EAST WEST BANCORP, INC.
Page
Overview 57
Selected Financial Data 59
Financial Review 60
Results of Operations 60
Net Interest Income 61
Noninterest Income 66
Noninterest Expense 67
Income Taxes 68
Operating Segment Results 68
Balance Sheet Analysis 72
Debt Securities 72
Loan Portfolio 76
Foreign Outstandings 83
Capital 83
Deposits and Other Sources of Funds 84
Regulatory Capital and Ratios 85
Other Matters 86
Off-Balance Sheet Arrangements 87
Risk Management 88
Credit Risk Management 88
Liquidity Risk Management 98
Market Risk Management 100
Critical Accounting Policies and Estimates 106
Reconciliation of GAAP to Non-GAAP Financial Measures 106
Forward-Looking Statements 109
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Overview
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources ofEast West Bancorp, Inc. (referred to herein on an unconsolidated basis as "East West" and on a consolidated basis as the "Company," "we" or "EWBC"), and its subsidiaries, including its subsidiary bank,East West Bank and its subsidiaries (referred to herein as "East West Bank " or the "Bank"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company's results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented elsewhere in this report, and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed withthe United States ("U.S.")Securities and Exchange Commission ("SEC") onFebruary 26, 2021 (the "Company's 2020 Form 10-K").
Company Overview
East West is a bank holding company incorporated inDelaware onAugust 26, 1998 and is registered under the Bank Holding Company Act. The Company commenced business onDecember 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of the Bank, which became its principal asset. The Bank is an independent commercial bank headquartered inCalifornia that has a focus on the financial service needs of the Asian-American community. Through over 120 locations in theU.S. andChina , the Company provides a full range of consumer and commercial products and services through the following business segments: Consumer and Business Banking and Commercial Banking, with the remaining operations recorded in Other. The Company's principal activity is lending to and accepting deposits from businesses and individuals. 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 ofSeptember 30, 2021 , the Company had$60.96 billion in assets and approximately 3,100 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 2020 Form 10-K.
Corporate Strategy
We are committed to enhancing long-term shareholder value by growing loans, deposits and revenue, improving profitability, and investing for the future, while managing risks, expenses and capital. Our business model is built on customer loyalty and engagement, understanding our customers' financial goals, and meeting our customers' financial needs through our diverse products and services. The Company's approach focuses on seeking out and deepening client relationships that meet our risk/return parameters. This 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 their businesses. We expect our relationship-focused business model to continue to generate organic growth from existing customers and to expand our targeted customer bases. We continually invest in technology to improve the customer user experience, strengthen critical business infrastructure, and streamline core processes, while appropriately managing operating expenses. 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
The Coronavirus Disease 2019 ("COVID-19") pandemic has created a historic public
health crisis and caused unprecedented disruptions to global economies. Since
the beginning of the COVID-19 pandemic, the U.S. government has taken various
steps to combat the disease and enacted a number of monetary and fiscal policies
to provide fiscal stimulus and relief. Although the COVID-19 pandemic continues
to present public health challenges, including the emergence of new variants,
great progress has been made and continues to be made in virus containment and
vaccination efforts. While these responses have largely mitigated the impact
from the COVID-19 pandemic and propelled the U.S. economy to recovery, the
resurgence of the pandemic, the adoption and long-term effectiveness of the
vaccines, and other factors including the continuing impact on global supply
chains may slow down such progress. As a result, we are unable to quantify all
the specific impacts, and the extent to which the COVID-19 pandemic may
negatively affect our business, financial condition and results of operations,
regulatory capital, and liquidity ratios for the remainder of 2021. The Company
has been, and may continue to be, impacted by the pandemic.
Throughout the COVID-19 pandemic, the Company has been focusing on serving our customers and communities and maintaining the well-being of our employees.
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On March 11, 2021 , President Biden signed the American Rescue Plan Act of 2021
("ARPA") to provide additional relief for individuals and businesses affected by
the COVID-19 pandemic, including additional funding for the Paycheck Protection
Program ("PPP"). The PPP Extension Act of 2021, enacted on March 30, 2021 ,
extended the PPP through May 31, 2021 . The Company has been a participating
lender in the PPP since 2020. As of September 30, 2021 , the Company had
approximately 3,600 PPP loans outstanding with balances totaling $807.3 million ,
which were recorded in the commercial and industrial ("C&I") loan portfolio.
During the first nine months of 2021, the Company submitted and received Small
Business Administration ("SBA") approval for the forgiveness of approximately
7,800 PPP loans, totaling $1.64 billion .
The Company also participated in the Board of Governors of the Federal Reserve
System's (the "Federal Reserve") Main Street Lending Program ("MSLP") and funded
$233.6 million in MSLP loans as of December 31, 2020 . As part of the MSLP, the
related Main Street special purpose vehicle purchased 95% participations in the
loans originated. The portion retained by the Company totaled $9.9 million and
$9.5 million as of September 30, 2021 and December 31, 2020 , respectively. The
MSLP was terminated on January 8, 2021 .
In response to the COVID-19 pandemic, the Company has implemented protocols and
processes to execute its business continuity plans to protect its employees and
support its customers. As state and local governments have relaxed restrictions
on temporary business closures, we have started phasing in the return of our
U.S. -based corporate associates to the office. The Company continues to monitor
the external environment and make changes to its safety protocols as
appropriate. For additional information on the PPP and other U.S. government
facilities, programs and loan modification relief as established by the
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), and our
response to the COVID-19 pandemic, refer to Overview - Coronavirus Disease 2019
Global Pandemic section in the Company's 2020 Form 10-K.
Further discussion of the potential impacts on our business due to the COVID-19 pandemic is provided in Item 1A - Risk Factors of the Company's 2020 Form 10-K.
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--------------------------------------------------------------------------------Selected Financial Data
Three Months Ended Nine Months Ended
($ and shares in thousands, except per share, ratio and September 30, June 30, September 30, September 30, September 30,
headcount data) 2021 2021 2020 2021 2020
Summary of operations:
Net interest income before provision for credit losses (1) $ 395,706 $ 376,473 $ 324,130 $ 1,125,874 $ 1,030,612
Noninterest income 73,109 68,431 54,503 214,406 165,715
Total revenue 468,815 444,904 378,633 1,340,280 1,196,327
(Reversal of) provision for credit losses (10,000) (15,000) 10,000 (25,000) 186,313
Noninterest expense 205,384 189,523 172,573 585,984 537,671
Income before income taxes 273,431 270,381 196,060 779,296 472,343
Income tax expense 47,982 45,639 36,523 124,111 68,630
Net income (1) $
225,449
Per common share: Basic earnings$ 1.59 $ 1.58 $ 1.13$ 4.62 $ 2.83 Diluted earnings$ 1.57 $ 1.57 $ 1.12$ 4.58 $ 2.82 Dividends declared$ 0.330 $ 0.330 $ 0.275$ 0.990 $ 0.825 Book value$ 40.10 $ 39.10 $ 36.22$ 40.10 $ 36.22 Non-Generally Accepted Accounting Principles ("GAAP") $
36.75
$ 32.85 tangible common equity (2) Weighted-average number of shares outstanding: Basic 141,880 141,868 141,498 141,799 142,595 Diluted 143,143 143,040 142,043 143,051 143,082 Common shares outstanding at period-end 141,884 141,878 141,507 141,884 141,507 Performance metrics: Return on average assets ("ROA") 1.46 % 1.56 % 1.26 % 1.50 % 1.13 % Return on average equity ("ROE") 15.75 % 16.61 % 12.50 % 15.98 % 10.73 % Return on average non-GAAP tangible equity (2) 17.25 % 18.28 % 13.88 % 17.56 % 11.95 % Total average equity to total average assets 9.26 % 9.39 % 10.11 % 9.41 % 10.53 % Common dividend payout ratio 21.05 % 21.11 % 24.74 % 21.72 % 29.58 % Net interest margin 2.70 % 2.75 % 2.72 % 2.72 % 3.05 % Efficiency ratio (3) 43.81 % 42.60 % 45.58 % 43.72 % 44.94 % Non-GAAP efficiency ratio (2) 35.55 % 36.30 % 40.79 % 36.80 % 39.14 % At period end: Total assets $
60,959,110
$
57,981,485
$
40,481,705
$ 9,713,006 $ 8,399,460 $ 4,539,160 Total deposits$ 53,356,190 $ 52,582,575 $ 41,680,555 Long-term debt $
147,586
$
248,898
$
5,690,201
Non-GAAP tangible common equity (2) $
5,214,655
3,085 3,161 3,208
EWBC capital ratios:
Common Equity Tier 1 ("CET1") capital 12.8 % 12.8 % 12.8 %
Tier 1 capital 12.8 % 12.8 % 12.8 %
Total capital 14.2 % 14.3 % 14.5 %
Tier 1 leverage capital 8.8 % 9.1 % 9.8 %
Total stockholders' equity to total assets 9.3 % 9.3 % 10.2 %
Non-GAAP tangible common equity to tangible assets (2) 8.6 % 8.5 % 9.3 %
(1)Includes $15.2 million , $15.4 million and $7.8 million of interest income
related to PPP loans for the second and third quarter of 2021, and third quarter
of 2020, respectively, and $45.6 million and $29.1 million for the first nine
months of 2021 and 2020, respectively.
(2)For a discussion of non-GAAP tangible common equity per share, return on
average non-GAAP tangible equity, non-GAAP efficiency ratio, non-GAAP tangible
common equity and non-GAAP tangible common equity to tangible assets, refer to
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") - Reconciliation of GAAP to Non-GAAP Financial Measures
in this Quarterly Report on Form 10-Q ("this Form 10-Q").
(3)The efficiency ratio is noninterest expense divided by total revenue.
(4)Includes $807.3 million , $1.43 billion and $1.77 billion of PPP loans as of
September 30, 2021 , June 30, 2021 and September 30, 2020 , respectively.
(5)Includes $1.43 billion of advances from the Federal Reserve Paycheck
Protection Program Liquidity Facility ("PPPLF") as of September 30, 2020 .
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--------------------------------------------------------------------------------Financial Review
The Company's net income for the third quarter 2021 was$225.4 million or$1.57 per diluted share, compared with third quarter 2020 net income of$159.5 million or$1.12 per diluted share, an increase of$65.9 million or 41%. Net income for the first nine months of 2021 was$655.2 million or$4.58 per diluted share, compared with the first nine months of 2020 net income of$403.7 million or$2.82 per diluted share, an increase of$251.5 million or 62%. The increases in both periods were due to higher net interest income and noninterest income, reversals of provision for credit losses in the second and third quarter of 2021, partially offset by higher noninterest expense and income tax expense. Noteworthy items about the Company's performance for the third quarter and first nine months of 2021 included: • As ofSeptember 30, 2021 , total assets were$60.96 billion , an increase of$8.80 billion or 17% from$52.16 billion as ofDecember 31, 2020 . • Total loans were$40.48 billion as ofSeptember 30, 2021 , an increase of$2.09 billion or 5% from$38.39 billion as ofDecember 31, 2020 . Total loan growth was well-diversified across the Company's major loan portfolios, including residential mortgage, commercial real estate ("CRE") and C&I. • Total deposits were$53.36 billion as ofSeptember 30, 2021 , an increase of$8.50 billion or 19% from$44.86 billion as ofDecember 31, 2020 . Total deposits' growth was primarily driven by growth in noninterest-bearing demand deposits and money market accounts. • Asset quality metrics improved. As ofSeptember 30, 2021 , criticized loans totaled$1.01 billion or 2.50% of loans held-for-investment, a decrease of$207.2 million or 17%, compared with$1.22 billion or 3.17% of loans held-for-investment as ofDecember 31, 2020 . Nonperforming assets were$172.6 million or 0.28% of total assets as ofSeptember 30, 2021 , a decrease of$62.3 million or 26%, compared with$234.9 million or 0.45% of total assets as ofDecember 31, 2020 . • The Company recorded a reversal of provision for credit losses in 2021, primarily due to an improved macroeconomic outlook. During the third quarter and first nine months of 2021, the Company recorded a reversal of credit losses of$10.0 million and$25.0 million , respectively, compared with a provision for credit losses of$10.0 million and$186.3 million for the same periods in 2020, respectively. • Profitability expanded in 2021. Third quarter 2021 ROA was 1.46%, compared with 1.26% for the third quarter of 2020. First nine months of 2021 ROA was 1.50%, compared with 1.13% for the first nine months of 2020. Third quarter 2021 ROE was 15.75%, compared with 12.50% for the third quarter of 2020. First nine months of 2021 ROE was 15.98%, compared with 10.73% for the first nine months of 2020. 60
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Results of Operations
Net Interest Income
The Company's primary source of revenue is net interest income, which is the
interest income earned on interest-earning assets less interest expense paid on
interest-bearing liabilities. Net interest margin is the ratio of net interest
income to average interest-earning assets. Net interest income and net interest
margin are impacted by several factors, including changes in average balances
and the composition of interest-earning assets and funding sources, market
interest rate fluctuations and the slope of the yield curve, repricing
characteristics and maturity of interest-earning assets and interest-bearing
liabilities, volume of noninterest-bearing sources of funds, and asset quality.
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Third quarter 2021 net interest income before provision for credit losses was
$395.7 million , an increase of $71.6 million or 22%, compared with third quarter
2020 net interest income of $324.1 million . Third quarter 2021 net interest
margin was 2.70%, a decrease of two basis points ("bps") from 2.72% for the
third quarter of 2020. The change in net interest income and net interest margin
primarily reflected higher interest income from loans and AFS debt securities
due to volume growth, and a lower cost of time and money market deposits. Net
interest income for the first nine months of 2021 was $1.13 billion , an increase
of $95.3 million or 9%, compared with $1.03 billion for the first nine months of
2020. Net interest margin was 2.72% for the first nine months of 2021, a
decrease of 33 bps from 3.05% for the first nine months of 2020. The changes in
net interest income and net interest margin primarily benefited from a lower
cost of time and money market deposits, higher interest income from AFS debt
securities due to volume growth, partially offset by lower interest income on
loans due to yield compression. The increase in average interest-bearing cash
and deposits with banks, which earned an average yield of 0.25% and 0.26% for
the third quarter and first nine months of 2021, respectively, also contributed
to net interest margin compression.
Average interest-earning assets were $58.24 billion for the third quarter of
2021, an increase of $10.81 billion or 23% from $47.43 billion for the third
quarter of 2020. For the first nine months of 2021, the average interest-earning
assets were $55.35 billion , an increase of $10.27 billion or 23% from $45.08
billion for the first nine months of 2020. The year-over-year increases in
average interest-earning assets for both periods reflect growth in the average
balances of AFS debt securities, loans, and interest-bearing cash and deposits
with banks.
The yield on average interest-earning assets for the third quarter of 2021 was
2.83%, a decrease of 24 bps from 3.07% for the third quarter of 2020, primarily
reflecting an increase in lower yielding AFS debt securities and
interest-bearing cash and deposits with banks in the earnings asset mix. The
yield on average interest-earning assets for the first nine months of 2021 was
2.89%, a decrease of 71 bps from 3.60% for the first nine months of 2020,
primarily reflecting compression in average loan yields.
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Average loan yield was 3.61% for the third quarter of 2021, an increase of one
bp from 3.60% for the third quarter of 2020. Average loan yield for the first
nine months of 2021 was 3.59%, a decrease of 49 bps from 4.08% for the first
nine months of 2020. Excluding the impacts of PPP loans, the adjusted average
loan yield was 3.56% and 3.70% for the third quarters of 2021 and 2020,
respectively, and 3.58% and 4.10% for the first nine months of 2021 and 2020,
respectively. For additional details, see the reconciliations of non-GAAP
measures presented under Item 2. MD&A - Reconciliation of GAAP to Non-GAAP
Financial Measures in this Form 10-Q. Approximately 65% of loans
held-for-investment were variable-rate or hybrid loans in their adjustable rate
period as of both September 30, 2021 and 2020.
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Deposits are an important source of funds and impact both net interest income
and net interest margin. The average cost of deposits was 0.12% for the third
quarter of 2021, a 21 bp decrease from 0.33% for the third quarter of 2020. The
average cost of deposits was 0.15% for the first nine months of 2021, a 38 bp
decrease from 0.53% for the same period in 2020. The year-over-year decreases
reflected a lower interest rate environment in 2021, as well as the
year-over-year run-off of higher rate time deposits. The higher proportion of
noninterest-bearing demand deposits, which comprised 43% and 40% of average
total deposits for the third quarter and first nine months of 2021, compared
with 35% and 33% for the same periods of 2020, respectively, also contributed to
the decrease in the average cost of deposits. The average cost of
interest-bearing deposits was 0.21% for the third quarter of 2021, a 29 bp
decrease from 0.50% for the third quarter of 2020. The average cost of
interest-bearing deposits was 0.25% for the first nine months of 2021, a 54 bp
decrease from 0.79% for the same period in 2020.
The average cost of funds was 0.14% for the third quarter of 2021, a decrease of
24 bps from 0.38% for the third quarter of 2020. For the first nine months of
2021, the average cost of funds was 0.18%, a decrease of 41 bps from 0.59% for
the first nine months of 2020. The decrease in the average cost of funds
reflected the lower cost of deposits, as well as decreases in other sources of
funding due to changes in the interest rate environment. Other sources of
funding included FHLB advances, assets sold under repurchase agreements
("repurchase agreements"), long-term debt and short-term borrowings.
The Company utilizes various tools to manage interest rate risk. Refer to the
Interest Rate Risk Management section of Item 2. MD&A - Risk Management - Market
Risk Management in this Form 10-Q.
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The following table presents the interest spread, net interest margin, average
balances, interest income and expense, and the average yield/rate by asset and
liability component for the third quarters of 2021 and 2020:
Three Months Ended September 30,
2021 2020
Average Average Average Average
($ in thousands) Balance Interest Yield/Rate (1) Balance Interest Yield/Rate (1)
ASSETS
Interest-earning assets: Interest-bearing cash and deposits with banks$ 7,036,823 $ 4,521 0.25 %$ 4,904,394 $ 5,045 0.41 % Assets purchased under resale agreements ("resale agreements") 2,382,741 8,957 1.49 % 1,225,217 5,295 1.72 % AFS debt securities (2)(3) 8,782,682 37,826 1.71 % 4,059,456 18,493 1.81 % Loans (4)(5) 39,960,151 363,503 3.61 % 37,160,445 336,542 3.60 % Restricted equity securities 77,083 500 2.57 % 79,074 353 1.78 % Total interest-earning assets$ 58,239,480 $ 415,307 2.83 %$ 47,428,586 $ 365,728 3.07 % Noninterest-earning assets: Cash and due from banks 627,640 522,699 Allowance for loan losses (584,827) (632,216) Other assets 3,077,240 2,928,190 Total assets$ 61,359,533 $ 50,247,259 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Checking deposits$ 6,646,515 $ 3,186 0.19 %$ 5,663,873 $ 4,345 0.31 % Money market deposits 12,604,827 3,446 0.11 % 9,981,704 6,837 0.27 % Savings deposits 2,792,702 1,943 0.28 % 2,259,788 1,481 0.26 % Time deposits 8,283,265 7,395 0.35 % 9,008,907 21,135 0.93 % Short-term borrowings 620 - - % 84,858 407 1.91 % FHLB advances 248,614 857 1.37 % 656,906 3,146 1.91 % Repurchase agreements 310,997 2,012 2.57 % 317,097 2,155 2.70 % Long-term debt and finance lease liabilities 151,870 762 1.99 % 1,579,623 (6) 2,092 0.53 % Total interest-bearing liabilities$ 31,039,410 $ 19,601 0.25 %$ 29,552,756 $ 41,598 0.56 % Noninterest-bearing liabilities and stockholders' equity: Demand deposits 23,169,323 14,296,475 Accrued expenses and other liabilities 1,470,494 1,318,677 Stockholders' equity 5,680,306 5,079,351 Total liabilities and stockholders' equity$ 61,359,533 $ 50,247,259 Interest rate spread 2.58 % 2.51 % Net interest income and net interest margin$ 395,706 2.70 %$ 324,130 2.72 % (1)Annualized. (2)Yields on tax-exempt securities are not presented on a tax-equivalent basis. (3)Includes the amortization of premiums on debt securities of$22.6 million and$8.1 million for the third quarters of 2021 and 2020, respectively. (4)Average balances include nonperforming loans and loans held-for-sale. (5)Loans include the accretion of net deferred loan fees, unearned fees and amortization of premiums, which totaled$17.0 million and$7.7 million for the third quarters of 2021 and 2020, respectively. (6)Includes average PPPLF balances, which were repaid in full during the fourth quarter of 2020. 64 -------------------------------------------------------------------------------- The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for first nine months of 2021 and 2020: Nine Months Ended September 30, 2021 2020 Average Average Average Average ($ in thousands) Balance Interest Yield/Rate (1) Balance Interest Yield/Rate (1) ASSETS Interest-earning assets: Interest-bearing cash and deposits with banks$ 6,078,982 $ 11,781 0.26 %$ 3,775,242 $ 20,717 0.73 % Resale agreements (2) 1,994,776 23,077 1.55 % 1,048,923 16,434 2.09 % AFS debt securities (3)(4) 7,755,029 101,616 1.75 % 3,685,837 59,639 2.16 % Loans (5)(6) 39,441,751 1,057,964 3.59 % 36,487,859 1,115,804 4.08 % Restricted equity securities 80,107 1,588 2.65 % 78,873 1,100 1.86 % Total interest-earning assets$ 55,350,645 $ 1,196,026 2.89 %$ 45,076,734 $ 1,213,694 3.60 % Noninterest-earning assets: Cash and due from banks 602,830 510,750 Allowance for loan losses (603,523) (563,912) Other assets 2,913,050 2,729,458 Total assets$ 58,263,002 $ 47,753,030 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Checking deposits$ 6,571,231 $ 11,177 0.23 %$ 5,119,568 $ 19,995 0.52 % Money market deposits 12,262,173 11,869 0.13 % 9,630,918 37,178 0.52 % Savings deposits 2,715,114 5,762 0.28 % 2,162,365 4,743 0.29 % Time deposits 8,635,250 26,982 0.42 % 9,633,582 94,684 1.31 % Short-term borrowings 1,871 42 3.00 % 128,846 1,228 1.27 % FHLB advances 457,273 6,025 1.76 % 667,935 10,655 2.13 % Repurchase agreements (2) 304,745 5,981 2.62 % 355,923 9,686 3.64 % Long-term debt and finance lease liabilities 152,018 2,314 2.04 % 807,599 (7) 4,913 0.81 % Total interest-bearing liabilities$ 31,099,675 $ 70,152 0.30 %$ 28,506,736 $ 183,082 0.86 % Noninterest-bearing liabilities and stockholders' equity: Demand deposits 20,345,370 12,987,813 Accrued expenses and other liabilities 1,335,252 1,230,359 Stockholders' equity 5,482,705 5,028,122 Total liabilities and stockholders' equity$ 58,263,002 $ 47,753,030 Interest rate spread 2.59 % 2.74 % Net interest income and net interest margin$ 1,125,874 2.72 %$ 1,030,612 3.05 % (1)Annualized. (2)Average balances of resale and repurchase agreements for the nine months endedSeptember 30, 2020 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 and gross repurchase agreements for the nine months endedSeptember 30, 2020 were 2.09% and 3.48%, 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$62.7 million and$17.3 million for first nine months of 2021 and 2020, 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$46.8 million and$36.8 million for first nine months of 2021 and 2020, respectively. (7)Includes average PPPLF balances, which were repaid in full during the fourth quarter of 2020. 65 -------------------------------------------------------------------------------- The following table summarizes the extent to which changes in (1) interest rate, and (2) volume of average interest-earning assets and average interest-bearing liabilities affected the Company's net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average rate. Three Months Ended September 30, Nine Months Ended September 30, 2021 vs. 2020 2021 vs. 2020 Total Changes Due to Total Changes Due to ($ in thousands) Change Volume Yield/Rate Change Volume Yield/Rate Interest-earning assets: Interest-bearing cash and deposits with banks$ (524) $ 1,763 $ (2,287) $ (8,936) $ 8,656 $ (17,592) Resale agreements 3,662 4,446 (784) 6,643 11,798 (5,155) AFS debt securities 19,333 20,448 (1,115) 41,977 55,098 (13,121) Loans 26,961 26,369 592 (57,840) 85,446 (143,286) Restricted equity securities 147 (9) 156 488 17
471
Total interest and dividend income$ 49,579 $ 53,017 $ (3,438) $ (17,668) $ 161,015 $ (178,683) Interest-bearing liabilities: Checking deposits$ (1,159) $ 670 $ (1,829) $ (8,818) $ 4,589 $ (13,407) Money market deposits (3,391) 1,478 (4,869) (25,309) 8,107 (33,416) Savings deposits 462 370 92 1,019 1,173 (154) Time deposits (13,740) (1,579) (12,161) (67,702) (8,933) (58,769) Short-term borrowings (407) (203) (204) (1,186) (1,900) 714 FHLB advances (2,289) (1,574) (715) (4,630) (2,988) (1,642) Repurchase agreements (143) (39) (104) (3,705) (1,263) (2,442) Long-term debt and finance lease liabilities (1,330) (3,188) 1,858 (2,599) (6,087) 3,488 Total interest expense$ (21,997) $ (4,065)
$ 57,082 $ 14,494 $ 95,262 $ 168,317 $ (73,055) Noninterest Income
The following table presents the components of noninterest income for the third quarters and first nine months of 2021 and 2020:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2021 2020 % Change 2021 2020 % Change
Lending fees $ 17,516 $ 18,736 (7) % $ 56,965 $ 56,455 1 %
Deposit account fees 18,508 12,573 47 % 51,233 33,892 51 %
Interest rate contracts and other
derivative income 7,156 5,538 29 % 20,981 18,718 12 %
Foreign exchange income 13,101 3,310 296 % 35,634 15,691 127 %
Wealth management fees 5,598 4,553 23 % 20,460 12,997 57 %
Net gains on sales of loans 3,329 361 822 % 6,601 1,443 357 %
Gains on sales of AFS debt
securities 354 698 (49) % 1,178 11,867 (90) %
Other investment income 5,349 5,239 2 % 13,870 6,652 109 %
Other income 2,198 3,495 (37) % 7,484 8,000 (6) %
Total noninterest income $ 73,109 $ 54,503 34 % $ 214,406 $ 165,715 29 %
66-------------------------------------------------------------------------------- Noninterest income comprised 16% of total revenue for both the third quarter and first nine months of 2021, compared with 14% for the same periods in 2020. Third quarter 2021 noninterest income was$73.1 million , an increase of$18.6 million or 34%, compared with$54.5 million for the same period in 2020. This increase was primarily due to increases in foreign exchange income and deposit account fees. Noninterest income for the first nine months of 2021 was$214.4 million , an increase of$48.7 million or 29%, compared with$165.7 million for the same period in 2020. This increase was primarily due to increases in foreign exchange income, deposit account fees, wealth management fees, other investment income, and gains on sales of loans, partially offset by a decrease in gains on sales of AFS debt securities. Deposit account fees increased$5.9 million or 47% to$18.5 million for the third quarter of 2021, and increased$17.3 million or 51% to$51.2 million for the first nine months of 2021, compared with the same periods in 2020. These increases primarily reflected an increase in treasury management service fees resulting from commercial deposit growth. Foreign exchange income increased$9.8 million or 296% to$13.1 million for the third quarter of 2021, and increased$19.9 million or 127% to$35.6 million for the first nine months of 2021, compared with the same periods in 2020. These increases reflected new customer acquisitions and growth in customer-driven transactions, favorable revaluation of foreign currency transactions, as well as remeasurement of certain foreign currency-denominated balance sheet items. Wealth management fees increased$1.0 million or 23% to$5.6 million for the third quarter of 2021, and increased$7.5 million or 57% to$20.5 million for the first nine months of 2021, compared with the same periods in 2020. These increases were primarily due to growth in customer-driven transactions. Net gains on sales of loans increased$3.0 million or 822% to$3.3 million for the third quarter of 2021, and increased$5.2 million or 357% to$6.6 million for the first nine months of 2021, compared with the same periods in 2020. These increases were primarily due to a higher volume of SBA loan sold. Gains on sales of AFS debt securities decreased$344 thousand or 49% to$354 thousand for the third quarter of 2021, compared with the same period in 2020. Gains on sales of AFS debt securities decreased$10.7 million or 90% to$1.2 million for the first nine months of 2021, compared with the same period in 2020. The decrease for the first nine months of 2021, compared with the same period in 2020, was primarily due to a lower volume of AFS debt securities sold. Other investment income increased$110 thousand or 2% to$5.3 million for the third quarter of 2021, and increased$7.2 million or 109% to$13.9 million for the first nine months of 2021, compared with the same periods in 2020. These increases primarily reflected higher earnings from equity method investments.
Noninterest Expense
The following table presents the components of noninterest expense for the third quarters and first nine months of 2021 and 2020:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2021 2020 % Change 2021 2020 % Change
Compensation and employee benefits $ 105,751 $ 99,756 6 % $ 318,985 $ 298,671 7 %
Occupancy and equipment expense 15,851 16,648 (5) % 47,150 49,941 (6) %
Deposit insurance premiums and
regulatory assessments 4,641 4,006 16 % 12,791 11,133 15 %
Deposit account expense 4,136 3,113 33 % 11,845 10,029 18 %
Data processing 3,575 3,590 0 % 12,088 11,896 2 %
Computer software expense 8,426 8,539 (1) % 23,106 22,006 5 %
Consulting expense 1,635 1,224 34 % 4,978 3,854 29 %
Legal expense 2,363 1,366 73 % 5,840 6,093 (4) %
Other operating expense 20,998 17,122 23 % 58,544 57,489 2 %
Amortization of tax credit and other
investments 38,008 17,209 121 % 90,657 57,819 57 %
Repurchase agreements' extinguishment
cost - - - % - 8,740 (100) %
Total noninterest expense $ 205,384 $ 172,573 19 % $ 585,984 $ 537,671 9 %
Efficiency ratio 43.81 % 45.58 % 43.72 % 44.94 %
67-------------------------------------------------------------------------------- Third quarter 2021 noninterest expense was$205.4 million , an increase of$32.8 million or 19%, compared with$172.6 million for the same period in 2020. This increase was primarily due to higher amortization of tax credit and other investments, compensation and employee benefits, and other operating expense. First nine months of 2021 noninterest expense was$586.0 million , an increase of$48.3 million or 9%, compared with$537.7 million for the same period in 2020. The increase primarily reflected higher amortization of tax credit and other investments, and compensation and employee benefits.
Compensation and employee benefits increased
The increase in other operating expense of$3.9 million or 23% to$21.0 million for the third quarter of 2021, compared with the same period in 2020, was primarily due to higher charitable contributions. Other operating expense was$58.5 million and$57.5 million for the first nine months of 2021 and 2020, respectively. Amortization of tax credit and other investments increased$20.8 million or 121% to$38.0 million for the third quarter of 2021, and increased$32.9 million or 57% to$90.7 million for the first nine months of 2021, compared with the same periods in 2020. These increases were primarily due to the timing of the tax credit recognition in each period, based on when new tax credit projects were put into service. During the second quarter of 2020, the Company prepaid$150.0 million of repurchase agreements and incurred a debt extinguishment cost of$8.7 million . No such expense was incurred in either the third quarter or first nine months of 2021. Efficiency ratio, calculated as noninterest expense divided by total revenue, was 43.81% and 45.58% for the third quarters of 2021 and 2020, respectively, and 43.72% and 44.94% for the first nine months of 2021 and 2020, respectively. Non-GAAP efficiency ratio, adjusted for the amortization of tax credit and other investments and the amortization of core deposit intangibles, improved 524 bps to 35.55% for the third quarter of 2021, and improved 234 bps to 36.80% for the first nine months of 2021, compared with the same periods in 2020. For additional details, see the reconciliations of non-GAAP measures presented under Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-Q. Income Taxes Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2021 2020 % Change 2021 2020 % Change Income before income taxes$ 273,431 $ 196,060 39 %$ 779,296 $ 472,343 65 % Income tax expense$ 47,982 $ 36,523 31 %$ 124,111 $ 68,630 81 % Effective tax rate 17.5 % 18.6 % 15.9 % 14.5 % Third quarter 2021 income tax expense was$48.0 million and the effective tax rate was 17.5%, compared with third quarter 2020 income tax expense of$36.5 million and effective tax rate of 18.6%. The decrease in effective tax rate for the third quarter of 2021, compared with the same period in 2020 was primarily due to the relative impact of tax credit investments on income tax expense. For the first nine months of 2021, income tax expense was$124.1 million and the effective tax rate was 15.9%, compared with income tax expense of$68.6 million and effective tax rate of 14.5% for the same period in 2020. The year-over-year increase in effective tax rate was predominantly driven by a higher level of income before income taxes, as well as the relative impact of tax credit investments on income tax expense in each period.
Operating Segment Results
The Company organizes its operations into three reportable operating segments:
(1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These
segments are defined by the type of customers served, and the related products
and services provided. The segments reflect how financial information is
currently evaluated by management. For additional description of the Company's
internal management reporting process, including the segment cost allocation
methodology, see Note 13 - Business Segments to the Consolidated Financial
Statements in this Form 10-Q.
Segment net interest income represents the difference between actual interest
earned on assets and interest incurred on liabilities of the segment, adjusted
for funding charges or credits through the Company's internal funds transfer
pricing ("FTP") process.
68
--------------------------------------------------------------------------------
The following tables present the results by operating segment for the periods
indicated:
Three Months Ended September 30,
Consumer and Business Banking Commercial Banking Other
($ in thousands) 2021 2020 2021 2020 2021 2020
Total revenue $ 199,124 $ 138,395 $ 232,716 $ 191,868 $ 36,975 $ 48,370
Provision for (reversal
of) credit losses 1,293 (3,470) (11,293) 13,470 - -
Noninterest expense 90,575 81,419 66,688 61,863 48,121 29,291
Segment income (loss)
before income taxes 107,256 60,446 177,321 116,535 (11,146) 19,079
Segment net income $ 76,825 $ 43,310 $ 126,767 $ 83,340 $ 21,857 $ 32,887
Nine Months Ended September 30,
Consumer and Business Banking Commercial Banking Other
($ in thousands) 2021 2020 2021 2020 2021 2020
Total revenue $ 568,080 $ 446,257 $ 685,066 $ 625,508 $ 87,134 $ 124,562
(Reversal of) provision
for credit losses (598) 9,908 (24,402) 176,405 - -
Noninterest expense 267,511 248,547 200,109 196,889 118,364 92,235
Segment income (loss)
before income taxes 301,167 187,802 509,359 252,214 (31,230) 32,327
Segment net income $ 215,720 $ 134,563 $ 364,632 $ 180,649 $ 74,833 $ 88,501
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 and digital banking platform. This segment offers consumer and
commercial deposits, mortgage and home equity loans, and other products and
services. It also originates commercial loans for small- and medium-sized
enterprises. Other products and services provided by this segment include wealth
management, treasury management, and foreign exchange services.
The following tables present additional financial information for the Consumer and Business Banking segment for the periods indicated:
Three Months Ended
Change from 2020
($ in thousands) 2021 2020 $ %
Net interest income before provision for
credit losses $ 176,678 $ 120,969 $ 55,709 46 %
Noninterest income 22,446 17,426 5,020 29 %
Total revenue 199,124 138,395 60,729 44 %
Provision for (reversal of) credit losses 1,293 (3,470) 4,763 (137) %
Noninterest expense 90,575 81,419 9,156 11 %
Segment income before income taxes 107,256 60,446 46,810 77 %
Income tax expense 30,431 17,136 13,295 78 %
Segment net income $ 76,825 $ 43,310 $ 33,515 77 %
Average loans $ 14,186,630 $ 12,267,993 $ 1,918,637 16 %
Average deposits $ 32,516,678 $ 27,596,090 $ 4,920,588 18 %
69--------------------------------------------------------------------------------
Nine Months Ended
Change from 2020
($ in thousands) 2021 2020 $ %
Net interest income before provision for
credit losses $ 500,352 $ 398,486 $ 101,866 26 %
Noninterest income 67,728 47,771 19,957 42 %
Total revenue 568,080 446,257 121,823 27 %
(Reversal of) provision for credit losses (598) 9,908 (10,506) (106) %
Noninterest expense 267,511 248,547 18,964 8 %
Segment income before income taxes 301,167 187,802 113,365 60 %
Income tax expense 85,447 53,239 32,208 60 %
Segment net income $ 215,720 $ 134,563 $ 81,157 60 %
Average loans $ 13,787,675 $ 11,851,089 $ 1,936,586 16 %
Average deposits $ 31,304,335 $ 26,734,437 $ 4,569,898 17 %
For the third quarter of 2021, segment net income increased $33.5 million or 77%
year-over-year to $76.8 million , driven by revenue growth, partially offset by
increases in income tax expense, noninterest expense, and the provision for
credit losses. Net interest income before provision for credit losses increased
$55.7 million or 46% to $176.7 million , driven by lower interest expense,
primarily due to lower interest rates and growth in noninterest-bearing demand
deposits; and higher interest income, primarily due to growth in residential
mortgage loans. Noninterest income increased $5.0 million or 29% to
$22.4 million , primarily due to higher foreign exchange income and deposit
account fees, reflecting growth in customer-driven transactions. Noninterest
expense increased $9.2 million or 11% to $90.6 million , primarily due to higher
allocated corporate overhead, and compensation and employee benefits.
For the first nine months of 2021, segment net income increased $81.2 million or
60% year-over-year to $215.7 million , due to revenue growth and a lower
provision for credit losses, partially offset by higher income tax expense and
noninterest expense. Net interest income before provision for credit losses
increased $101.9 million or 26% to $500.4 million , driven by higher interest
income, primarily due to growth in residential mortgage loans; and lower
interest expense, primarily due to growth in noninterest-bearing demand deposits
and lower interest rates. Noninterest income increased $20.0 million or 42% to
$67.7 million , primarily due to higher foreign exchange income, deposit account
fees, and wealth management fees, partially offset by lower interest rate
contracts and other derivative income. Noninterest expense increased $19.0
million or 8% to $267.5 million , primarily from increased compensation and
employee benefits, and allocated corporate overhead.
Commercial Banking
The Commercial Banking segment primarily offers commercial loan and deposit
products. Commercial loan products include commercial business loans and lines
of credit, trade finance loans and letters of credit, CRE loans, construction
and land lending, affordable housing loans and letters of credit, asset-based
lending, and equipment financing. Commercial deposit products and other
financial services include treasury management, foreign exchange services, and
interest rate and commodity risk hedging.
70
--------------------------------------------------------------------------------The following tables present additional financial information for the Commercial Banking segment for the periods indicated:
Three Months Ended
Change from 2020
($ in thousands) 2021 2020 $ %
Net interest income before provision for
credit losses $ 189,791 $ 162,884 $ 26,907 17 %
Noninterest income 42,925 28,984 13,941 48 %
Total revenue 232,716 191,868 40,848 21 %
(Reversal of) provision for credit losses (11,293) 13,470 (24,763) (184) %
Noninterest expense 66,688 61,863 4,825 8 %
Segment income before income taxes 177,321 116,535 60,786 52 %
Income tax expense 50,554 33,195 17,359 52 %
Segment net income $ 126,767 $ 83,340 $ 43,427 52 %
Average loans $ 25,773,521 $ 24,892,452 $ 881,069 4 %
Average deposits $ 18,275,884 $ 10,766,677 $ 7,509,207 70 %
Nine Months Ended
Change from 2020
($ in thousands) 2021 2020 $ %
Net interest income before provision for
credit losses $ 559,579 $ 530,181 $ 29,398 6 %
Noninterest income 125,487 95,327 30,160 32 %
Total revenue 685,066 625,508 59,558 10 %
(Reversal of) provision for credit losses (24,402) 176,405 (200,807) (114) %
Noninterest expense 200,109 196,889 3,220 2 %
Segment income before income taxes 509,359 252,214 257,145 102 %
Income tax expense 144,727 71,565 73,162 102 %
Segment net income $ 364,632 $ 180,649 $ 183,983 102 %
Average loans $ 25,654,076 $ 24,636,770 $ 1,017,306 4 %
Average deposits $ 16,611,906 $ 10,197,018 $ 6,414,888 63 %
For the third quarter of 2021, segment net income increased $43.4 million or 52%
year-over-year to $126.8 million , driven by revenue growth and a lower provision
for credit losses, partially offset by higher income tax expense and noninterest
expense. Net interest income before provision for credit losses increased
$26.9 million or 17% to $189.8 million , driven by higher interest income, due to
more PPP loan-related income and growth in commercial loans; and lower interest
expense due to growth in noninterest-bearing demand deposits. Noninterest income
increased $13.9 million or 48% to $42.9 million , reflecting higher foreign
exchange income, deposit account fees, gains on sales of loans, and interest
rate contracts and other derivative income. Noninterest expense increased $4.8
million or 8% to $66.7 million , primarily due to higher compensation and
employee benefits.
For the first nine months of 2021, segment net income increased $184.0 million
or 102% year-over-year to $364.6 million , reflecting a lower provision for
credit losses and revenue growth, partially offset by higher income tax expense
and noninterest expense. Net interest income before provision for credit losses
increased $29.4 million or 6% to $559.6 million , driven by lower interest
expense, due to lower interest rates and growth in noninterest-bearing demand
deposits; partially offset by lower interest income, due to compression in
commercial loan yields. Noninterest income increased $30.2 million or 32% to
$125.5 million , reflecting higher foreign exchange income, deposit account fees,
interest rate contracts and other derivative income, and gains on sales of
loans. Noninterest expense increased $3.2 million or 2% to $200.1 million , due
to increases in compensation and employee benefits, and deposit related
expenses, partially offset by a decrease in loan related expense.
Other
Centralized functions, including the corporate treasury activities of the Company and eliminations of inter-segment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments, namely the Consumer and Business Banking and the Commercial Banking segments.
71
--------------------------------------------------------------------------------The following tables present additional financial information for the Other segment for the periods indicated:
Three Months Ended
Change from 2020
($ in thousands) 2021 2020 $ %
Net interest income before provision for
credit losses $ 29,237 $ 40,277 $ (11,040) (27) %
Noninterest income 7,738 8,093 (355) (4) %
Total revenue 36,975 48,370 (11,395) (24) %
Noninterest expense 48,121 29,291 18,830 64 %
Segment (loss) income before income taxes (11,146) 19,079 (30,225) (158) %
Income tax benefit (33,003) (13,808) (19,195) 139 %
Segment net income $ 21,857 $ 32,887 $ (11,030) (34) %
Average deposits $ 2,704,070 $ 2,847,980 $ (143,910) (5) %
Nine Months Ended
Change from 2020
($ in thousands) 2021 2020 $ %
Net interest income before provision for
credit losses $ 65,943 $ 101,945 $ (36,002) (35) %
Noninterest income 21,191 22,617 (1,426) (6) %
Total revenue 87,134 124,562 (37,428) (30) %
Noninterest expense 118,364 92,235 26,129 28 %
Segment (loss) income before income taxes (31,230) 32,327 (63,557) (197) %
Income tax benefit (106,063) (56,174) (49,889) 89 %
Segment net income $ 74,833 $ 88,501 $ (13,668) (15) %
Average deposits $ 2,612,897 $ 2,602,791 $ 10,106 0 %
Segment net income decreased $11.0 million or 34% year-over-year to $21.9
million for the third quarter of 2021. Net interest income before provision for
credit losses decreased $11.0 million or 27% to $29.2 million . The decrease was
primarily driven by lower FTP spread income absorbed by the Other segment,
partially offset by growth in interest income from investments due to a higher
volume of AFS debt securities. Noninterest expense increased $18.8 million or
64% to $48.1 million , primarily due to higher amortization of tax credits and
other investments.
Segment net income decreased $13.7 million or 15% year-over-year to $74.8
million for the first nine months of 2021. Net interest income before provision
for credit losses decreased $36.0 million or 35% to $65.9 million . The decrease
was primarily driven by lower FTP spread income absorbed by the Other segment,
partially offset by growth in interest income from investments due to a higher
volume of AFS debt securities. Noninterest expense increased $26.1 million or
28% to $118.4 million , primarily driven by higher amortization of tax credits
and other investments.
Balance Sheet Analysis
Debt Securities
The Company maintains a portfolio of high quality and liquid debt securities
with moderate durations to minimize overall interest rate and liquidity risks.
The Company's debt securities provide:
•interest income for earnings and yield enhancement;
•availability for funding needs arising during the normal course of business;
•the ability to execute interest rate risk management strategies in response to
changes in economic or market conditions; and
•collateral to support pledging agreements as required and/or to enhance the
Company's borrowing capacity.
72
--------------------------------------------------------------------------------Debt securities classified as AFS are carried at their fair value with the corresponding changes in fair value recorded in Accumulated other comprehensive income (loss), net of tax, as a component of Stockholders' equity on the Consolidated Balance Sheet.
The following table presents the distribution of the Company's AFS debt
securities portfolio by fair value and percentage of portfolio as of
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