CRE56,577  16,441  
Multifamily residential774  819  
Total CRE57,351  17,260  
Consumer:
Residential mortgage:
Single-family residential20,070  14,865  
HELOCs14,068  10,742  
Total residential mortgage34,138  25,607  
Other consumer2,508  2,517  
Total nonaccrual loans178,820  120,219  
OREO, net19,504  125  
Other nonperforming assets3,890  1,167  
Total nonperforming assets$202,214  $121,511  
Nonperforming assets to total assets
0.41 %0.27 %
Nonaccrual loans to loans held-for-investment0.48 %0.35 %
Allowance for loan losses to nonaccrual loans353.47 %298.03 %
Annualized quarterly net charge-offs to average loans held-for-investment0.21 %0.10 %
TDRs included in nonperforming loans$23,733  $54,566  
 
($ in thousands) March 31, 2020 December 31, 2019
 Nonaccrual Loans 
Non-PCI
Nonaccrual Loans
Commercial:    
C&I $89,079
 $74,835
CRE:    
CRE 6,298
 16,441
Multifamily residential 803
 819
Total CRE 7,101
 17,260
Consumer:    
Residential mortgage:    
Single-family residential 17,536
 14,865
HELOCs 10,446
 10,742
Total residential mortgage 27,982
 25,607
Other consumer 2,506
 2,517
Total nonaccrual loans 126,668
 120,219
     
OREO, net 19,504
 125
Other nonperforming assets 4,758
 1,167
Total nonperforming assets $150,930
 $121,511
Nonperforming assets to total assets 
 0.33% 0.27%
Nonaccrual loans to loans held-for-investment 0.35% 0.35%
Allowance for loan losses to nonaccrual loans 439.73% 298.03%
Annualized quarterly net charge-offs to average loans held-for-investment 0.01% 0.10%
TDR included in nonperforming loans $34,364
 $54,566
 


Period-over-period changes to nonaccrual loans represent loans that are placed on nonaccrual status in accordance with the Company’s accounting policy, offset by reductions for loan repayments and for loans that are paid down, charged off, sold, foreclosed, or no longer classified as nonaccrual as a result of continued performance and improvement in the borrowers’ financial condition. Nonaccrual loans were $126.7$178.8 million as of March 31,June 30, 2020, an increase of $6.4$58.6 million or 5%49% from $120.2 million as of December 31, 2019. This increase iswas primarily due to new additions fromdriven by the oil & gas C&I and residential mortgageCRE loans that became nonaccrual in the second quarter of 2020, partially offset by payoffs and charge-offs and loans returned to accrual status, paid down or paid off. Nonaccrual loans as a percentage of loans held-for-investment were 0.35% as of both March 31, 2020 and December 31, 2019. C&I nonaccrual loans were 70% and 62% of total nonaccrual loans as of March 31, 2020 and December 31, 2019, respectively.loans. Credit risk related to the C&I nonaccrual loans were partially mitigated by the collateralcollaterals in place. Nonaccrual loans as a percentage of loans held-for-investment were 0.48% and 0.35% as of June 30, 2020 and December 31, 2019, respectively. C&I nonaccrual loans were 47% and 62% of total nonaccrual loans as of June 30, 2020 and December 31, 2019, respectively. As of March 31,June 30, 2020, $61.9$58.7 million, or 49%33%, of the $126.7$178.8 million nonaccrual loans were less than 90 days delinquent. In comparison, $35.6 million or 30%, of the $120.2 million nonaccrual loans were less than 90 days delinquent as of December 31, 2019.



OREO wasincreased by $19.4 million from $125 thousand as of December 31, 2019 to $19.5 million as of March 31,June 30, 2020 a quarter-over-quarter increase of $19.4 million becausedue to the Company tooktaking possession of a retail CRE property located in Southern California.California in the first quarter of 2020.

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The following table presents the accruing loans past due by portfolio segments as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)
Total Accruing Past Due Loans (1)
ChangePercentage of
Total Loans Outstanding
June 30, 2020December 31, 2019June 30, 2020December 31, 2019
Commercial:
C&I$60,136  $48,155  $11,981  25 %0.45 %0.40 %
CRE:
CRE8,727  24,807  (16,080) (65)%0.08 %0.24 %
Multifamily residential5,963  729  5,234  718 %0.20 %0.03 %
Total CRE14,690  25,536  (10,846) (42)%0.10 %0.19 %
Total commercial74,826  73,691  1,135  2 %0.27 %0.29 %
Consumer:
Residential mortgage:
Single-family residential20,691  20,517  174  1 %0.27 %0.29 %
HELOCs2,938  7,064  (4,126) (58)%0.20 %0.48 %
Total residential mortgage23,629  27,581  (3,952) (14)%0.26 %0.32 %
Other consumer14,695  11  14,684  NM8.05 %0.00 %
Total consumer38,324  27,592  10,732  39 %0.41 %0.31 %
Total$113,150  $101,283  $11,867  12 %0.30 %0.29 %
 
($ in thousands) 
Total Accruing Past Due Loans (1)
 Change Percentage of Total Loans Outstanding
 March 31, 2020 December 31, 2019  March 31, 2020 December 31, 2019
Commercial:            
C&I $18,385
 $48,155
 $(29,770) (62)% 0.15% 0.40%
CRE:            
CRE 6,986
 24,807
 (17,821) (72)% 0.07% 0.24%
Multifamily residential 876
 729
 147
 20% 0.03% 0.03%
Total CRE 7,862
 25,536
 (17,674) (69)% 0.06% 0.19%
Total commercial 26,247
 73,691
 (47,444) (64)% 0.10% 0.29%
Consumer:            
Residential mortgage:            
Single-family residential 58,663
 20,517
 38,146
 186% 0.79% 0.29%
HELOCs 14,634
 7,064
 7,570
 107% 1.01% 0.48%
Total residential mortgage 73,297
 27,581
 45,716
 166% 0.83% 0.32%
Other consumer 63
 11
 52
 473% 0.02% 0.00%
Total consumer 73,360
 27,592
 45,768
 166% 0.81% 0.31%
Total $99,607
 $101,283
 $(1,676) (2)% 0.28% 0.29%
 
(1)There were no accruing loans past due 90 days or more as of both March 31, 2020 and December 31, 2019.

NM — Not meaningful.
(1)There were no accruing loans past due 90 days or more as of both June 30, 2020 and December 31, 2019.

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. Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectibilitycollectability and meet the borrower’s financial needs. The Company has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act, the Company has elected to not apply TDR classification to any COVID-19 related loan modifications. On April 7, 2020, the federal banking regulators issued the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customer Affected by the Coronovirus (Revised)” (the Interagency Statement). The Interagency Statement provides additional TDR relief as it clarifies that it is not necessary to consider the impact of the COVID-19 pandemic on the financial condition of a borrower in connection with a short-term (e.g., six months) COVID-19 related loan modification provided that the borrower is current at the date the modification program is implemented. For COVID-19 related loan modifications in the form of payment deferrals, the delinquency status will not advance and loans that were accruing at the timenot accounted for as TDRs. Existing TDRs that the relief is provided will generally not be placed on nonaccrual status during the deferral period. Interest income willwere subsequently modified in response to COVID-19 continue to be recognized over the contractual lifeclassified as TDRs. As of the loan.June 30, 2020, there were 14 TDRs totaling $29.3 million were provided subsequent modifications related to COVID-19.



The following table presents the performing and nonperforming TDRs by portfolio segments as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
Performing
TDRs		Nonperforming
TDRs		Performing
TDRs		Nonperforming
TDRs
Commercial:
C&I$45,187  $21,186  $39,208  $41,014  
CRE:
CRE5,112  348  5,177  11,503  
Multifamily residential3,316  223  3,644  229  
Construction and land19,692  —  19,691  —  
Total CRE28,120  571  28,512  11,732  
Consumer:
Residential mortgage:
Single-family residential6,684  1,260  7,346  1,098  
HELOCs2,809  716  2,832  722  
Total residential mortgage9,493  1,976  10,178  1,820  
Total TDRs$82,800  $23,733  $77,898  $54,566  

100

 
($ in thousands) March 31, 2020 December 31, 2019
 
Performing
TDRs
 
Nonperforming
TDRs
 
Performing
TDRs
 
Nonperforming
TDRs
Commercial:        
C&I $30,186
 $31,956
 $39,208
 $41,014
CRE:        
CRE 5,133
 385
 5,177
 11,503
Multifamily residential 3,320
 222
 3,644
 229
Construction and land 19,691
 —
 19,691
 —
Total CRE 28,144
 607
 28,512
 11,732
Consumer:        
Residential mortgage:        
Single-family residential 6,764
 1,085
 7,346
 1,098
HELOCs 2,814
 716
 2,832
 722
Total residential mortgage 9,578
 1,801
 10,178
 1,820
Total TDRs $67,908
 $34,364
 $77,898
 $54,566
 

Performing TDRs were $67.9$82.8 million as of March 31,June 30, 2020, a decreasean increase of $10.0$4.9 million or 13%6% from $77.9 million as of December 31, 2019. This decrease reflects performingincrease primarily reflected $26.7 million in newly designated C&I TDR loans, no longer classified as TDR, loan pay-offs and loan paydowns,partially offset by threepaydowns and payoffs of existing C&I loans that were newly designated as TDR.TDR loans. Nonperforming TDRs were $34.4$23.7 million as of March 31,June 30, 2020, a decrease of $20.2$30.8 million or 37%57% from $54.6 million as of December 31, 2019. This decrease primarily reflects onereflected $37.1 million in payoffs and paydowns of C&I loans, $11.1 million in the transfer of nonperforming CRE loans to OREO, partially offset by $17.2 million new designation of C&I non-performing TDR loans. The allowance for loan transferred losses for TDRs was $1.6 million and $400 thousand as of June 30, 2020 and December 31, 2019, respectively. See Note 7— Loans Receivable and Allowance for Loan Losses to OREO.the Consolidated Financial Statements in this Form 10-Q.

Loan Modifications Due to COVID-19

As of June 30, 2020, the Company provided $2.82 billion in COVID-19 related loan modifications that were not considered TDRs to consumer and commercial customers. The aging of loan modifications related to COVID-19 are frozen at the time of the modification. Interest income continues to be recognized over the contractual life of the loan. For more information related to the Company’s accounting policy on loan modifications related to COVID-19, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements inthis Form 10-Q.

Loan Modifications under Section 4013 CARES Act — The CARES Act includes a provision that permits a financial institution to elect to temporarily suspend TDR accounting under ASC Subtopic 310-40 in certain circumstances (“Section 4013 CARES Act”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the federal National Emergency or (b) December 31, 2020. The Company provided relief programs under Section 4013 CARES Act to 2,890 loans totaling $2.68 billion, none of which were on nonaccrual status as of June 30, 2020. The majority of Section 4013 loan modification programs offered by our Company were comprised of payment deferrals. As of June 30, 2020, 288 commercial loans totaling $1.46 billion, comprising 55% of outstanding loan balances under the Section 4013 payment deferral program were primarily on a three-month payment deferral program, comprising of either principal payment deferrals or a combination of principal and interest payment deferrals. The deferred payments for commercial loans are either repaid at contractual maturity or over the remaining contractual term of the loan. As of June 30, 2020, 2,590 consumer loans totaling $1.17 billion, comprising 44% of the outstanding loan balances under the payment deferral program, were primarily comprised of single-family residential loans with payment deferrals ranging between two to six months. The deferred payments for consumer loans are either repaid at contractual maturity, or repaid over six or 12 months. Section 4013 forbearance programs consisted of interest rate reductions and/or concessions. As of June 30, 2020, there were three CRE loans totaling $30.6 million under the Section 4013 forbearance programs.

Loan Modifications under Interagency Statement — In response to the loan modification provisions under the CARES Act, the federal banking regulators issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board (“FASB”), confirmed that for loans not subject to section 4013, short-term modifications (i.e. six months or less) made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40. As of June 30, 2020, there were 293 loans totaling $143.0 million under the payment deferral program, comprising primarily of single-family residential loans, of which 90 single-family residential loans totaling $15.1 million were under the Federal Housing Finance Agency payment deferral program. The remaining $127.9 million loans primarily had a three-month payment deferral to be repaid either over six or 12 months. The majority of these loans were performing loans.

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The following table presents loan modifications in response to the COVID-19 pandemic, by modification types, portfolio segments, and accommodation categories as of June 30, 2020, none of which were classified as TDRs:
($ in thousands)June 30, 2020
Section 4013 CARES ActInteragency StatementTotal
Number of LoansOutstanding BalanceNumber of LoansOutstanding BalanceNumber of LoansOutstanding Balance
Modification type:
Payment Deferral
Commercial:
C&I70$121,353  1$3,735  71$125,088  
CRE:
CRE1981,202,046  219,6842001,221,730
Multifamily residential26102,176  ——26102,176
Construction and land351,192  ——351,192
Total CRE2271,355,414  219,6842291,375,098
Total commercial2971,476,767  323,4193001,500,186
Consumer:
Residential mortgage:
Single-family residential2,1271,000,092  277116,3952,4041,116,487
HELOCs463172,096  133,166476175,262
Total residential mortgage2,5901,172,188  290119,5612,8801,291,749
Total consumer2,5901,172,188  290119,5612,8801,291,749
Total payment deferral2,8872,648,955  293142,9803,1802,791,935
Forbearance
Commercial:
CRE:
CRE330,599  ——330,599
Total CRE330,599  ——330,599
Total commercial330,599  ——330,599
Total forbearance330,599  ——330,599
Total2,890$2,679,554  293$142,980  3,183$2,822,534  

Allowance for Credit Losses

Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses that 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 includesestimate uses various models and estimation techniques based on our historical loss experience, current borrower characteristics, current conditions, reasonable and supportable forecasts and other relevant factors. The adoption of the new accounting standard increased the allowance for loan losses by $125.2 million, and the allowance for unfunded credit commitments.

commitments by $10.5 million, partially offset by an after-tax decrease to opening retained earnings of $98.0 million on January 1, 2020.

Allowance
The Company’s methodology for Loan Losses — Thedetermining the allowance for loan losses is a valuation account that is deducted from, or added to, the amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loan loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loan loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level as well as for changes in environmental conditions.

Allowance for loan losses is measured on a collective basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral, adjusted for selling cost as appropriate.

Allowance for Unfunded Credit Commitments— The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for unfunded credit commitments is adjusted through Provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitmentsa collective basis for groups loans with similar risk characteristics and specific allowance for loans which are individually evaluated. For collectively evaluated loans, the Company uses quantitative models to forecast expected credit losses and these models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable. The Company also considers qualitative factors in determining the allowance for loan losses. Qualitative adjustments are used to be funded over its estimated life. Thecapture characteristics in the portfolio that impact expected credit losses which are not fully captured within the Company’s expected credit loss models.
102

In addition to the allowance for loan losses, the Company maintains an allowance for unfunded credit commitments include reserves providedcommitments. The Company has three general areas where it provides the allowance for unfunded credit commitments: recourse obligations for loans sold, letters of credit and unfunded lending commitments. The Company’s methodology for determining the allowance for unfunded lending commitments SBLCs, and recoursecalculation uses the lifetime loss rates of the on-balance sheet commitment. Recourse obligations for loans sold.sold and letters of credit use the weighted loss rates for the segment of individual credit.




The Company employs a disciplined process and methodology to establish its allowance for loan losses each quarter. The process for estimating the allowance for loan losses takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan-specific risk characteristics. In addition to regular quarterly reviews of the adequacy of the allowance for loan losses, the Company performs ongoing assessments of the risks inherent in the loan portfolio. Determining the appropriateness of the allowance for loan losses is reported separately oncomplex and requires judgement by management about the Consolidated Balance Sheet, whereas the allowance for unfunded credit commitments is included in Accrued expenses and other liabilities on the Consolidated Balance Sheet. The Provision for credit losses is reported on the Consolidated Statementeffect of Income.matters that are inherently uncertain.

The Company is committed to maintaining the allowance for creditloan losses at a level that is commensurate with the estimated inherent losses in the loan portfolio, including unfunded credit facilities. In addition to regular quarterly reviews of the adequacy of the allowance for credit losses, the Company performs ongoing assessments of the risks inherent in the loan portfolio. While the Company believes that the allowance for creditloan losses was appropriate as of March 31,June 30, 2020, 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. The Company adopted ASU2016-13 on January 1, 2020. For additional information, seeSee Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies — New Accounting Pronouncements Adopted. AdoptedThe calculation of the allowance for credit losses involves subjective and complex judgments. For additional details about the Company’s allowance for credit losses, including the methodologies used, see, Note 7 — Loans ReceivableReceivables and Allowance for CreditLoan Losses — Allowance for Loan Losses and to the Consolidated Financial Statements and Item 7.2. MD&A — Critical Accounting Policies and Estimatesin this Form 10-Q.10-Qfor a description of the policies, methodologies and judgements used to determine the allowance for credit losses.

The following table presentstables present a summary of activities in the allowance for loan losses for loans by portfolio segments for the second quarter and first quarterhalf of 2020:2020 and 2019:
($ in thousands)Three Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family
Residential		HELOCs
Allowance for loan losses, beginning of period$362,629  $132,819  $16,530  $11,018  $26,822  $3,881  $3,304  $557,003  
Provision for (reversal of) credit losses on loans(a)37,862  43,315  7,908  7,526  (1,667) 205  (849) 94,300  
Gross charge-offs(20,378) (320) —  —  —  (221) (30) (20,949) 
Gross recoveries602  226  620  7  159  2  93  1,709  
Total net (charge-offs) recoveries(19,776) (94) 620  7  159  (219) 63  (19,240) 
Foreign currency translation adjustments8  —  —  —  —  —  —  8  
Allowance for loan losses, end of period$380,723  $176,040  $25,058  $18,551  $25,314  $3,867  $2,518  $632,071  

103

 
($ in thousands) March 31, 2020
 Commercial Consumer Total
 C&I CRE Residential Mortgage 
Other
Consumer
 
  CRE 
Multi-Family
Residential
 
Construction
and Land
 
Single-
Family
Residential
 HELOCs  
Allowance for loan losses, December 31, 2019 $238,376
 $40,509
 $22,826
 $19,404
 $28,527
 $5,265
 $3,380
 $358,287
Impact of ASU 2016-13 adoption 74,237
 72,169
 (8,112) (9,889) (3,670) (1,798) 2,221
 125,158
Allowance for loan losses, January 1, 2020 312,613
 112,678
 14,714
 9,515
 24,857
 3,467
 5,601
 483,445
Provision for (reversal of ) credit losses 60,618
 11,435
 1,281
 1,482
 1,700
 412
 (2,272) 74,656
Gross charge-offs (11,977) (954) —
 —
 —
 —
 (26) (12,957)
Gross recoveries 1,575
 9,660
 535
 21
 265
 2
 1
 12,059
Total net charge-offs (10,402) 8,706
 535
 21
 265
 2
 (25) (898)
Foreign currency translation adjustments (200) —
 —
 —
 —
 —
 —
 (200)
Allowance for loan losses, March 31, 2020 $362,629
 $132,819
 $16,530
 $11,018
 $26,822
 $3,881
 $3,304
 $557,003
 
($ in thousands)Three Months Ended June 30, 2019
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family
Residential		HELOCs
Allowance for loan losses, beginning of period$189,757  $39,224  $19,169  $22,349  $35,759  $7,401  $4,235  $317,894  
Provision for (reversal of) credit losses on loans(a)26,140  (1,250) 58  173  (3,068) (1,224) (98) 20,731  
Gross charge-offs(11,745) —  —  —  —  —  (14) (11,759) 
Gross recoveries1,713  1,837  53  439  72  —  7  4,121  
Total net (charge-offs) recoveries(10,032) 1,837  53  439  72  —  (7) (7,638) 
Foreign currency translation adjustments(362) —  —  —  —  —  —  (362) 
Allowance for loan losses, end of period$205,503  $39,811  $19,280  $22,961  $32,763  $6,177  $4,130  $330,625  

($ in thousands)Six Months Ended June 30, 2020
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family
Residential		HELOCs
Allowance for loan losses, beginning of period$238,376  $40,509  $22,826  $19,404  $28,527  $5,265  $3,380  $358,287  
Impact of ASU 2016-13 adoption74,237  72,169  (8,112) (9,889) (3,670) (1,798) 2,221  125,158  
Allowance for loan losses, January 1, 2020312,613  112,678  14,714  9,515  24,857  3,467  5,601  483,445  
Provision for (reversal of) credit losses on loans(a)98,480  54,750  9,189  9,008  33  617  (3,121) 168,956  
Gross charge-offs(32,355) (1,274) —  —  —  (221) (56) (33,906) 
Gross recoveries2,177  9,886  1,155  28  424  4  94  13,768  
Total net (charge-offs) recoveries(30,178) 8,612  1,155  28  424  (217) 38  (20,138) 
Foreign currency translation adjustments(192) —  —  —  —  —  —  (192) 
Allowance for loan losses, end of period$380,723  $176,040  $25,058  $18,551  $25,314  $3,867  $2,518  $632,071  

($ in thousands)Six Months Ended June 30, 2019
CommercialConsumerTotal
C&ICREResidential MortgageOther
Consumer
CREMulti-Family
Residential		Construction
and Land		Single-
Family
Residential		HELOCs
Allowance for loan losses, beginning of period$189,117  $40,666  $19,885  $20,290  $31,340  $5,774  $4,250  $311,322  
Provision for (reversal of) credit losses on loans(a)41,404  (2,914) (939) 2,169  1,349  401  (99) 41,371  
Gross charge-offs(28,989) —  —  —  —  —  (28) (29,017) 
Gross recoveries3,964  2,059  334  502  74  2  7  6,942  
Total net (charge-offs) recoveries(25,025) 2,059  334  502  74  2  (21) (22,075) 
Foreign currency translation adjustments7  —  —  —  —  —  —  7  
Allowance for loan losses, end of period$205,503  $39,811  $19,280  $22,961  $32,763  $6,177  $4,130  $330,625  

104

The following table presents a summary of activities in the allowance for unfunded credit commitments for the first quarter of 2020:three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30,Six Months Ended June 30,
($ in thousands)2020201920202019
Unfunded credit facilities
Allowance for unfunded credit commitments, beginning of period$20,829  $14,505  $11,158  $12,566  
Impact of ASU 2016-13 adoption—  —  10,457  —  
Provision for (reversal of) credit losses on unfunded credit
commitments		(b)8,143  (1,486) 7,357  453  
Allowance for unfunded credit commitments, end of period$28,972  $13,019  $28,972  $13,019  
Provision for credit losses(a) + (b)$102,443  $19,245  $176,313  $41,824  
 
($ in thousands) Three Months Ended
March 31, 2020
Unfunded credit facilities  
Allowance for unfunded credit commitments, December 31, 2019 $11,158
Impact of ASU 2016-13 adoption 10,457
Allowance for unfunded credit commitments, January 1, 2020 21,615
Reversal of credit losses (786)
Allowance for unfunded credit commitments, March 31, 2020 $20,829
   
Total provision for credit losses $73,870
 



93


The following table presents a summary of activities in the allowance for loan losses and the allowance for unfunded credit commitments for the first quarter of 2019:
 
($ in thousands) Three Months Ended
March 31, 2019
Allowance for loan losses, beginning of period $311,322
Provision for loan losses(a)20,640
Gross charge-offs:  
Commercial:  
C&I (17,244)
Consumer:  
Other consumer (14)
Total gross charge-offs (17,258)
Gross recoveries:  
Commercial:  
C&I 2,251
CRE:  
CRE 222
Multifamily residential 281
Construction and land 63
Total CRE 566
Consumer:  
Residential mortgage:  
Single-family residential 2
HELOCs 2
Total residential mortgage 4
Total gross recoveries 2,821
Net charge-offs (14,437)
Foreign currency translation adjustments 369
Allowance for loan losses, end of period $317,894
   
Unfunded credit facilities  
Allowance for unfunded credit commitments, beginning of period $12,566
Provision for credit losses(b)1,939
Allowance for unfunded credit commitments, end of period $14,505
   
Total provision for credit losses(a) + (b)$22,579
 

The following table presents the Company’s credit quality ratios for the second quarters and the first quartershalf of 2020 and 2019:
($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Average loans held-for-investment$37,139,949  $32,981,161  $36,146,736  $32,699,380  
Loans held-for-investment37,229,412  $33,730,377  $37,229,412  $33,730,377  
Allowance for loan losses to loans held-for-investment1.70 %0.98 %1.70 %0.98 %
Annualized net charge-offs to average loans held-for-investment0.21 %0.09 %0.11 %0.14 %
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Average loans held-for-investment $35,153,522
 $32,414,467
Loans held-for-investment $35,893,393
 $32,863,286
Allowance for loan losses on loans to loans held-for-investment 1.55% 0.97%
Annualized net charge-offs to average loans held-for-investment 0.01% 0.18%
 


As of March 31,June 30, 2020, the allowance for loan losses amounted to $557.0$632.1 million or 1.55%1.70% of loans held-for-investment, compared with $358.3 million or 1.03% and $317.9$330.6 million or 0.97%0.98% of loans held-for-investment as of December 31, 2019 and March 31,June 30, 2019, respectively. The increasequarter-over-quarter and year-over-year increases in allowance for loan losses waswere largely due to a combination of factors: deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic, which resulted in a provision for credit losses of $102.4 million and $176.3 million for the second quarter and first half of 2020, respectively, and the adoption of ASU 2016-13, which increased the allowance for loan losses by $125.2 million a deterioration in the forecasted macroeconomic variables related to the impact of COVID-19 pandemicon January 1, 2020. Second quarter 2020 gross charge-offs were $20.9 million and loan growth that resulted in a $73.9 million increase in provision for credit losses. Gross charge-offs of $13.0 million were primarily from C&I loans, whichpartially offset by gross recoveries of $1.7 million, resulting in net charge-offs of $19.2 million or annualized 0.21% of average loans held-for-investment. First half 2020 gross charge-offs were almost entirely$33.9 million and were primarily from C&I loans, partially offset by recoveries of $13.8 million, primarily from CRE loans.loans, resulting in net charge-offs of $20.1 million or annualized 0.11% of average loans held-for-investment. Charge-offs in C&I portfolio totaled $20.4 million and $32.4 million for the three and six months ended June 30, 2020, respectively. These primarily comprised of oil & gas loan charge-offs of $13.8 million and $25.7 million in these respective periods.

As previously discussed, the Company has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. As of June 30, 2020, the Bank funded PPP loans for over 7,200 customers, with an outstanding loan balance totaling $1.75 billion. As these loans are 100% guaranteed by SBA, the Company expects that these loans will have zero expected loss. As a result, as of June 30, 2020, these loans had no related allowance for loan losses. Additionally, in consideration of the economic disruption caused by COVID-19, the Company offered temporary loan accommodations. In calculating the allowance, these loans were included in the first quartergeneral reserve in their corresponding loan categories.The Companyfurther evaluated these loans and noted that no additional qualitative allowance was needed for the impact of 2020 of $12.0 million, primarily resulted from our oil and gas loan portfolio.the pandemic because the effects were captured through the forecast used by the models.


The allowance for unfunded credit commitments was $20.8$29.0 million as of March 31,June 30, 2020, compared with $11.2 million and $11.2$13.0 million as of December 31, 2019. The allowance for unfunded credit commitments as of March 31, 2020 included a cumulative-effect adjustment due to the adoption of ASU 2016-13.2019 and June 30, 2019, respectively. The Company believes that the allowance for creditloan losses as of March 31,June 30, 2020, and December 31, 2019 and June 30, 2019 was adequate.

105

The following table presents the Company’san allocation of the allowance for loan losses by portfolio segment and the ratio of each loan type to total loans held-for-investment as of March 31,June 30, 2020 and December 31, 2019:2019 (prior to the adoption of ASU 2016-13):
($ in thousands)June 30, 2020December 31, 2019
Allowance
Allocation		% of
Allowance to
Total
Allowance		Loans as % of
Total Loans		% of ACL to LoansAllowance
Allocation		% of
Allowance to
Total
Allowance		Loans as % of
Total Loans		% of ACL to Loans
Commercial:
C&I$380,723  60 %36 %2.84 %$238,376  67 %35 %1.96 %
CRE:
CRE176,040  28 %29 %1.61 %40,509  11 %30 %0.39 %
Multifamily residential25,058  4 %8 %0.83 %22,826  6 %8 %0.80 %
Construction and land18,551  3 %2 %3.27 %19,404  5 %2 %3.09 %
Total CRE219,649  35 %39 %1.51 %82,739  22 %40 %0.60 %
Consumer:
Residential mortgage:
Single-family residential25,314  4 %21 %0.33 %28,527  8 %20 %0.40 %
HELOCs3,867  1 %4 %0.26 %5,265  2 %4 %0.36 %
Total residential mortgage29,181  5 %25 %0.32 %33,792  10 %24 %0.39 %
Other consumer2,518  0 %0 %1.38 %3,380  1 %1 %1.19 %
Total$632,071  100 %100 %1.70 %$358,287  100 %100 %1.03 %
 
($ in thousands) March 31, 2020 December 31, 2019
 
Allowance
Allocation
 
% of
Allowance to
Total
Allowance
 
Loans as % of
Total Loans
 
Allowance
Allocation
 
% of
Allowance to
Total
Allowance
 
Loans as % of
Total Loans
Commercial:            
C&I $362,629
 65% 35% $238,376
 67% 35%
CRE:            
CRE 132,819
 24% 30% 40,509
 11% 30%
Multifamily residential 16,530
 3% 8% 22,826
 6% 8%
Construction and land 11,018
 2% 2% 19,404
 5% 2%
Total CRE 160,367
 29% 40% 82,739
 22% 40%
Consumer:            
Residential mortgage:

            
Single-family residential 26,822
 4% 20% 28,527
 8% 20%
HELOCs 3,881
 1% 4% 5,265
 2% 4%
Total residential mortgage 30,703
 5% 24% 33,792
 10% 24%
Other consumer 3,304
 1% 1% 3,380
 1% 1%
Total $557,003
 100% 100% $358,287
 100% 100%
 

The allowance for loan losses increased $198.7$273.8 million or 55%76% from December 31, 2019, primarily driven by the impact of adopting ASU 2016-13 adoption impact of $74.2 million in C&I and $72.2 million in CRE loans, as well as first quarterhalf 2020 provision for C&I and CRE credit losses of $60.6$98.5 million and $54.8 million, respectively, mainly due to the significant deterioration in the economic outlook from the COVID-19 pandemic.pandemic, partially offset by first half 2020 C&I gross charge-offs of $32.4 million, primarily from our oil & gas loan portfolio.

Upon adoption of ASU 2016-13, allowance for loan losses for PCD loans is determined using the same methodology as other loans held-for-investment. As of December 31, 2019, the Company had no allowance for loan losses against $222.9 million of PCI loans.


95


Liquidity Risk Management

Liquidity

Liquidity is a financial institution’s capacity to meet its deposit and other counterparties’ obligations 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 of Directors’ Risk Oversight Committee has primary oversight responsibility. At the management level, the Company’s Asset/Liability Committee (“ALCO”) sets the liquidity guidelines that govern the day-to-day active management of the Company’s liquidity position. The ALCO regularly monitors the Company’s liquidity status and related management processes, and provides regular reports to the Board of Directors. These liquidity management practices have allowed the Company to effectively manage the market stress that began in the first quarter of 2020 from the COVID-19 pandemic.

106

Liquidity Risk — Liquidity Sources. The Company’s primary source of funding is from deposits generated by its banking business, which is relatively stable and low-cost. Total deposits amounted to $38.69$40.67 billion as of March 31,June 30, 2020, compared with $37.32 billion as of December 31, 2019. The Company’s loan-to-deposit ratio was 92% and 93% as of both March 31,June 30, 2020 and December 31, 2019.2019, respectively. In addition, the Company has access to various sources of wholesale funding, as well as borrowing capacity at the FHLB and Federal Reserve BankFRB of San Francisco (“FRB”) 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. See Item 2 — MD&A — Balance Sheet Analysis — Deposits and Other Sources of Funds in this Form 10-Q for further detail related to the Company’s funding sources.

The Company’s liquid assets include cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements and AFS debt securities. The following table presents the Company’s liquid assets as of March 31,June 30, 2020 and December 31, 2019:
($ in thousands)June 30, 2020December 31, 2019
EncumberedUnencumberedTotalEncumberedUnencumberedTotal
Cash and cash equivalents$—  $4,533,502  $4,533,502  $—  $3,261,149  $3,261,149  
Interest-bearing deposits with banks—  531,591  531,591  —  196,161  196,161  
Short-term resale agreements—  700,000  700,000  —  400,000  400,000  
AFS debt securities745,163  3,139,411  3,884,574  479,432  2,837,782  3,317,214  
Total$745,163  $8,904,504  $9,649,667  $479,432  $6,695,092  $7,174,524  
 
($ in thousands) March 31, 2020 December 31, 2019
 Encumbered Unencumbered Total Encumbered Unencumbered Total
Cash and cash equivalents $—
 $3,080,042
 $3,080,042
 $—
 $3,261,149
 $3,261,149
Interest-bearing deposits with banks —
 293,509
 293,509
 —
 196,161
 196,161
Short-term resale agreements —
 400,000
 400,000
 —
 400,000
 400,000
AFS debt securities 742,410
 2,953,533
 3,695,943
 479,432
 2,837,782
 3,317,214
Total $742,410
 $6,727,084
 $7,469,494
 $479,432
 $6,695,092
 $7,174,524
 

Unencumbered liquid assets totaled $6.73$8.90 billion and $6.70 billion as of March 31,June 30, 2020 and December 31, 2019, respectively. AFS debt securities included as part of liquidity sources are primarily comprised of mortgage-backed securities and debt securities issued by U.S. government agency and U.S. government-sponsored enterprises, U.S. Treasury securities, municipal securities and foreign bonds. The Company believes these AFS debt securities provide quick sources of liquidity to obtain financing, regardless of market conditions, through sale or pledging.

As a means of augmenting the Company’s liquidity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB and FRB, unsecured federal funds lines of credit with various correspondent banks, and several master repurchase agreements with major brokerage companies. The Company’s available borrowing capacity with the FHLB and FRB as of June 30, 2020, was $6.68$7.19 billion and $2.91$4.35 billion, respectively, as of March 31, 2020.respectively. Unencumbered loans and/or securities were pledged to the FHLB and FRB discount window as collateral. Eligibility of collateral is defined in guidelines from the FHLB and FRB and is subject to change at their discretion. The Bank’s unsecured federal funds lines of credit, subject to availability, totaled $875.0 million$1.00 billion with correspondent banks as of March 31,June 30, 2020. Estimated borrowing capacity from unpledged AFS debt securities totaled $2.51$2.78 billion as of March 31,June 30, 2020. In connection with the Company’s participation in the PPP under the CARES Act, the Company has the ability to pledge loans it has made under the SBA’s PPP program to the PPPLF and receive term funding matching the term of the pledged loans for the full balance of PPP loans held by the Company. As of June 30, 2020, the Company had drawn down $1.43 billion from the Federal Reserve PPPLF and had $343.6 million PPP loans available to be pledged as collateral to secure additional funding. In sum, the Company had available borrowing capacity of $13.0$15.66 billion as of March 31,June 30, 2020, and the Company believes that its liquidity sources are sufficient to meet all reasonably foreseeable short-term needs over the next 12 months.



Liquidity Risk — Liquidity for East West. East West’s primary source of liquidity is from cash dividends distributed by its subsidiary, East West Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends as discussed in Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds of the Company’s 2019 Form 10-K. During the first quartershalf of 2020 and 2019, the Bank paid total dividends of $211.0$511.0 million and $40.0$90.0 million to East West, respectively.

Liquidity Risk — Liquidity Stress Testing. Liquidity stress testing is performed at the Company level, as well as at the foreign subsidiary and foreign branch levels. Stress testing and scenario analysis are intended to quantify the potential impact of a liquidity event on the financial and liquidity position of the entity. These scenarios include assumptions about significant changes in key funding sources, market triggers and potential uses of funding and economic conditions in certain countries. In addition, Company specific events are incorporated into the stress testing. Liquidity stress tests are conducted to ascertain potential mismatches between liquidity sources and uses over a variety of time horizons, both immediate and longer term, and over a variety of stressed conditions. Given the range of potential stresses, the Company maintains a series of contingency funding plans on a consolidated basis and for individual entities.
107

In response to recent developments relating to COVID-19, the Company is continuing to closely monitoringmonitor the impact of the pandemic on its business. The uncertainty surrounding COVID-19 and in the financial service industry in general could potentially impact the liquidity of the Company. The prolonged strained economic, capital, credit and/or financial market conditions may expose the Company to liquidity risk. Nevertheless, the Company believes that the market conditions have shown signs of improvement after the Federal Reserve stepped in with a broad array of actions to stabilize financial markets and lower borrowing costs. As of March 31,June 30, 2020, the Company was not aware of any material commitments for capital expenditures in the foreseeable future and believes it has adequate liquidity resources to conduct operations and meet other needs in the ordinary course of business. Given the uncertainty and the rapidly changing market and economic conditions related to the COVID-19 pandemic, the Company will continue to actively evaluate the nature and extent of the impact of the COVID-19 pandemic on its business and financial position.

Consolidated Cash Flows Analysis

The following table presents a summary of the Company’s Consolidated Statement of Cash Flows for the periods indicated, which may be helpful to highlight business strategies and macro trends. In addition to this cash flow analysis, the discussion related to liquidity in Item 7. MD&A — Risk Management — Liquidity Risk Management — Liquidity may provide a more useful context in evaluating the Company’s liquidity position and related activity.
($ in thousands)Six Months Ended June 30,
20202019
Net cash provided by operating activities$270,916  $290,001  
Net cash used in investing activities(3,510,613) (997,151) 
Net cash provided by financing activities4,527,520  1,327,884  
Effect of exchange rate changes on cash and cash equivalents(15,470) (497) 
Net increase in cash and cash equivalents1,272,353  620,237  
Cash and cash equivalents, beginning of period3,261,149  3,001,377  
Cash and cash equivalents, end of period$4,533,502  $3,621,614  
 
($ in thousands) Three Months Ended March 31,
 2020 2019
Net cash provided by operating activities $91,703
 $139,241
Net cash used in investing activities (1,405,330) (118,681)
Net cash provided by financing activities 1,119,028
 749,370
Effect of exchange rate changes on cash and cash equivalents 13,492
 14,018
Net (decrease) increase in cash and cash equivalents (181,107) 783,948
Cash and cash equivalents, beginning of period 3,261,149
 3,001,377
Cash and cash equivalents, end of period $3,080,042
 $3,785,325
     

Operating Activities — Net cash provided by operating activities was $91.7$270.9 million and $139.2$290.0 million for the first quartershalf of 2020 and 2019, respectively. During the first quartershalf of 2020 and 2019, net cash provided by operating activities mainly reflected inflows of $144.8$244.2 million and $164.0$314.4 million from net income, respectively. During the first quarterhalf of 2020, net operating cash inflows also benefited from $105.3$228.3 million of non-cashnoncash adjustments to reconcile net income to net operating cash, as well as $304.7$257.4 million of net changes in accrued expenses and other liabilities, partially offset by $462.8$456.4 million of net changes in accrued interest receivable and other assets. The $456.4 million of net changes in accrued interest receivable and other assets between June 30, 2020 and December 31, 2019 was primarily due to changes in derivative asset fair values. In comparison, during the same period in 2019, net operating cash inflows benefited from $62.2$113.6 million of non-cashnoncash adjustments to reconcile net income to net operating cash, which was offset by $60.8 million of net changes in accrued expenses and other liabilities, and $27.6$150.2 million of net changes in accrued interest receivable and other assets.



Investing Activities — Net cash used in investing activities was $1.41$3.51 billion and $118.7$997.2 million for the first quartershalf of 2020 and 2019, respectively. During the first quarterhalf of 2020, net cash used in investing activities primarily reflected cash outflows of $1.14$2.48 billion from loans held-for-investment, $372.0$501.1 million from AFS debt securities, $115.4$315.5 million from interest-bearing deposits with banks and $27.6$150.0 million from net funding of investments in qualified affordable housing partnerships, tax credit and other investments.resale agreements. The cash outflows from loans held-for-investment were primarily due to C&I, CRE and single-family residential loan growth during the first quarterhalf of 2020. These cash outflows used in investing activities were partially offset by cash inflows of $250.0 million from resale agreements. During the same period in 2019, net cash used in investing activities primarily reflected cash outflows of $465.0 million$1.35 billion from loans held-for-investment, and $33.3 million from net funding of investments in qualified affordable housing partnerships, tax credit and other investments, partially offset by a $245.4$222.4 million increase in interest-bearing deposits with banks and $175.7 million net cash inflows fromdecrease in AFS debt securities of $137.2 million.securities.

Financing Activities — Net cash provided by financing activities was $1.12$4.53 billion and $749.4 million$1.33 billion for the first quartershalf of 2020 and 2019, respectively. During the first quartershalf of 2020, net cash provided by financing activities primarily reflected net increases of $1.37$3.36 billion in deposits, $1.43 billion in PPPLF advances and $40.0$225.8 million in short-term borrowings, partially offset by $158.7 million in repayment of repurchase agreements and its extinguishment cost, $146.0 million in shares repurchased, $100.0$90.0 million net repayment of FHLB advances, and $41.4$80.3 million in cash dividends. During the same period in 2019, net cash provided by financing activities primarily reflected a $1.04 billion net increase of $800.1in deposits and a $418.0 million net increase in deposits,FHLB advances, partially offset by $34.9cash dividends of $74.9 million and a $38.1 million decrease in cash dividends.short-term borrowings.

108

Market Risk Management

Market risk is the risk that the Company’s financial condition may change resulting from adverse movements in market rates or prices including interest rates, foreign exchange rates, interest rate contracts, investment securities prices, credit spreads, and related risk resulting from mismatches in rate sensitive assets and liabilities. In the event of market stress, the risk could have a material impact on our results of financial condition.

The Board’s Risk Oversight Committee has primary oversight responsibility. At the management level, the ALCO establishes and monitors compliance with the policies and risk limits pertaining to market risk management activities. Corporate Treasury supports the ALCO in measuring, monitoring and managing interest rate risk as well as all other market risks.

Interest Rate Risk Management

Interest rate risk results primarily from the Company’s traditional banking activities of gathering deposits and extending loans, and is the primary market risk for the Company. Economic and financial conditions, movements in interest rates, and consumer preferences impact the level of noninterest-bearing funding sources at the Company, and affect the difference between the interest the Company earns on interest-earning assets and pays on interest-bearing liabilities. In addition, changes in interest rates can influence the rate of principal prepayments on loans and the speed of deposit withdrawals. Due to the pricing term mismatches and the embedded options inherent in certain products, changes in market interest rates not only affect expected near-term earnings, but also the economic value of these interest-earning assets and interest-bearing liabilities. Other market risks include foreign currency exchange risk and equity price risk. These risks are not considered significant to the Company and no separate quantitative information concerning these risks is presented herein.

With oversight by the Company’s Board of Directors, the ALCO coordinates the overall management of the Company’s interest rate risk. The ALCO meets regularly and is responsible for reviewing the Company’s open market positions and establishing policies to monitor and limit exposure to market risk. Management of interest rate risk is carried out primarily through strategies involving the Company’s investment securities portfolio, loan portfolio, available funding channels and capital market activities. In addition, the Company’s policies permit the use of derivative instruments to assist in managing interest rate risk.

The interest rate risk exposure is measured and monitored through various risk management tools, which include a simulation model that performs interest rate sensitivity analyses under multiple interest rate scenarios. The model incorporates the Company’s cash instruments, loans, debt securities, resale agreements, deposits, borrowings and repurchase agreements, as well as financial instruments from the Company’s foreign operations. The Company incorporates both a static balance sheet and a forward growth balance sheet in order to perform these analyses. The simulated interest rate scenarios include a non-parallel shift in the yield curve (“rate shock”) and a gradual non-parallel shift in the yield curve (“rate ramp”). In addition, the Company also performs simulations using alternative interest rate scenarios, including various permutations of the yield curve flattening, steepening or inverting. Results of these various simulations are used to formulate and gauge strategies to achieve a desired risk profile within the Company’s capital and liquidity guidelines.



The net interest income simulation model is based on the actual maturity and re-pricing characteristics of the Company’s interest-rate sensitive assets, liabilities and related derivative contracts. It also incorporates various assumptions, which management believes to be reasonable but may have a significant impact on results. These assumptions include, but are not limited to, the timing and magnitude of changes in interest rates, the yield curve evolution and shape, the correlation between various interest rate indices, financial instrument future repricing characteristics and spread relative to benchmark rates, and the effect of interest rate floors and caps. The modeled results are highly sensitive to deposit decay and deposit beta assumptions, derived from a regression analysis of the Company’s historical deposit data. Deposit beta commonly refers to the correlation of the change in interest rates paid on deposits to changes in benchmark market interest rates. The model is also sensitive to the loan and investment prepayment assumptions, based on an independent model and the Company’s historical prepayment data, which consider anticipated prepayments under different interest rate environments.

Simulation results are highly dependent on input assumptions. To the extent actual behavior is different from the assumptions in the models, there could be a material change in interest rate sensitivity. The assumptions applied in the model are documented and supported for reasonableness, and periodically back-tested to assess their effectiveness. The Company makes appropriate calibrations to the model as needed, continually refining the model, methodology and results. Changes to key model assumptions are reviewed by the ALCO. Scenario results do not reflect strategies that management could employ to limit the impact of changing interest rate expectations.

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As the federal funds target rate range has been lowered to near zero to between 0.00% and 0.25% in March 2020 and the Federal Reserve has committed its resources to support the financial markets, business, and state and local governments, it is not expected that rates can decline further, or into the negative territory. Consequently, the simulation results for the downward interest rate scenarios as of June 30, 2020 are not provided.

Twelve-Month Net Interest Income Simulation

Net Interest Income simulation modeling looks at interest rate risk through earnings. It projects the changes in interest rate sensitive asset and liability cash flows, expressed in terms of net interest income, over a specified time horizon for defined interest rates scenarios. Net interest income simulations generate insight into the impact of market rates changes on earnings and guide risk management decisions. The Company assesses interest rate risk by comparing net interest income using different interest rate scenarios.

The following table presents the Company’s net interest income sensitivity as of March 31, 2020 and December 31, 2019 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in upward direction as of June 30, 2020 and in both directions:directions as of December 31, 2019.
Change in Interest Rates
(Basis Points)
Net Interest Income Volatility (1)(2)
June 30, 2020December 31, 2019
+20014.6 %13.2 %
+1006.7 %6.7 %
-100NM(5.5)%
-200NM(8.7)%
 
Change in Interest Rates
(Basis Points)		 
Net Interest Income Volatility (1)
 March 31, 2020 December 31, 2019
+200 12.8% 13.2%
+100 5.7% 6.7%
-100 (0.4)% (5.5)%
-200 (0.7)% (8.7)%
 
(1)The percentage change represents net interest income over 12 months in a stable interest rate environment versus net interest income in the various rate scenarios.
(1)The percentage change represents net interest income over 12 months in a stable interest rate environment versus net interest income in the various rate scenarios.
(2)NM — Not meaningful.

The Company’sCompany��s estimated twelve-month net interest income sensitivity as of March 31,June 30, 2020 was lowerhigher when compared with the sensitivity as of December 31, 2019, for both the upward 100 and upward 200 basis point rate scenarios.scenario, while the sensitivity remained unchanged for the upward 100 basis point rate scenario. This reflects a greater rate of upward repricing in the Company’s deposit portfolio,rate sensitive assets, which offsets simulated increases in interest incomeexpense from higher interest rates on assets. The reduction in simulated increases in interest income is also impacted by thedeposits. While there has been an increase in the population of floating rate loans that are currently at their floors which has increased under the current low interest rate environment. In both ofenvironment, an increase in the simulated downward interest rate scenarios, sensitivity is primarily decreased as a result ofcash and cash equivalents along with an increase in non-interest bearing deposits and the 150 basis point reduction in the federal funds targetbase case twelve-month net interest income were the primary drivers for the increased the interest rate range to 0.00% and 0.25% during March 2020.sensitivity under the upward interest rate scenarios.

The Company’s net interest income profile as of March 31,June 30, 2020 reflects an asset sensitive position. Net interest income would be expected to increase if interest rates rise and to decrease if interest rates decline, albeit the federal funds rate is floored at the target range between 0.00% and 0.25%. The Company is naturally asset sensitive due to the large share of variable rate loans in its loan portfolio, which are primarily linked to Prime and LIBOR indices. The Company’s interest income is vulnerable to changes in short-term interest rates. The Company’s deposit portfolio is primarily comprised of non-maturity deposits, which are not directly tied to short-term interest rate indices, but are, nevertheless, sensitive to changes in short-term interest rates.



The federal funds target rate was between 0.00% and 0.25% as of March 31,June 30, 2020 and between 1.50% and 1.75% as of December 31, 2019. In its statement released onAfter cutting the rate to a range of between 0.00% and 0.25% in March 3, 2020, the Federal Open Market Committee decidedpledged to lowermaintain monetary support and planned to leave interest rates unchanged through 2022 in order to support the target range formarkets, which continued to be strained from the federal funds rate to a range of between 1.00% to 1.25% and, on March 15, 2020, further announced its decision to lower the target range to 0.00% and 0.25%. The Fed deemed that the effectsimpact of the COVID-19 pandemic will weigh on economic activity in the near term and pose risks to the economic outlook.pandemic.

110

While an instantaneous and sustained non-parallel shift in market interest rates was used in the simulation model described in the preceding paragraphs, the Company believes that any shift in interest rates would likely be more gradual and would therefore have a more modest impact. The rate ramp table below shows the net income volatility under a gradual non-parallel shift upward and downward of the yield curve in even quarterly increments over the first twelve months, followed by rates held constant thereafter:
Change in Interest Rates
(Basis Points)
Net Interest Income Volatility (1)(2)
June 30, 2020December 31, 2019
+200 Rate Ramp5.7 %6.0 %
+100 Rate Ramp2.7 %3.0 %
-100 Rate RampNM(2.6)%
-200 Rate RampNM(5.1)%
 
Change in Interest Rates
(Basis Points)		 
Net Interest Income Volatility (1)
 March 31, 2020 December 31, 2019
+200 Rate Ramp 5.0% 6.0%
+100 Rate Ramp 2.2% 3.0%
-100 Rate Ramp (0.3)% (2.6)%
-200 Rate Ramp (0.4)% (5.1)%
 
(1)The percentage change represents net interest income under a gradual non-parallel shift in even quarterly increments over 12 months.
(1)The percentage change represents net interest income under a gradual non-parallel shift in even quarterly increments over 12 months.
(2)NM — Not meaningful.

The Company believes that the rate ramp table, shown above, when evaluated together with the results of the rate shock simulation, presents a better indication of the potential impact to the Company’s twelve-month net interest income in a rising and falling rate scenario. Between March 31,June 30, 2020 and December 31, 2019, the Company’s modeled sensitivity slightly decreased under a ramp simulation.simulation under the upward interest rate scenarios.

Economic Value of Equity at Risk

Economic value of equity (“EVE”) is a cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows. This calculation is used for asset/liability management and measures changes in the economic value of the bank. The fair market values of a bank's assets and liabilities are directly linked to interest rates. In some ways, the economic value approach provides a broader scope than the net income volatility approach since it captures all anticipated cash flows.

EVE simulation reflects the effect of interest rate shifts on the value of the Company and is used to assess the degree of interest rate risk exposure. In contrast to the earnings perspective, the economic perspective identifies riskrisks arising from repricing or maturity gaps for the life of the balance sheet. Changes in economic value indicate anticipated changes in the value of the bank’s future cash flows. Thus, the economic perspective can provide a leading indicator of the bank’s future earnings and capital values. The economic valuation method also reflects those sensitivities across the full maturity spectrum of the bank’s assets and liabilities.

The following table presents the Company’s EVE sensitivity as of March 31, 2020 and December 31, 2019 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in an upward direction as of June 30, 2020 and in both directions:directions as of December 31, 2019:
Change in Interest Rates
(Basis Points)
EVE Volatility (1)(2)
June 30, 2020December 31, 2019
+20012.8 %7.0 %
+1006.4 %3.6 %
-100NM(1.4)%
-200NM(3.5)%
     
Change in Interest Rates
(Basis Points)		 
EVE Volatility (1)
 March 31, 2020 December 31, 2019
+200 11.2% 7.0%
+100 6.5% 3.6%
-100 (0.9)% (1.4)%
-200 (5.8)% (3.5)%
     
(1)The percentage change represents net portfolio value of the Company in a stable interest rate environment versus net portfolio value in the various rate scenarios.
(1)The percentage change represents net portfolio value of the Company in a stable interest rate environment versus net portfolio value in the various rate scenarios.
(2)NM — Not meaningful.

The Company’s EVE sensitivity for the upward interest rate scenarios increased as of March 31, 2020. The sensitivity for the downward 100 basis points scenario decreased while the sensitivity for the downward 200 basis points scenario increased as of March 31,June 30, 2020 as compared with the results as of December 31, 2019. The changes in EVE sensitivity during this period were primarily due to the reduced base EVE and the changechanges in level and shape of the yield curve.



The Company’s EVE profile as of March 31,June 30, 2020 reflects an asset sensitive EVE position.position under the upward interest rate scenarios. Given the uncertainty of the magnitude, timing and direction of future interest rate movements, and the shape of the yield curve, actual results may vary from those predicted by the Company’s model.

111

Derivatives

It is the Company’s policy not to speculate on the future direction of interest rates, foreign currency exchange rates and commodity prices. However, the Company will, from time to time, enter into derivative transactions in order to reduce its exposure to market risks, primarily interest rate risk and foreign currency risk. The Company believes that these derivative transactions, when properly structured and managed, may provide a hedge against inherent risk in certain assets and liabilities and against risk in specific transactions. Hedging transactions may be implemented using a variety of derivative instruments such as swaps, forwards and options. Prior to entering into any hedging activities, the Company analyzes the costs and benefits of the hedge in comparison to alternative strategies. In addition, the Company enters into derivative transactions in order to assist customers with their risk management objectives, primarily to manage exposures to fluctuations in interest rates, foreign currencies and commodity prices. To economically hedge against the derivative contracts entered into with the Company’s customers, the Company enters into mirrored derivative contracts with third-party financial institutions. The exposures from derivative transactions are collateralized by cash and/or eligible securities based on limits as set forth in the respective agreements entered between the Company and the financial institutions.

The Company is subject to credit risk associated with the counterparties to the derivative contracts. This counterparty credit risk is a multidimensional form of risk, affected by both the exposure and credit quality of the counterparty, both of which are sensitive to market-induced changes. The Company’s Credit Risk Management Committee provides oversight of credit risks and the Company has guidelines in place to manage counterparty concentration, tenor limits and collateral. The Company manages the credit risk of its derivative positions by diversifying its positions among various counterparties, entering into legally enforceable master netting arrangements and requiring collateral arrangements, where possible. The Company may also transfer counterparty credit risk related to interest rate swaps to institutional third parties through the use of credit risk participation agreements (“RPAs”). Certain derivative contracts are required to be centrally cleared through clearinghouses to further mitigate counterparty credit risk. The Company incorporates credit value adjustments and other market standard methodologies to appropriately reflect its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives.

Fair Value Hedges — As of March 31, 2020, theThe Company had one and two cancellable interest rate swap contracts as of June 30, 2020 and December 31, 2019, respectively, with original terms of 20 years.years each. These swap contracts involve the exchange of variable rate payments over the life of the agreements without the exchange of the underlying notional amounts. The changes in fair value of the hedged brokered certificates of deposit are expected to be effectively offset by the changes in fair value of the swaps throughout the terms of these contracts.

Cash Flow Hedges — As of June 30, 2020, the Company entered into two interest rate swap contracts designated to hedge against the risk of variable cash flow that the Company is exposed to from its variable interest rate borrowings, including FRB discount window borrowing and FHLB advances. For cash flow hedges, the entire change in the fair value of the hedging instruments is recognized in AOCI and reclassified to earnings in the same period during which the hedged cash flows impact earnings.

Net Investment Hedges — ASC 830-20, Foreign Currency Matters — Foreign Currency Transactions and ASC 815, Derivatives and Hedging, allow hedging of the foreign currency risk of a net investment in a foreign operation. The CompanyBank entered into foreign currency forward contracts to hedge its investment in East West Bank (China) Limited, a non-U.S. dollar (“USD”) functional currency subsidiary in China. The hedging instruments designated as net investment hedges, involve hedging the risk of changes in the USDU.S. dollar equivalent value of a designated monetary amount of the Company’s net investment in East West Bank (China) Limited, against the risk of adverse changes in the foreign currency exchange rate of the Chinese Renminbi (“RMB”). As of March 31,June 30, 2020, the outstanding foreign currency forwards effectively hedged approximately 92%50% of the RMB exposure in East West Bank (China) Limited. The fluctuation in foreign currency translation of the hedged exposure is expected to be offset by changes in the fair value of the forwards.

112

Interest Rate Contracts — The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions including with central clearing organizations. Certain derivative contracts entered with central clearing organizations are settled-to-market daily to the extent the central clearing organizations’ rulebooks legally characterize the variation margin as settlement. Derivative contracts allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are not linked to specific Company assets or liabilities on the Consolidated Balance Sheet or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked-to-market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements.



Foreign Exchange Contracts — The Company enters into foreign exchange contracts with its customers, consisting of forward, spot, swap and option contracts to accommodate the business needs of its customers. For the foreign exchange contracts entered into with its customers, the Company managed its foreign exchange exposure by entering into offsetting foreign exchange contracts with third-party financial institutions and/or entering into bilateral collateral and master netting agreements with customer counterparties to manage its credit exposure. The changes in the fair values entered with third-party financial institutions are expected to be largely comparable to the changes in fair values of the foreign exchange transactions executed with the customers throughout the terms of these contracts. The Company also utilizes foreign exchange contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in certain foreign currency on-balance sheet assets and liabilities, primarily foreign currency denominated deposits offered to its customers. The Company’s policies permit taking proprietary currency positions within approved limits, in compliance with the proprietary trading exemption provided under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Company does not speculate in the foreign exchange markets, and actively manages its foreign exchange exposures within prescribed risk limits and defined controls.

Credit Contracts — The Company may periodically enter into RPAs to manage the credit exposure on interest rate contracts associated with its syndicated loans. The Company may enter into protection sold or protection purchased RPAs with institutional counterparties. Under the RPA, the Company will receive or make a payment if a borrower defaults on the related interest rate contract. The Company manages its credit risk on the RPAs by monitoring the credit worthiness of the borrowers, which is based on the Company’s normal credit review process.

Equity Contracts — As part of the loan origination process, from time to time, the Company obtained warrants to purchase preferred and/or common stock of technology and life sciences companies to which it provides loans to.loans. The warrants included on the Consolidated Financial Statements were from public and private companies.

Commodity Contracts — The Company entered into energy commodity contracts with its customers to allow them to hedge against the risk of fluctuation in energy commodity prices. To economically hedge against the risk of fluctuation in commodity prices in the products offered to its customers, the Company enters into offsetting commodity contracts with third-party financial institutions including with central clearing organizations. Certain derivative contracts entered with central clearing organizations are settled to market daily to the extent the central clearing organizations’ rulebooks legally characterize the variation margin as settlement. The changes in fair values of the energy commodity contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the energy commodity transactions executed with customers throughout the terms of these contracts.

Additional information on the Company’s derivatives is presented in Note 1 — Summary of Significant Accounting Policies — Derivatives to the Consolidated Financial Statements of the Company’s 2019 Form 10-K, Note 3 — Fair Value Measurement and Fair Value of Financial Instruments and Note 6 — Derivatives to the Consolidated Financial Statements of this Form 10-Q.

113

Impact of Inflation

The consolidated financial statements and related financial data presented in this report have been prepared according to GAAP, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Since almost all the assets and liabilities of a financial institution are monetary in nature, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. AlthoughWhile inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies and use of estimates (for significant accounting policies and use of estimates of allowance for credit losses, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies in this Form 10-Q and for all other significant accounting policies and use of estimates, see Note 1 — Summary of Significant Accounting Policies of the Company’s 2019 Form 10-K) are fundamental to understanding its results of operations and financial condition. Some accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In addition, some significant accounting policies require significant judgmentjudgments in applying complex accounting principles to individual transactions to determinetransaction and determining the most appropriate treatment. The Company has procedures and processes in place to facilitate making these judgments. For significant accounting policies and use of estimates of allowance for credit losses, see Note 2—Current Accounting Developments and Summary of Significant Accounting Policies in this Form 10-Q; and for all other significant accounting policies and use of estimates, see Note 1 — Summary of Significant Accounting Policies of the Company’s 2019 Form 10-K.


Certain accounting policies are considered to have a critical effect on the Company’s Consolidated Financial Statements in the Company’s judgment. Critical accounting policies are defined as those that require the most complex or subjective judgments and are reflective of significant uncertainties, and whose actual results could differ from the Company’s estimates. Future changes in the key variables could change future valuations and impact the results of operations. In each area, the Company has identified the most important variables in the estimation process. The Company has used the best information available to make the estimations necessary for the related assets and liabilities. The following accounting policies are critical to the Company’s Consolidated Financial Statements as they require management to make subjective and complex judgments about matters that are inherently uncertain where actual results could differ materially from the Company’s estimates:

•fair value of financial instruments;
•allowance for credit losses;
•goodwill impairment; and
•income taxes.

Recently Issued Accounting Standards

For detailed discussion and disclosure on new accounting pronouncements adopted and recent accounting pronouncements issued, see Note 2 — Current Accounting Developments and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10-Q.

Supplemental Information — Explanation of GAAP andto Non-GAAP Financial Measures

To supplement the Company’s unaudited interim Consolidated Financial Statements presented in accordance with GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not in accordance with, or an alternative to GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement. The Company believes these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding its performance, and allow comparability to prior periods. These non-GAAP financial measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes.

During the second quarter of 2020, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million. During the first quarterand second quarters of 2019, the Company recorded a $7.0 million pre-tax impairment charge and reversed $30.1 million of certain previously claimed tax credits related to DC Solar.Solar, respectively.


114

The following tables present the reconciliations of GAAP to non-GAAP financial measures for the periods presented:
($ and shares in thousands, except per share data)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net income(a)$99,352  $150,380  $244,176  $314,404  
Add: Impairment charge related to DC Solar (1)
—  —  —  6,978  
Tax effect of adjustments (2)
—  —  —  (2,063) 
Add: Reversal of certain previously claimed tax credits related to DC Solar—  30,104  —  30,104  
Non-GAAP net income(b)$99,352  $180,484  $244,176  $349,423  
Diluted weighted-average number of shares outstanding141,827  146,052  143,560  146,016  
Diluted EPS$0.70  $1.03  $1.70  $2.15  
Diluted EPS impact of impairment charge related to DC Solar, net of tax—  —  —  0.03  
Diluted EPS impact of reversal of certain previously claimed tax credits related to DC Solar—  0.21  —  0.21  
Non-GAAP diluted EPS$0.70  $1.24  $1.70  $2.39  
Average total assets(c)$48,228,914  $41,545,441  $46,492,211  $41,144,152  
Average stockholders’ equity(d)$4,982,446  $4,684,348  $5,002,226  $4,611,231  
ROA (3)
(a)/(c)0.83 %1.45 %1.06 %1.54 %
Non-GAAP ROA (3)
(b)/(c)0.83 %1.74 %1.06 %1.71 %
ROE (3)
(a)/(d)8.02 %12.88 %9.82 %13.75 %
Non-GAAP ROE (3)
(b)/(d)8.02 %15.45 %9.82 %15.28 %
 
($ and shares in thousands, except per share data)  Three Months Ended March 31,
 2020 2019
Net income (a) $144,824
 $164,024
Add: Impairment charge related to DC Solar (1)
   —
 6,978
Tax effect of adjustments (2)
   —
 (2,063)
Non-GAAP net income (b) $144,824
 $168,939
       
Diluted weighted-average number of shares outstanding   145,285
 145,921
       
Diluted EPS   $1.00
 $1.12
Diluted EPS impact of impairment charge related to DC Solar, net of tax   —
 0.04
Non-GAAP diluted EPS   $1.00
 $1.16
       
Average total assets (c) $44,755,509
 $40,738,404
Average stockholders’ equity (d) $5,022,005
 $4,537,301
ROA (3)
 (a)/(c) 1.30% 1.63%
Non-GAAP ROA (3)
 (b)/(c) 1.30% 1.68%
ROE (3)
 (a)/(d) 11.60% 14.66%
Non-GAAP ROE (3)
 (b)/(d) 11.60% 15.10%
 
(1)
(1)Included in Amortization of tax credit and other investments on the Consolidated Statement of Income.
(2)Applied statutory rates of 28.35% for the first quarter of 2020 and 29.56% for the first quarter of 2019.
(3)Annualized.
 
($ in thousands)  Three Months Ended March 31,
 2020 2019
Net interest income before provision for credit losses (a) $362,707
 $362,461
Total noninterest income   54,049
 42,131
Total revenue (b) $416,756
 $404,592
       
Total noninterest expense (c) $178,876
 $186,922
Less: Amortization of tax credit and other investments   (17,325) (24,905)
 Amortization of core deposit intangibles   (953) (1,174)
Non-GAAP noninterest expense (d) $160,598
 $160,843
       
Efficiency ratio (c)/(b) 42.92% 46.20%
Non-GAAP efficiency ratio (d)/(b) 38.54% 39.75%
 
(2)Applied statutory rate of 29.56% for the three and six months ended June 30, 2019.
(3)Annualized.

($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Income tax expense(a)$12,921  $72,797  $32,107  $103,864  
Less: Reversal of certain previously claimed tax credit related to DC Solar(b)—  (30,104) —  (30,104) 
Non-GAAP income tax expense(c)$12,921  $42,693  $32,107  $73,760  
Income before income taxes(d)112,273  $223,177  $276,283  $418,268  
Effective tax rate(a)/(d)11.51 %32.62 %11.62 %24.83 %
Less: Reversal of certain previously claimed tax credit related to DC Solar(b)/(d)— %(13.49)%— %(7.20)%
Non-GAAP effective tax rate(c)/(d)11.51 %19.13 %11.62 %17.63 %
115
 

($ and shares in thousands, except per share data)		  March 31,
2020		 December 31,
2019		 March��31,
2019
Stockholders’ equity (a) $4,902,985
 $5,017,617
 $4,591,930
Less: Goodwill   (465,697) (465,697) (465,697)
Other intangible assets (1)
   (14,769) (16,079) (21,109)
Non-GAAP tangible common equity (b) $4,422,519
 $4,535,841
 $4,105,124
         
Number of common shares at period-end (c) 141,435
 145,625
 145,501
Non-GAAP tangible common equity per share (b)/(c) $31.27
 $31.15
 $28.21
 
(1)Includes core deposit intangibles and mortgage servicing assets.


104

($ in thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net interest income before provision for credit losses(a)$343,775  $367,326  $706,482  $729,787  
Total noninterest income58,637  52,759  112,686  94,890  
Total revenue(b)$402,412  $420,085  $819,168  $824,677  
Total noninterest expense(c)$187,696  $177,663  $366,572  $364,585  
Less: Amortization of tax credit and other investments(24,759) (16,739) (42,084) (41,644) 
 Amortization of core deposit intangibles(931) (1,152) (1,884) (2,326) 
 Repurchase agreements’ extinguishment cost(8,740) —  (8,740) —  
Non-GAAP noninterest expense(d)$153,266  $159,772  $313,864  $320,615  
Efficiency ratio(c)/(b)46.64 %42.29 %44.75 %44.21 %
Non-GAAP efficiency ratio(d)/(b)38.09 %38.03 %38.31 %38.88 %

($ and shares in thousands, except per share data)		June 30,
2020		March 31,
2020		June 30,
2019
Stockholders’ equity(a)$4,987,243  $4,902,985  $4,734,593  
Less: Goodwill(465,697) (465,697) (465,697) 
Other intangible assets (1)
(13,490) (14,769) (18,952) 
Non-GAAP tangible common equity(b)$4,508,056  $4,422,519  $4,249,944  
Number of common shares at period-end(c)141,486  141,435  145,547  
Non-GAAP tangible common equity per share(b)/(c)$31.86  $31.27  $29.20  
(1)Includes core deposit intangibles and mortgage servicing assets.


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Forward-Looking Statements

Certain matters discussed in this Form 10-Q contains certain forward-looking information about us that is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts.facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control, particularly with regard to developments related to COVID-19. These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” “assumes,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs, and the negative thereof. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such differences, some of which are beyond the Company’s control, include, but are not limited to

•the impact of disease pandemics, such as the outbreak and worldwide spread of COVID-19, on the Company, its operations and its customers, employees and employees;the markets in which the Company operates and in which its loans are concentrated; and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may precipitate or exacerbate one or more of the below-mentioned and/or other risks, and significantly disrupt or prevent the Company from operating its business in the ordinary course for an extended period;
•changes in governmental policy and regulation, including measures taken in response to economic, business, political and social conditions, such as the SBA’s PPP, the Federal Reserve efforts to provide liquidity to the U.S. financial system, including changes in government interest rate policies, and to provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic, as well as the resulting effect of all such items on the Company’s operations, liquidity and capital position, and on the financial condition of the Company’s borrowers and other customers;
•changes in the U.S. economy, including an economic slowdownsslowdown or recession, inflation, deflation, employment levels, rate of growth and general business conditions;
fluctuations in the Company’s stock price;
government intervention in the financial system, including changes in government interest rate policies;
changes in income tax laws and regulations;
•the changes and effects thereof in trade, monetary and fiscal policies and laws, including the ongoing trade dispute between the U.S. and the People’s Republic of China;
•fluctuations in the Company’s stock price;
•changes in income tax laws and regulations;
•the Company’s ability to compete effectively against other financial institutions in its banking markets;
•success and timing of the Company’s business strategies;
•the Company’s ability to retain key officers and employees;
•impact on the Company’s funding costs, net interest income and net interest margin from changes in key variable market interest rates, competition, regulatory requirements and the Company’s product mix;
•changes in the Company’s costs of operation, compliance and expansion;
•the Company’s ability to adopt and successfully integrate new technologies into its business in a strategic manner;
•impact of benchmark interest rate reform in the U.S. that resulted in the SOFR selected as the preferred alternative reference rate to the LIBOR;
•impact of failure in, or breach of, the Company’s operational or security systems or infrastructure, or those of third parties with whom the Company does business, including as a result of cyber attacks;cyber-attacks; and other similar matters which could result in, among other things, confidential and/or proprietary information being disclosed or misused;
•adequacy of the Company’s risk management framework, disclosure controls and procedures and internal control over financial reporting;
•future credit quality and performance, including the Company’s expectations regarding future credit losses and allowance levels;
•impact of adverse changes to the Company’s credit ratings from major credit rating agencies;
•impact of adverse judgments or settlements in litigation;
•changes in the commercial and consumer real estate markets;
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•changes in consumer spending and savings habits;
•impact on the Company’s international operations due to political developments, disease pandemics, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions;
•changes in laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve, Board System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the SEC, the Consumer Financial Protection Bureau and the California Department of Business Oversight - Division of Financial Institutions;


•impact of the Dodd-Frank Act on the Company’s business, business practices, cost of operations and executive compensation;
•heightened regulatory and governmental oversight and scrutiny of the Company’s business practices, including dealings with consumers;
•impact of reputational risk from negative publicity, fines and penalties and other negative consequences from regulatory violations and legal actions and from the Company’s interactions with business partners, counterparties, service providers and other third parties;
•impact of regulatory enforcement actions;
•changes in accounting standards as may be required by the Financial Accounting Standards BoardFASB or other regulatory agencies and their impact on critical accounting policies and assumptions;
•impact of other potential federal tax changes and spending cuts;
•the Company’s capital requirements and its ability to generate capital internally or raise capital on favorable terms;
•impact on the Company’s liquidity due to changes in the Company’s ability to receive dividends from its subsidiaries;
•any future strategic acquisitions or divestitures;
•continuing consolidation in the financial services industry;
•changes in the equity and debt securities markets;
•fluctuations in foreign currency exchange rates;
•a recurrence of significant turbulence or disruption in the capital or financial markets, which could result in, among other things, a reduction in the availability of funding or increases in funding costs, a reduction in investor demand for mortgage loans and declines in asset values and/or recognition of OTTI on securities held in the Company’s AFS debt securities portfolio; and
•impact of natural or man-made disasters or calamities, such as wildfires, or conflicts or other events that may directly or indirectly result in a negative impact on the Company’s financial performance.

In addition to the risk factors enumerated above, the economic impact of the COVID-19 pandemic could cause actual outcome to differ, possibly materially, from the Company’s forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Company’s control. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on the Company’s business. The extent to which the COVID-19 pandemic impacts the Company will depend on future developments that are uncertain and unpredictable, including the scope, severity and duration of the pandemic and its impact on the Company’s customers, the actions taken by governmental authorities in response to the pandemic as well as its impact on global and regional economies, and the pace of recovery when the COVID-19 pandemic subsides, among others.

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2019 Form 10-K under the heading Item 1A. Risk Factors and the information set forth under Item 1A. Risk Factors in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update or revise any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures regarding market risk in the Company’s portfolio, see Item 1. Consolidated Financial Statements — Note 6 — Derivatives and Item 2. MD&A — Risk Management — Market Risk Management in Part I of this Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of March 31,June 30, 2020, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31,June 30, 2020.

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting

There have beenwere no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31,June 30, 2020, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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107



PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

See Item 1. Consolidated Financial Statements — Note 10 — Commitments and Contingencies — Litigation in Part I of this report, incorporated herein by reference.

ITEM 1A.  RISK FACTORS

The Company’s 2019In addition to the risk factor set forth below and the information set forth in this Form 10-K contains10-Q, you should carefully consider the disclosure regarding the risks and uncertainties related to the Company’s business under the heading Item 1A. Risk Factors.in the Company’s 2019 Form 10-K. There has been no material changes to the Company’s risk factors as presented in the Company’s 2019 Form 10-K, other than the risk factors set forth below:

The effects of the COVID-19 disease pandemic willhave had and may continue to impact the Company’s businesses, results of operations and financial condition, and the extent and duration of these impacts remain uncertain. In December 2019,A second wave of COVID-19 was reportedmay have a similar or worse impact on the Company than the first wave. The COVID-19 pandemic and governmental responses to the pandemic have had and will likely continue to have a severe impact on global economic conditions, including disruption and volatility in China, which rapidly spread to other countries, includingthe financial markets, disruption of global supply chains, temporary closures or failures of businesses, increased unemployment, and the institution of social distancing and restrictions on movement in the U.S. In March 2020, the WHO characterized COVID-19 as a global pandemic and recommended containment and mitigation measures. On January 31, 2020, the U.S. declared a national public health emergency, and the President announced a National Emergency on March 13, 2020. Many states and municipalities have declared emergencies as well. Along with these declarations, there have been extraordinary and wide-ranging actions undertaken by international, federal, state and local public health and governmental authorities to contain the outbreak and spread of COVID-19 across the world and in the U.S., including quarantines, “stay-at-home” orders and similar mandates for individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the broader economies, financial markets and overall demand environment for the Company’s businesses.other countries.

East West Bank is considered an essential business in the seveneight states where we have branches.branches or office locations. As part of the CARES Act passed by Congress in March 2020, various initiatives to protect and support individuals, businesses and local economies, such as the SBA PPP and the Main Street Lending Program were established. The Company participates and will continue to participate in the SBA PPP and intends to participateduring the time it is available, or until August 8, 2020. Further, the Company participates in additional new government-sponsored programs, as they are enacted.the Main Street Lending Program. In addition, to provide further relief to customers during these turbulent times, we are providing loan modifications and payment accommodationsdeferrals for certain small-to medium-sized business, nonprofit organization and consumer customers impacted by COVID-19, and pausing action on collections anddeferring foreclosures on certain residential mortgage loans. These initiatives and accommodations madeOur loan portfolio includes loans that are in forbearance but which are not classified as TDRs due to our customers are expected to negatively impact our revenue and results of operationsthe exclusions provided in the near termCARES Act and iffederal banking regulators. In the future, we may be required to classify a portion of these loans as TDRs. There can be no assurance that the federal stimulus measures will improve the markets or economies in which we conduct operations. If the federal stimulus measures are not effective in mitigating the effect of COVID-19, oncredit issues for our loan customers may be severe and adversely affectaffecting our business and results of operations more substantially over a longer period of time.

Further, in order to facilitate our business and in response to enhanced safety measures, the Company has consolidated certain branch locations in the U.S., resulting in temporary closure of certain branches, adjusted branch hoursimplemented employee business travel restrictions, and implemented certain employee travel restrictions. In addition, we havehas implemented business continuity plans, which include shifting a majority of our corporate and division office functions to work remotely, alternating workplace arrangements such as split work sites and rotating shifts for certain employees to suit the changing business requirements. To date, the business continuity plans work as designed and support our ongoing normal course of business. However, our ability to provide services has been, and may continue to be, to some extent, negatively impacted by interruptions due to illnesses, quarantines, “stay-at-home” orders or other restrictions of our employees, or the safety measures implemented to prevent illnesses of our employees, including the potential closure of particular branches and certain employees working remotely.

We may face increased cybersecurity risks due to the shifting of a majority of our corporate and division office functions to operating remotely in regions impacted by stay-at-home“stay-at-home” orders. Increased levels of remote access may create additional opportunities for cybercriminals to attempt to exploit vulnerabilities, and our employees may be more susceptible to phishing and social engineering attempts due to increased stress caused by the crisis and from balancing family and work responsibilities at home. In addition, our technological resources may be strained due to the number of remote users.

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The conditions caused by the COVID-19 pandemic could continue to adversely affect the ability of the Company’s borrowers to satisfy their obligations, and becauseobligations. Taken into consideration that many of the Company’s loans are secured by real estate, a potential decline in real estate markets could further impact the Company’s business and financial condition and the credit quality of the Company’s loan portfolio, hence potentially increasingportfolio. If unemployment continues to rise and our clients and customers draw on their lines of credit or seek additional loans to help finance their businesses, our level of charge-offs and provision for credit losses.losses could continue to increase. Further, the disruptions related to COVID-19 may decrease our borrowers’ confidence or with respect to purchasing real estate or homes and adversely affect the demand for the Company’s loans and other products and services, the valuation of our loans, securities and derivatives portfolios, the carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations.


In addition, recentthe unprecedented developments and reports relating to COVID-19 have coincided with heightened volatility in financial markets in the U.S. and worldwide. Our businesses and resultsThe continuation of operations are affected by the financial markets and generalprolonged adverse economic conditions (including whether due to a resurgence or a second wave of COVID-19 infections) primarily in the U.S. and Greater China.China can be expected to have adverse effects on the Company’s businesses and results of operations, which could have material impacts on the value of securities, derivatives and other financial instruments which the Company owns. The Company executes transactions with various counterparties in the financial industry, including brokers and dealers,broker-dealers, commercial banks and investment banks. Defaults by financial services institutions and uncertainty in the financial services industry in general could lead to market-wide liquidity problems and may expose the Company to credit risk in the event of default of its counterparties or clients.clients and further increase the possibility of downgrades in the Company’s credit ratings. This pandemic, and any further measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a materialsignificant adverse impacteffect on our results of operations and financial condition. Additionally, the earnings impacts from recent and future emergency interest rate cuts could further compress interest margins, which could potentially have an adverse effect on our results of operations and financial condition.

The extent to which the COVID-19 pandemic and any resultant economic downturn impactscontinues to impact our business, operations, and financial results is uncertain and will depend on numerous evolving factors that are outside our control and we may not be able to accurately predict, including the durationscope, severity and scopeduration of the pandemic and the governmental, business and individual actions already taken, and those actions implemented in the future, in response to the pandemic and the impact of those actions on global economic activity.

PriceDeclines in Oil & Gas Sector May Adversely Affect Our Business. The fluctuations inactivity, as well as the oil and gas markets have generally been dependent uponpace of economic recovery when the prevailing view of future gas and oil prices, which are influenced by numerous supply and demand factors, including availability and cost of capital, global and domestic economic conditions, environmental regulations, policies of Organization of Petroleum Exporting Countries and Russia, geopolitics, U.S. consumer demand and consumption, transportation industry activity, and other factors. The COVID-19 pandemic along with recent actions by Saudi Arabia and Russia, have ledsubsides. To the extent the COVID-19 pandemic continues to a significant decline in oil and gas prices. In consideration of any further price declines in this sector, we have increased our allowance for loan loss against the oil & gas loan portfolio. However, continuous volatility and downward pressure on oil and gas prices in the global market could lead to increased credit losses, which could adversely affect our business, operations, and financial results. For a descriptionresults, as well as global economic conditions more generally, it may also heighten many of our oil and gas loan exposure, refer to Part 1. Item 2. MD&A — Balance Sheet Analysis — Loan Portfolio — Commercial — Commercial and Industrial Loansthe other risk factors described in thisthe Company’s 2019 Form 10-Q.10-K.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities for the three months ended March 31,second quarter and first half of 2020. The following table summarizes common stock repurchased by the Company under the Company’s common stock repurchase program for the three months endedfirst half of 2020. There were no repurchased activities for the second quarter of 2020.
Period
Total Number of
Shares
Repurchased (1)
Average Price
Paid per Share of
Common Stock		Total Number of
Shares of Common
Stock Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
($ in millions) (2)
January 1, 2020 - January 31, 2020—  $—  —  $500.0  
February 1, 2020 - February 29, 2020—  —  —  500.0  
March 1, 2020 - March 31, 20204,471,682  32.64  4,471,682  354.0  
April 1, 2020 - April 30, 2020—  —  —  354.0  
May 1, 2020 - May 31, 2020—  —  —  354.0  
June 1, 2020 - June 30, 2020—  —  —  354.0  
Total4,471,682  $32.64  4,471,682  $354.0  
(1)Excludes activity of common stock pursuant to various stock compensation plans and agreements totaling $7.6 million.
(2)On March 31, 2020:3, 2020, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s common stock. This $500.0 million repurchase authorization is inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The share repurchase authorization has no expiration date.
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Period 
Total Number of
Shares
Repurchased (1)
 
Average Price
Paid per Share of
Common Stock
 
Total Number of
Shares of Common
Stock Purchased
as Part of Publicly
Announced Plans
or Programs
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
($ in millions) (2)
January 1, 2020 - January 31, 2020 —
 $—
 —
 $500.0
February 1, 2020 - February 29, 2020 —
 —
 —
 500.0
March 1, 2020 - March 31, 2020 4,471,682
 32.64
 4,471,682
 354.0
Total 4,471,682
 $32.64
 4,471,682
 $354.0
         
(1)Excludes activity of common stock pursuant to various stock compensation plans and agreements totaling $7.6 million.
(2)On March 3, 2020, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s common stock. This $500.0 million repurchase authorization is inclusive of the Company’s $100.0 million stock repurchase authorization previously outstanding. The share repurchase authorization has no expiration date.


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ITEM 6. EXHIBITS
 
The following exhibit index lists Exhibits filed, or in the case of Exhibits 32.1 and 32.2 furnished, with this report:
Exhibit No.Exhibit Description
Exhibit No.Exhibit Description
10.1
Form of Amendment to Employment Agreement — Dominic Ng* Filed herewith.
10.2
Form of Amendment to Employment Agreement — Douglas P. Krause* Filed herewith.
31.1
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
101.INSThe instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCHInline XBRL Taxonomy Extension Schema Document. Filed herewith.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document. Filed herewith.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith.
104Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith). Filed herewith.
* Denotes management contract or compensatory plan or arrangement.
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110



GLOSSARY OF ACRONYMS


AFSAvailable-for-saleLTVLIBORLoan-to-valueLondon Interbank Offered Rates
ALCOAsset/Liability CommitteeLTVLoan-to-value
AOCIAccumulated other comprehensive income (loss)MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
AOCIARRCAccumulated other comprehensive income (loss)Alternative Reference Rates CommitteeMMBTUMillion British thermal unit
ARRCASCAlternative Reference Rates CommitteeAccounting Standards CodificationMoody'sMoody’s Investors Service
ASCASUAccounting Standards CodificationNAVNet Asset Value
ASUAccounting Standards UpdateOREONAVNet asset value
C&ICommercial and industrialOREOOther real estate owned
C&ICommercial and industrialOTTIOther-than-temporary impairment
CARES ActThe Coronavirus Aid, Relief, and Economic Security ActPCDOTTIPurchased financial assets with credit deteriorationOther-than-temporary impairment
CECLCurrent expected credit lossPCIPCDPurchased credit impaireddeteriorated
CET1Common Equity Tier 1PDPCIPurchased credit impaired
CLOCollateralized loan obligationPDProbability of default
CLOCMECollateralized loan obligationChicago Mercantile ExchangePPPPaycheck Protection Program
CMECOVID-19Chicago Mercantile ExchangeCoronavirus Disease 2019RMBPPPLFChinese RenminbiPaycheck Protection Program Liquidity Facility
CRACommunity Reinvestment ActROARMBChinese Renminbi
CRECommercial real estateROAReturn on average assets
CREE&PCommercial real estateExploration and productionROEReturn on average equity
EPSEarnings per shareRPACredit risk participation agreement
ERMEnterprise Risk Managementrisk managementRSURestricted stock unit
EVEEconomic value of equityS&PStandard &and Poor's
FHLBFASBFinancial Accounting Standards BoardSBASmall Business Administration
FHLBFederal Home Loan BankSBLCStandby letter of credit
FitchFitch RatingsSECU.S. Securities and Exchange Commission
FRBFederal Reserve Bank of San FranciscoSOFRSecured Overnight Financing Rate
FTPFunds transfer pricingTDRTroubled debt restructuring
GAAPGenerally accepted accounting principlesU.S.United States
HELOCHome equity linesline of creditUSDU.S. dollar
LCHLondon Clearing HouseVIEVariable interest entity
LGDLoss given defaultWHOWorld Health Organization
LIBORLondon Interbank Offered Rate


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:August 7, 2020
Dated:May 8, 2020
EAST WEST BANCORP, INC.

(Registrant)
By/s/ IRENE H. OH
Irene H. Oh
Executive Vice President and

Chief Financial Officer


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