# East West Bancorp Inc: Form 10-Q for the period ended Sep 30, 2019

- Company: [East West Bancorp Inc](/companies/ewbc.md) (CIK 1069157)
- Form: 10-Q
- Filed: 2019-11-08
- Accepted by EDGAR: Nov 8, 2019, 17:17 ET
- Period: 2019-09-30
- Accession: 0001628280-19-013854
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1069157/000162828019013854/ewbc10q09302019.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1069157/000162828019013854/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $14.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $41.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2019-07-01 to 2019-09-30 | $107.1m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-01-01 to 2019-09-30 | $315.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $35.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $138.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $171.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $485.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $1.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $3.33 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $1.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $3.34 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 146,120,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 146,088,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $389.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $8.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-09-30 | $3.04bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-09-30 | $43.27bn | us-gaap:Assets |
| Total liabilities | at 2019-09-30 | $38.39bn | us-gaap:Liabilities |
| Short-term borrowings | at 2019-09-30 | $47.7m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-09-30 | $4.88bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 177,046 characters.

|  | Page |
| --- | ---: |
| **Overview** | 63 |
| **Selected Financial Data** | 64 |
| **Financial Highlights** | 65 |
| **Results of Operations** | 67 |
| Net Interest Income | 67 |
| Noninterest Income | 71 |
| Noninterest Expense | 72 |
| Income Taxes | 73 |
| Operating Segment Results | 75 |
| **Balance Sheet Analysis** | 78 |
| Selected Consolidated Balance Sheet Data | 78 |
| Investment Securities | 79 |
| Total Loan Portfolio | 82 |
| Non-PCI Nonperforming Assets | 88 |
| Allowance for Credit Losses | 90 |
| Deposits and Other Sources of Funds | 92 |
| Foreign Outstandings | 94 |
| Capital | 95 |
| Regulatory Capital and Ratios | 95 |
| **Other Matters** | 96 |
| **Off-Balance Sheet Arrangements** | 97 |
| **Asset Liability and Market Risk Management** | 97 |
| Liquidity | 97 |
| Consolidated Cash Flows Analysis | 99 |
| Interest Rate Risk Management | 99 |
| Derivatives | 102 |
| **Critical Accounting Policies and Estimates** | 104 |
| **Supplemental Information — Explanation of GAAP and Non-GAAP Financial Measures** | 104 |
| **Forward-Looking Statements** | 107 |

62

### 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” 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, 2018, filed with the United States Securities and Exchange Commission on February 27, 2019 (the “Company’s 2018 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 130 locations in the United States (“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 investment securities and interest paid on deposits and other funding sources. As of September 30, 2019, the Company had $43.27 billion in assets and approximately 3,300 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 2018 Form 10-K.

### Corporate Strategy

We are committed to enhancing long-term stockholder value by executing on the fundamentals of 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 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. 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.

### Selected Financial Data

*($ and shares in thousands, except per share, ratio and headcount data)*

| Summary of operations: | Three Months Ended September 30, 2019 | June 30, 2019 | September 30, 2018 |  | Nine Months Ended September 30, 2019 | September 30, 2018 |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest and dividend income | $476,912 | $474,844 |  | $422,185 | $1,415,067 |  | $1,194,369 |  |
| Interest expense | 107,105 | 107,518 |  | 73,465 | 315,473 |  | 177,277 |  |
| Net interest income before provision for credit losses | 369,807 | 367,326 |  | 348,720 | 1,099,594 |  | 1,017,092 |  |
| Provision for credit losses | 38,284 | 19,245 |  | 10,542 | 80,108 |  | 46,296 |  |
| Net interest income after provision for credit losses | 331,523 | 348,081 |  | 338,178 | 1,019,486 |  | 970,796 |  |
| Noninterest income | 51,474 | 52,759 |  | 46,502 | 146,364 |  | 169,214 | (1) |
| Noninterest expense | 176,630 | 177,663 |  | 179,815 | 541,215 |  | 526,369 |  |
| Income before income taxes | 206,367 | 223,177 |  | 204,865 | 624,635 |  | 613,641 |  |
| Income tax expense | 34,951 | 72,797 | (2) | 33,563 | 138,815 | (2) | 82,958 |  |
| Net income | $171,416 | $150,380 |  | $171,302 | $485,820 |  | $530,683 |  |
| **Per common share:** |  |  |  |  |  |  |  |  |
| Basic earnings | $1.18 | $1.03 |  | $1.18 | $3.34 |  | $3.66 |  |
| Diluted earnings | $1.17 | $1.03 |  | $1.17 | $3.33 |  | $3.63 |  |
| Dividends declared | $0.275 | $0.275 |  | $0.230 | $0.780 |  | $0.630 |  |
| Book value | $33.54 | $32.53 |  | $29.29 | $33.54 |  | $29.29 |  |
| Non-United States generally accepted accounting principles (“GAAP”) tangible common equity per share (3) | $30.22 | $29.20 |  | $25.91 | $30.22 |  | $25.91 |  |
| **Weighted-average number of shares outstanding:** |  |  |  |  |  |  |  |  |
| Basic | 145,559 | 145,546 |  | 144,921 | 145,455 |  | 144,829 |  |
| Diluted | 146,120 | 146,052 |  | 146,173 | 146,088 |  | 146,158 |  |
| Common shares outstanding at period-end | 145,568 | 145,547 |  | 144,929 | 145,568 |  | 144,929 |  |
| **At period end:** |  |  |  |  |  |  |  |  |
| Total assets (4) | $43,274,659 | $42,892,358 |  | $39,042,713 | $43,274,659 |  | $39,042,713 |  |
| Total loans (4) | $34,025,270 | $33,734,256 |  | $31,213,299 | $34,025,270 |  | $31,213,299 |  |
| Available-for-sale investment securities | $3,284,034 | $2,592,913 |  | $2,676,510 | $3,284,034 |  | $2,676,510 |  |
| Total deposits | $36,659,526 | $36,477,542 |  | $33,629,124 | $36,659,526 |  | $33,629,124 |  |
| Long-term debt and finance lease liabilities | $152,390 | $152,506 |  | $156,770 | $152,390 |  | $156,770 |  |
| Federal Home Loan Bank (“FHLB”) advances | $745,494 | $745,074 |  | $325,596 | $745,494 |  | $325,596 |  |
| Stockholders’ equity | $4,882,664 | $4,734,593 |  | $4,244,850 | $4,882,664 |  | $4,244,850 |  |
| Non-GAAP tangible common equity (3) | $4,399,532 | $4,249,944 |  | $3,755,647 | $4,399,532 |  | $3,755,647 |  |
| Head count (full-time equivalent) | 3,282 | 3,261 |  | 2,930 | 3,282 |  | 2,930 |  |
| **Performance metrics:** |  |  |  |  |  |  |  |  |
| Return on average assets (“ROA”) | 1.58% | 1.45% |  | 1.76% | 1.55% |  | 1.87% |  |
| Return on average equity (“ROE”) | 14.06% | 12.88% |  | 16.19% | 13.86% |  | 17.47% |  |
| Net interest margin | 3.59% | 3.73% |  | 3.76% | 3.70% |  | 3.77% |  |
| Efficiency ratio (5) | 41.93% | 42.29% |  | 45.50% | 43.44% |  | 44.37% |  |
| Non-GAAP efficiency ratio (3) | 37.66% | 38.03% |  | 39.89% | 38.47% |  | 40.13% |  |
| **Credit quality metrics:** |  |  |  |  |  |  |  |  |
| Allowance for loan losses | $345,576 | $330,625 |  | $310,041 | $345,576 |  | $310,041 |  |
| Allowance for loan losses to loans held-for-investment (4) | 1.02% | 0.98% |  | 0.99% | 1.02% |  | 0.99% |  |
| Non-purchased credit-impaired (“PCI”) nonperforming assets to total assets (4) | 0.31% | 0.28% |  | 0.29% | 0.31% |  | 0.29% |  |
| Annualized net charge-offs to average loans held-for-investment | 0.26% | 0.09% |  | 0.05% | 0.18% |  | 0.11% |  |
| **Selected metrics:** |  |  |  |  |  |  |  |  |
| Total average equity to total average assets | 11.22% | 11.28% |  | 10.86% | 11.21% |  | 10.72% |  |
| Common dividend payout ratio | 23.62% | 26.95% |  | 19.68% | 23.63% |  | 17.39% |  |
| Loan-to-deposit ratio (4) | 92.81% | 92.48% |  | 92.82% | 92.81% |  | 92.82% |  |
| **EWBC capital ratios:** |  |  |  |  |  |  |  |  |
| Common Equity Tier 1 (“CET1”) capital | 12.8% | 12.5% |  | 12.3% | 12.8% |  | 12.3% |  |
| Tier 1 capital | 12.8% | 12.5% |  | 12.3% | 12.8% |  | 12.3% |  |
| Total capital | 14.2% | 13.9% |  | 13.8% | 14.2% |  | 13.8% |  |
| Tier 1 leverage capital | 10.3% | 10.4% |  | 10.0% | 10.3% |  | 10.0% |  |

(1) Includes $31.5 million of pretax gain recognized from the sale of the Desert Community Bank (“DCB”) branches during the first nine months of 2018.

(2) Includes $30.1 million of additional tax expense to reverse certain previously claimed tax credits related to the DC Solar tax credit investments during the second quarter of 2019.

(3) 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.

(4) Total assets and loans held-for-investment include PCI loans of $240.7 million, $270.9 million and $345.0 million as of September 30, 2019, June 30, 2019 and September 30, 2018, respectively.

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

### Financial Highlights

Noteworthy items about the Company’s performance for the third quarter and first nine months of 2019 included:

- **Earnings:** Third quarter 2019 net income was $171.4 million or $1.17 in diluted earnings per share (“EPS”), compared with third quarter 2018 net income of $171.3 million or $1.17 in diluted EPS. This slight increase in net income was primarily due to net interest income growth, partially offset by increased provision for credit losses. Net income for the first nine months of 2019 was $485.8 million or $3.33 in diluted EPS, compared with net income of $530.7 million or $3.63 in diluted EPS for the same period in 2018, a decrease of 8%. The year-over-year decrease primarily reflected the $30.1 million of additional income tax expense recorded in the second quarter of 2019 to reverse certain previously claimed tax credits related to DC Solar. Pre-tax income of $624.6 million for the first nine months of 2019 increased $11.0 million or 2% compared with the same period a year ago.
- **Adjusted Earnings:** There were no adjustments for non-recurring items in the third quarters of 2019 and 2018 that affected non-GAAP net income and diluted EPS. Non-GAAP net income and non-GAAP diluted EPS for the first nine months of 2019 were $520.8 million and $3.57, respectively, compared with $508.5 million and $3.48 for the first nine months of 2018, respectively, a year-over-year increase of 2%. During the second quarter of 2019, the Company recorded $30.1 million in additional income tax expense to reverse certain previously claimed tax credits related to DC Solar. During the first quarter of 2019, the Company recorded a $7.0 million pre-tax impairment charge related to DC Solar or $4.9 million after tax (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). During the first quarter of 2018, the Company recognized a $31.5 million pre-tax gain from the sale of its DCB branches or $22.2 million after tax. (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.)
- **Revenue:** Revenue, or the sum of net interest income before provision for credit losses and noninterest income, was $421.3 million for the third quarter of 2019, compared with $395.2 million for the third quarter of 2018, an increase of $26.1 million or 7%. This increase was primarily due to increased net interest income. Revenue for the first nine months of 2019 was $1.25 billion, compared with $1.19 billion for the first nine months of 2018, an increase of $59.7 million or 5%. This increase was primarily due to increased net interest income, partially offset by a decrease in noninterest income. Noninterest income for the first nine months of 2018 included a $31.5 million pre-tax gain from the sale of DCB branches.
- **Net Interest Income and Net Interest Margin:** Third quarter 2019 net interest income was $369.8 million, compared with third quarter 2018 net interest income of $348.7 million, an increase of $21.1 million or 6%. Third quarter 2019 net interest margin was 3.59%, a decrease of 17 basis points from 3.76% for the third quarter of 2018. Net interest income for the first nine months of 2019 was $1.10 billion, compared with $1.02 billion for the first nine months of 2018, an increase of $82.5 million or 8%. Net interest margin was 3.70% for the first nine months of 2019, a decrease of seven basis points from 3.77% for the first nine months of 2018.
- **Operating Efficiency:** Efficiency ratio, calculated as noninterest expense divided by revenue, was 41.93% and 45.50% for the third quarters of 2019 and 2018, respectively. The efficiency ratio was 43.44% and 44.37% for the first nine months of 2019 and 2018, respectively. Adjusting for non-recurring items, amortization of tax credit and other investments, and the amortization of core deposit intangibles, the non-GAAP efficiency ratio for the third quarter 2019 was 37.66%, a 223 basis point improvement from 39.89% for the third quarter of 2018. Adjusting for the amortization of tax credit and other investments, the amortization of core deposit intangibles in both the first nine months of 2019 and 2018, and the $31.5 million pre-tax gain from the sale of the Company’s DCB branches in the first nine months of 2018, the non-GAAP efficiency ratio was 38.47% for the first nine months of 2019, a 166 basis point improvement from 40.13% for the first nine months of 2018. (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.)
- **Tax:** The effective tax rates were 16.9% and 16.4% for the third quarters of 2019 and 2018, respectively, and 22.2% and 13.5% for the first nine months of 2019 and 2018, respectively. The higher effective tax rate during the first nine months of 2019 was primarily due to the $30.1 million reversal of certain previously claimed tax credits related to DC Solar in the second quarter of 2019.
- **Profitability:** ROA for the third quarters of 2019 and 2018 were 1.58% and 1.76%, respectively. ROA for the first nine months of 2019 and 2018 were 1.55% and 1.87%, respectively. Third quarters 2019 and 2018 ROE were 14.06% and 16.19%, respectively. ROE for the first nine months of 2019 and 2018 were 13.86% and 17.47%, respectively. Adjusting for non-recurring items that only affected year-to-date calculations, non-GAAP ROA was 1.67% for the first nine months of 2019, compared with 1.80% for the first nine months of 2018. For the first nine months of 2019, non-GAAP ROE was 14.85%, compared with 16.74% for the first nine months of 2018. (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 $34.03 billion as of September 30, 2019, an increase of $1.64 billion or 5% from $32.39 billion as of December 31, 2018. Growth was well-diversified across single-family residential, commercial real estate (“CRE”), and commercial and industrial (“C&I”) loans.
- **Deposits:** Total deposits were $36.66 billion as of September 30, 2019, an increase of $1.22 billion or 3% from $35.44 billion as of December 31, 2018. This increase was primarily due to the $1.45 billion or 16% increase in time deposits.
- **Asset Quality Metrics:** The allowance for loan losses was $345.6 million or 1.02% of loans held-for-investment as of September 30, 2019, compared with $311.3 million or 0.96% of loans held-for-investment as of December 31, 2018. Non-PCI nonperforming assets were $134.5 million or 0.31% of total assets as of September 30, 2019, an increase from $93.0 million or 0.23% of total assets as of December 31, 2018. Third quarter 2019 net charge-offs were $22.5 million or annualized 0.26% of average loans held-for-investment, an increase from $3.7 million or annualized 0.05% of average loans held-for-investment for the third quarter of 2018. For the first nine months of 2019, net charge-offs were $44.5 million or annualized 0.18% of average loans held-for-investment, compared with $24.1 million or annualized 0.11% of average loans held-for-investment for the first nine months of 2018.
- **Capital Levels:** Our capital levels are strong. As of September 30, 2019, all of the Company’s and the Bank’s regulatory capital ratios were well above the required well-capitalized levels. See *Item 2. MD&A — Balance Sheet Analysis — Regulatory Capital and Ratios* in this Form 10-Q for more information regarding capital.
- **Cash Dividend Increase:** The quarterly cash common stock dividend for the third quarter of 2019 was $0.275 per share, an increase of $0.045 or 20% from $0.23 per share for the third quarter of 2018. The Company returned $40.5 million and $114.8 million in cash dividends to stockholders during the third quarter and the first nine months of 2019, respectively, compared with $33.7 million and $92.3 million during the same periods in 2018.

### Results of Operations

### Net Interest Income

The Company’s primary source of revenue is net interest income, which is the difference between interest income earned on interest-earning assets and 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 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.

Third quarter 2019 net interest income was $369.8 million, an increase of $21.1 million or 6%, compared with $348.7 million for the third quarter of 2018. For the first nine months of 2019, net interest income was $1.10 billion, an increase of $82.5 million or 8%, compared with $1.02 billion for the first nine months of 2018. Year-over-year, net interest income growth was primarily driven by loan growth, partially offset by a higher cost of funds. Third quarter 2019 net interest margin was 3.59%, a 17 basis point decrease from 3.76% for the third quarter of 2018. For the first nine months of 2019, net interest margin was 3.70%, a seven basis point decrease from 3.77% for the first nine months of 2018.

The average loan yield for the third quarter of 2019 was 5.11%, a nine basis point increase from 5.02% for the third quarter of 2018. For the first nine months of 2019, the average loan yield was 5.23%, a 34 basis point increase from 4.89% for the first nine months of 2018. The increases in both periods, compared with the same periods a year ago, were driven by the upward repricing of the Company’s loan portfolio in response to higher short-term interest rates during the periods. Approximately 70% and 69% of loans were variable-rate or hybrid that were in their adjustable rate periods as of September 30, 2019 and 2018, respectively. Third quarter 2019 average loans were $33.66 billion, an increase of $3.16 billion or 10% from $30.50 billion for the third quarter of 2018. For the first nine months of 2019, average loans were $33.02 billion, an increase of $3.23 billion or 11% from $29.79 billion for the first nine months of 2018. Average loan growth was broad-based across single-family residential, C&I and CRE loans.

Third quarter 2019 average interest-earning assets were $40.92 billion, an increase of $4.10 billion or 11% from $36.82 billion for the third quarter of 2018. This was primarily due to increases of $3.16 billion in average loans and $1.03 billion in average interest-bearing cash and deposits with banks. For the first nine months of 2019, average interest-earning assets were $39.72 billion, an increase of $3.68 billion or 10% from $36.04 billion for the first nine months of 2018. This was primarily due to increases of $3.23 billion in average loans and $608.6 million in average interest-bearing cash and deposits with banks, partially offset by a decrease of $156.8 million in average available-for-sale investment securities. The yield on average interest-earning assets for the third quarter of 2019 was 4.62%, a seven basis point increase from 4.55% for the third quarter of 2018. For the first nine months of 2019, the average earning asset yield was 4.76%, a 33 basis point increase from 4.43% for the first nine months of 2018.

Deposits are an important source of funds and impact both net interest income and net interest margin. Average noninterest-bearing demand deposits totaled $10.71 billion for the third quarter of 2019, compared with $10.64 billion for the third quarter of 2018, an increase of $73.1 million or 1%. Average noninterest-bearing demand deposits were $10.34 billion for the first nine months of 2019, compared with $10.97 billion for the first nine months of 2018, a decrease of $626.0 million or 6%. Average noninterest-bearing demand deposits comprised 29% and 32% of average total deposits for the third quarters of 2019 and 2018, respectively; and 29% and 34% of average total deposits for the first nine months of 2019 and 2018, respectively. Average interest-bearing deposits of $25.79 billion for the third quarter of 2019 increased $3.18 billion or 14% from $22.60 billion for the third quarter of 2018. Average interest-bearing deposits of $25.25 billion for the first nine months of 2019 increased $3.58 billion or 16% from $21.67 billion for the first nine months of 2018.

The average cost of funds was 1.13% for the third quarter of 2019, an increase of 27 basis points from 0.86% for the third quarter of 2018. For the first nine months of 2019, the average cost of funds was 1.16%, an increase of 45 basis points from 0.71% for the first nine months of 2018. The increases in the average cost of funds were primarily due to an increase in the average cost of interest-bearing deposits. The average cost of interest-bearing deposits increased 35 basis points to 1.49% for the third quarter of 2019, up from 1.14% for the third quarter of 2018. The average cost of interest-bearing deposits increased 56 basis points to 1.52% for the first nine months of 2019, up from 0.96% for the first nine months of 2018. Other sources of funding included in the calculation of the average cost of funds consist of FHLB advances, long-term debt and securities sold under repurchase agreements (“repurchase agreements”).

The Company utilizes various tools to manage interest rate risk. Refer to *Item 2. MD&A — Asset Liability and Market Risk Management — Interest Rate Risk Management* in this Form 10-Q.

The following table presents the interest rate 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 2019 and 2018:

*($ in thousands)*

| ASSETS Interest-earning assets: | Three Months Ended September 30, 2019 Average Balance | Interest | Average Yield/ Rate (1) | 2018 Average Balance | Interest | Average Yield/ Rate (1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing cash and deposits with banks | $3,547,626 | $19,772 | 2.21% | $2,521,002 | $13,353 | 2.10% |
| Securities purchased under resale agreements (“Resale agreements”) (2) | 981,196 | 6,881 | 2.78% | 1,002,500 | 7,393 | 2.93% |
| Available-for-sale investment securities (3)(4) | 2,651,069 | 15,945 | 2.39% | 2,727,219 | 15,180 | 2.21% |
| Loans (5)(6) | 33,661,282 | 433,658 | 5.11% | 30,498,037 | 385,538 | 5.02% |
| Restricted equity securities | 78,213 | 656 | 3.33% | 73,535 | 721 | 3.89% |
| **Total interest-earning assets** | **$40,919,386** | **$476,912** | **4.62%** | **$36,822,293** | **$422,185** | **4.55%** |
| **Noninterest-earning assets:** |  |  |  |  |  |  |
| Cash and due from banks | 441,898 |  |  | 424,350 |  |  |
| Allowance for loan losses | (328,523) |  |  | (301,557) |  |  |
| Other assets | 2,103,512 |  |  | 1,714,176 |  |  |
| **Total assets** | **$43,136,273** |  |  | **$38,659,262** |  |  |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |  |  |  |  |  |  |
| **Interest-bearing liabilities:** |  |  |  |  |  |  |
| Checking deposits | $4,947,511 | $14,488 | 1.16% | $4,515,256 | $9,551 | 0.84% |
| Money market deposits | 8,344,993 | 26,943 | 1.28% | 7,613,030 | 21,411 | 1.12% |
| Savings deposits | 2,154,592 | 2,656 | 0.49% | 2,194,792 | 2,308 | 0.42% |
| Time deposits | 10,337,990 | 52,733 | 2.02% | 8,277,129 | 31,762 | 1.52% |
| Federal funds purchased and other short-term borrowings | 40,433 | 382 | 3.75% | 58,218 | 643 | 4.38% |
| FHLB advances | 745,263 | 5,021 | 2.67% | 325,246 | 2,732 | 3.33% |
| Repurchase agreements (2) | 50,000 | 3,239 | 25.70% | 50,000 | 3,366 | 26.71% |
| Long-term debt and finance lease liabilities | 152,471 | 1,643 | 4.28% | 156,794 | 1,692 | 4.28% |
| **Total interest-bearing liabilities** | **$26,773,253** | **$107,105** | **1.59%** | **$23,190,465** | **$73,465** | **1.26%** |
| **Noninterest-bearing liabilities and stockholders’ equity:** |  |  |  |  |  |  |
| Demand deposits | 10,712,612 |  |  | 10,639,554 |  |  |
| Accrued expenses and other liabilities | 812,127 |  |  | 631,568 |  |  |
| Stockholders’ equity | 4,838,281 |  |  | 4,197,675 |  |  |
| **Total liabilities and stockholders’ equity** | **$43,136,273** |  |  | **$38,659,262** |  |  |
| **Interest rate spread** |  |  | **3.03%** |  |  | **3.29%** |
| **Net interest income and net interest margin** |  | **$369,807** | **3.59%** |  | **$348,720** | **3.76%** |

(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 2.57% and 2.63% for the third quarters of 2019 and 2018, respectively. The weighted-average interest rates of gross repurchase agreements were 4.68% and 4.65% for the third quarters of 2019 and 2018, respectively.

(3) Yields on tax-exempt securities are not presented on a tax-equivalent basis.

(4) Includes the amortization of premiums on investment securities of $3.0 million and $3.4 million for the third quarters of 2019 and 2018, respectively.

(5) Average balances include nonperforming loans and loans held-for-sale.

(6) Includes the accretion of net deferred loan fees, unearned fees and ASC 310-30 discounts, and amortization of premiums, which totaled $7.8 million and $8.6 million for the third quarters of 2019 and 2018, respectively.

The following table presents the interest rate spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component for the first nine months of 2019 and 2018:

*($ in thousands)*

| ASSETS Interest-earning assets: | Nine Months Ended September 30, 2019 Average Balance | Interest | Average Yield/ Rate (1) | 2018 Average Balance | Interest | Average Yield/ Rate (1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing cash and deposits with banks | $2,996,340 | $52,103 | 2.32% | $2,387,712 | $36,013 | 2.02% |
| Resale agreements (2) | 1,005,147 | 22,070 | 2.94% | 1,016,044 | 21,509 | 2.83% |
| Available-for-sale investment securities (3)(4) | 2,614,949 | 47,378 | 2.42% | 2,771,727 | 45,695 | 2.20% |
| Loans (5)(6) | 33,023,713 | 1,291,642 | 5.23% | 29,790,281 | 1,088,997 | 4.89% |
| Restricted equity securities | 76,313 | 1,874 | 3.28% | 73,618 | 2,155 | 3.91% |
| **Total interest-earning assets** | **$39,716,462** | **$1,415,067** | **4.76%** | **$36,039,382** | **$1,194,369** | **4.43%** |
| **Noninterest-earning assets:** |  |  |  |  |  |  |
| Cash and due from banks | 449,739 |  |  | 433,299 |  |  |
| Allowance for loan losses | (321,486) |  |  | (293,403) |  |  |
| Other assets | 1,970,775 |  |  | 1,695,156 |  |  |
| **Total assets** | **$41,815,490** |  |  | **$37,874,434** |  |  |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |  |  |  |  |  |  |
| **Interest-bearing liabilities:** |  |  |  |  |  |  |
| Checking deposits | $5,145,308 | $44,579 | 1.16% | $4,487,314 | $24,694 | 0.74% |
| Money market deposits | 8,094,933 | 85,858 | 1.42% | 7,919,845 | 56,056 | 0.95% |
| Savings deposits | 2,117,773 | 7,360 | 0.46% | 2,286,402 | 6,364 | 0.37% |
| Time deposits | 9,887,274 | 148,992 | 2.01% | 6,976,359 | 68,319 | 1.31% |
| Federal funds purchased and other short-term borrowings | 45,410 | 1,359 | 4.00% | 23,805 | 774 | 4.35% |
| FHLB advances | 540,535 | 12,011 | 2.97% | 327,978 | 7,544 | 3.08% |
| Repurchase agreements (2) | 50,000 | 10,200 | 27.27% | 50,000 | 8,714 | 23.30% |
| Long-term debt and finance lease liabilities | 152,480 | 5,114 | 4.48% | 161,691 | 4,812 | 3.98% |
| **Total interest-bearing liabilities** | **$26,033,713** | **$315,473** | **1.62%** | **$22,233,394** | **$177,277** | **1.07%** |
| **Noninterest-bearing liabilities and stockholders’ equity:** |  |  |  |  |  |  |
| Demand deposits | 10,342,966 |  |  | 10,968,958 |  |  |
| Accrued expenses and other liabilities | 751,065 |  |  | 610,105 |  |  |
| Stockholders’ equity | 4,687,746 |  |  | 4,061,977 |  |  |
| **Total liabilities and stockholders’ equity** | **$41,815,490** |  |  | **$37,874,434** |  |  |
| **Interest rate spread** |  |  | **3.14%** |  |  | **3.36%** |
| **Net interest income and net interest margin** |  | **$1,099,594** | **3.70%** |  | **$1,017,092** | **3.77%** |

(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 2.69% and 2.59% for the first nine months of 2019 and 2018, respectively. The weighted-average interest rates of gross repurchase agreements were 4.87% and 4.36% for the first nine months of 2019 and 2018, respectively.

(3) Yields on tax-exempt securities are not presented on a tax-equivalent basis.

(4) Includes the amortization of premiums on investment securities of $9.0 million and $11.6 million for the first nine months of 2019 and 2018, respectively.

(5) Average balances include nonperforming loans and loans held-for-sale.

(6) Includes the accretion of net deferred loan fees, unearned fees and ASC 310-30 discounts, and amortization of premiums, which totaled $24.6 million and $28.0 million for the first nine months of 2019 and 2018, respectively.

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 rate. 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. Nonaccrual loans are included in average loans to compute the table below:

*($ in thousands)*

| Interest-earning assets: | Three Months Ended September 30, 2019 vs. 2018 Total Change Volume | Changes Due to Yield/Rate | Volume | Nine Months Ended September 30, 2019 vs. 2018 Total Change Yield/Rate | Changes Due to |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing cash and deposits with banks | $6,419 | $5,689 | $730 | $16,090 | $10,057 | $6,033 |
| Resale agreements | (512) | (155) | (357) | 561 | (233) | 794 |
| Available-for-sale investment securities | 765 | (433) | 1,198 | 1,683 | (2,678) | 4,361 |
| Loans | 48,120 | 40,633 | 7,487 | 202,645 | 123,227 | 79,418 |
| Restricted equity securities | (65) | 44 | (109) | (281) | 77 | (358) |
| Total interest and dividend income | $54,727 | $45,778 | $8,949 | $220,698 | $130,450 | $90,248 |
| **Interest-bearing liabilities:** |  |  |  |  |  |  |
| Checking deposits | $4,937 | $984 | $3,953 | $19,885 | $4,044 | $15,841 |
| Money market deposits | 5,532 | 2,179 | 3,353 | 29,802 | 1,265 | 28,537 |
| Savings deposits | 348 | (43) | 391 | 996 | (496) | 1,492 |
| Time deposits | 20,971 | 9,029 | 11,942 | 80,673 | 35,210 | 45,463 |
| Federal funds purchased and other short-term borrowings | (261) | (177) | (84) | 585 | 651 | (66) |
| FHLB advances | 2,289 | 2,923 | (634) | 4,467 | 4,731 | (264) |
| Repurchase agreements | (127) | — | (127) | 1,486 | — | 1,486 |
| Long-term debt and finance lease liabilities | (49) | (47) | (2) | 302 | (285) | 587 |
| Total interest expense | $33,640 | $14,848 | $18,792 | $138,196 | $45,120 | $93,076 |
| **Change in net interest income** | **$21,087** | **$30,930** | **$(9,843)** | **$82,502** | **$85,330** | **$(2,828)** |

### Noninterest Income

The following table presents the components of noninterest income for the third quarters and first nine months of 2019 and 2018:

*($ in thousands)*

|  | Three Months Ended September 30, 2019 | 2018 | % Change | Nine Months Ended September 30, 2019 | 2018 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Lending fees | $14,846 | $15,367 | (3)% | $45,884 | $44,072 | 4% |
| Deposit account fees | 9,918 | 9,777 | 1% | 29,347 | 30,347 | (3)% |
| Foreign exchange income | 8,065 | 6,077 | 33% | 20,366 | 14,069 | 45% |
| Wealth management fees | 4,841 | 3,535 | 37% | 12,453 | 10,989 | 13% |
| Interest rate contracts and other derivative income | 8,423 | 4,595 | 83% | 22,037 | 17,855 | 23% |
| Net gains on sales of loans | 2,037 | 1,145 | 78% | 2,967 | 5,081 | (42)% |
| Net gains on sales of available-for-sale investment securities | 58 | 35 | 66% | 3,066 | 2,374 | 29% |
| Net gains on sales of fixed assets | 48 | 3,402 | (99)% | 48 | 5,602 | (99)% |
| Net gain on sale of business | — | — | —% | — | 31,470 | (100)% |
| Other income | 3,238 | 2,569 | 26% | 10,196 | 7,355 | 39% |
| **Total noninterest income** | **$51,474** | **$46,502** | **11%** | **$146,364** | **$169,214** | **(14)%** |

71

Noninterest income comprised 12% of total revenue for both the third quarter and first nine months of 2019, compared with 12% and 14%, respectively, for the same periods a year ago. Third quarter 2019 noninterest income was $51.5 million, an increase of $5.0 million or 11%, compared with $46.5 million for the same period in 2018. This increase was primarily due to increases in interest rate contracts and other derivative income, foreign exchange income, as well as wealth management fees, partially offset by a decrease in net gains on sales of fixed assets. For the first nine months of 2019, noninterest income was $146.4 million, a decrease of $22.9 million or 14%, compared with $169.2 million for the same period in 2018. This decrease was primarily due to decreases in net gain on sale of business, as well as net gains on sales of fixed assets, partially offset by increases in foreign exchange income, and interest rate contracts and other derivative income. The following discussion provides the composition of the major changes in noninterest income.

Foreign exchange income increased $2.0 million or 33% to $8.1 million for the third quarter of 2019, and increased $6.3 million or 45% to $20.4 million for the first nine months of 2019. The increases in both periods were primarily driven by an increased volume of foreign exchange transactions and the favorable revaluation of certain foreign currency-denominated balance sheet items.

Wealth management fees increased $1.3 million or 37% to $4.8 million for the third quarter of 2019, and increased $1.5 million or 13% to $12.5 million for the first nine months of 2019. These increases were driven by higher customer activity.

Interest rate contracts and other derivative income increased $3.8 million or 83% to $8.4 million for the third quarter of 2019, and increased $4.2 million or 23% to $22.0 million for the first nine months of 2019. These increases reflected strong customer demand for interest rate swaps in response to the overall low level of interest rates. This increase was partially offset by the fair value changes of the interest rate derivative contracts that were primarily driven by the decline in long-term interest rates during the third quarter and first nine months of 2019.

Net gains on sales of fixed assets decreased to $48 thousand for both the third quarter and the first nine months of 2019, down from $3.4 million for the third quarter of 2018 and $5.6 million for the first nine months of 2018. This was due to the Company’s adoption of Accounting Standards Update (“ASU”) 2016-02, *Leases* (Topic 842) on January 1, 2019, under which deferred gains on sale and leaseback transactions were no longer amortized to gain on sales of fixed assets in 2019.

Net gain on sale of business for the first nine months of 2018 reflected the $31.5 million pre-tax gain recognized from the sale of the Bank’s eight DCB branches as discussed in *Note 3 — Dispositions* to the Consolidated Financial Statements in this Form 10-Q.

### Noninterest Expense

The following table presents the components of noninterest expense for the third quarters and first nine months of 2019 and 2018:

*($ in thousands)*

|  | Three Months Ended September 30, 2019 | 2018 | % Change | Nine Months Ended September 30, 2019 | 2018 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Compensation and employee benefits | $97,819 | $96,733 | 1% | $300,649 | $285,832 | 5% |
| Occupancy and equipment expense | 17,912 | 17,292 | 4% | 52,592 | 50,879 | 3% |
| Deposit insurance premiums and regulatory assessments | 3,550 | 6,013 | (41)% | 9,557 | 18,118 | (47)% |
| Legal expense | 1,720 | 1,544 | 11% | 6,300 | 6,636 | (5)% |
| Data processing | 3,328 | 3,289 | 1% | 9,945 | 10,017 | (1)% |
| Consulting expense | 2,559 | 2,683 | (5)% | 6,687 | 10,155 | (34)% |
| Deposit related expense | 3,584 | 2,600 | 38% | 10,426 | 8,201 | 27% |
| Computer software expense | 6,556 | 5,478 | 20% | 18,845 | 16,081 | 17% |
| Other operating expense | 22,769 | 23,394 | (3)% | 67,737 | 61,780 | 10% |
| Amortization of tax credit and other investments | 16,833 | 20,789 | (19)% | 58,477 | 58,670 | —% |
| **Total noninterest expense** | **$176,630** | **$179,815** | (2)% | **$541,215** | **$526,369** | **3%** |

72

Third quarter 2019 noninterest expense was $176.6 million, a decrease of $3.2 million or 2%, compared with $179.8 million for the same period in 2018. This decrease was primarily due to decreases in amortization of tax credit and other investments, as well as deposit insurance premiums and regulatory assessments, partially offset by an increase in compensation and employee benefits. For the first nine months of 2019, noninterest expense was $541.2 million, an increase of $14.8 million or 3%, compared with $526.4 million for the same period in 2018. This increase was primarily attributable to increases in compensation and employee benefits, as well as other operating expense, partially offset by a decrease in deposit insurance premiums and regulatory assessments.

Compensation and employee benefits increased $1.1 million or 1% to $97.8 million for the third quarter of 2019, and increased $14.8 million or 5% to $300.6 million for the first nine months of 2019. These increases were primarily attributable to staffing growth to support the Company’s growing business and annual employee merit increases.

Deposit insurance premiums and regulatory assessments decreased $2.5 million or 41% to $3.6 million for the third quarter of 2019, and decreased $8.6 million or 47% to $9.6 million for the first nine months of 2019. These decreases were primarily due to lower Federal Deposit Insurance Corporation (“FDIC”) assessment rates. Effective October 1, 2018, the FDIC removed the temporary surcharge applied on the larger banks’ assessment base, since the Deposit Insurance Fund Reserve Ratio has exceeded its statutory minimum requirement of 1.35%.

Other operating expense primarily consists of marketing, travel, telecommunications and postage, charitable contributions, loan related expenses, and other miscellaneous expense categories. Year-over-year, other operating expense decreased $625 thousand or 3% to $22.8 million for the third quarter of 2019, compared with the same period in 2018. For the first nine months of 2019, other operating expense increased $6.0 million or 10% to $67.7 million, primarily due to increases in marketing expenses, and a decrease in gains on sale of other real estate owned (“OREO”).

Amortization of tax credit and other investments decreased $4.0 million or 19% to $16.8 million for the third quarter of 2019, compared with the third quarter of 2018. This decrease was primarily due to fewer tax credit investments placed in service during 2019, partially offset by $1.7 million in other-than-temporary impairment (“OTTI”) charges related to two historic tax credit investments recorded in the third quarter of 2019. Amortization of tax credit and other investments decreased $193 thousand to $58.5 million for the first nine months of 2019, compared with the same period in 2018. The decrease was mainly due to fewer tax credit investments placed in service during 2019, which was offset by a $7.0 million full write-off of the DC Solar related tax credit investments during the first quarter of 2019, as well as the $4.6 million of OTTI charges related to three historic tax credit investments and a Community Reinvestment Act investment.

### Income Taxes

*($ in thousands)*

|  | Three Months Ended September 30, 2019 | 2018 | % Change | Nine Months Ended September 30, 2019 | 2018 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Income before income taxes | $206,367 | $204,865 | 1% | $624,635 | $613,641 | 2% |
| Income tax expense | $34,951 | $33,563 | 4% | $138,815 | $82,958 | 67% |
| Effective tax rate | 16.9% | 16.4% |  | 22.2% | 13.5% |  |

The effective tax rates were 16.9% and 16.4% for the third quarters of 2019 and 2018, respectively. The effective tax rate and income tax expense for the third quarter of 2019 included a $6.4 million discrete item for the reversal of state income taxes payable. The effective tax rates were 22.2% and 13.5% for the first nine months of 2019 and 2018, respectively. The year-over-year increase for the nine-month effective tax rate and income tax expense was primarily due to $30.1 million of income tax expense recorded in the second quarter of 2019 to reverse certain previously claimed tax credits related to the Company’s investment in DC Solar. Excluding this $30.1 million income tax expense recorded in the second quarter of 2019, the non-GAAP effective tax rates for the first nine months of 2019 was 17.4%. (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.) The higher effective tax rate during the first nine months of 2019, compared with the same period a year ago, was due to a decrease in tax credits recognized from investments in renewable energy and historic rehabilitation tax credit 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. The Company’s investments in the DC Solar tax credit funds qualified for federal energy tax credit under Section 48 of the Internal Revenue Code of 1986, as amended. The Company also received a “should” level legal opinion from an external law firm supporting the legal structure of the investments for tax credit purposes. These investments were recorded in *Investments in tax credit and other investments, net* on the Consolidated Balance Sheet and were accounted for under the equity method of accounting. For reasons that were not known or knowable to the Company, DC Solar had its assets frozen in December 2018. DC Solar filed for bankruptcy protection in February 2019. In February 2019, an affidavit from a Federal Bureau of Investigation special agent stated that DC Solar was operating a fraudulent “Ponzi-like scheme” and that the majority of the mobile solar generators sold to investors and managed by DC Solar, as well as the majority of the related lease revenues claimed to had been received by DC Solar might not have existed.

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 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 of the fact that DC Solar has ceased operations and its bankruptcy case had been converted from Chapter 11 to Chapter 7 on March 22, 2019. More discussion regarding the Company’s impairment evaluation and monitoring process of tax credit investments is provided in *Note 4 — Fair Value Measurement and Fair Value of Financial Instruments* to the Consolidated Financial Statements in this Form 10-Q.

Investors in DC Solar funds, including the Company, received tax credits for making these renewable energy investments. The Company claimed tax credits of approximately $53.9 million in the Consolidated Financial Statements between 2014 and 2018, partially reduced by a deferred tax liability of $5.7 million related to the 50% tax basis reduction, for a net impact to the Consolidated Financial Statements of $48.2 million. During the second quarter of 2019, the Company reversed $33.6 million out 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 income tax expense.

ASC 740-10-25-6 states in part, that an entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. The term “more-likely-than-not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” include resolution of the related appeals or litigation processes, if any. The level of evidence that is necessary and appropriate to support the technical merits of a tax position is subject to judgment and depends on available information as of the balance sheet date. Under ASC 740, *Income Taxes*, when evaluating an uncertain tax position as of the balance sheet date, an entity should not consider new information that is received after the balance sheet date. Based on the available information known as of December 31, 2018 and March 31, 2019, the Company reassessed the technical merits of the position taken and concluded, based on initial and ongoing due diligence performed by the Company, it believed that the DC Solar related tax credits the Company had previously claimed continued to meet the more-likely-than-not criterion for recognition as of those dates.

During the first quarter of 2019, the Company, in coordination with other fund investors, engaged an unaffiliated third party inventory firm to report on the actual number of mobile solar generators in existence. As of September 30, 2019, based on the latest inventory report, none of the mobile service generators that had been purchased by the Company’s 2017 and 2018 tax credit funds were found. On the other hand, a vast majority of the mobile solar generators purchased by the Company’s 2014 and 2015 tax credit funds were found. Based on the inventory information available as of the second and third quarters of 2019, as well as management’s best judgments regarding the future settlement of the related tax positions with the Internal Revenue Service, the Company concluded that a portion of the previously claimed tax credits would be recaptured. Accordingly, the Company recorded $30.1 million in income tax expense in the second quarter of 2019.

The Company continues to conduct an ongoing investigation to gather information related to this matter, including tracking asset seizures of DC Solar and ongoing federal investigations. There can be no assurance that the Company will not have to recognize additional income tax expense as new information becomes available, or due to changes in tax laws, case law and regulations; or that the Company will not ultimately need to reverse the remaining tax credits previously claimed. For additional information on the risks surrounding the Company’s investments in tax-advantaged projects, see *Item 1A. Risk Factors* in the Company’s 2018 Form 10-K.

### 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 and the related products and services provided, and 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 18 — Business segments* to the Consolidated Financial Statements in this Form 10-Q.

During the first quarter of 2019, the Company enhanced its segment cost allocation methodology related to stock compensation expense and bonus accrual. Effective first quarter of 2019, stock compensation expense is allocated to all three segments, whereas it was previously recorded in the Other segment as a corporate expense. In addition, bonus expense is now allocated at a more granular level at the segment level at the time of accrual. For comparability, segment information for the third quarter and the first nine months of 2018 have been restated to conform to the current presentation. During the third quarter of 2019, the Company enhanced its funds transfer pricing (“FTP”) methodology related to deposits by setting a minimum floor rate for the FTP credits paid by the Other segment to the Consumer and Business Banking, as well as the Commercial Banking segments in consideration of the flattened and inverted yield curve. For consistency in the application of this change, the Company adjusted the segment reporting results for the three months ended March 31 and June 30, 2019, which increased segment net income for the Consumer and Business Banking, as well as the Commercial Banking segments, and, correspondingly, reduced net income for Other segment. This change in FTP methodology related to deposits had no impact on 2018 segment results.

The following tables present the selected segment information for the third quarters and first nine months of 2019 and 2018:

*($ in thousands)*

|  | Three Months Ended September 30, 2019 Consumer and Business Banking | Commercial Banking | Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Net interest income before provision for credit losses | $170,183 | $166,106 | $33,518 | $369,807 |
| Provision for credit losses | 4,251 | 34,033 | — | 38,284 |
| Noninterest income | 15,103 | 33,731 | 2,640 | 51,474 |
| Noninterest expense | 86,489 | 62,246 | 27,895 | 176,630 |
| Segment income before income taxes | 94,546 | 103,558 | 8,263 | 206,367 |
| Segment net income | $67,592 | $74,111 | $29,713 | $171,416 |

*($ in thousands)*

|  | Three Months Ended September 30, 2018 Consumer and Business Banking | Commercial Banking | Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Net interest income before provision for credit losses | $182,272 | $149,770 | $16,678 | $348,720 |
| Provision for credit losses | 705 | 9,837 | — | 10,542 |
| Noninterest income | 13,137 | 27,861 | 5,504 | 46,502 |
| Noninterest expense | 87,640 | 57,376 | 34,799 | 179,815 |
| Segment income (loss) before income taxes | 107,064 | 110,418 | (12,617) | 204,865 |
| Segment net income | $76,711 | $79,344 | $15,247 | $171,302 |

75

*($ in thousands)*

|  | Nine Months Ended September 30, 2019 Consumer and Business Banking | Commercial Banking | Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Net interest income before provision for credit losses | $536,153 | $477,755 | $85,686 | $1,099,594 |
| Provision for credit losses | 8,880 | 71,228 | — | 80,108 |
| Noninterest income | 43,378 | 91,931 | 11,055 | 146,364 |
| Noninterest expense | 258,051 | 200,093 | 83,071 | 541,215 |
| Segment income before income taxes | 312,600 | 298,365 | 13,670 | 624,635 |
| Segment net income | $223,478 | $213,331 | $49,011 | $485,820 |

*($ in thousands)*

|  | Nine Months Ended September 30, 2018 Consumer and Business Banking | Commercial Banking | Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Net interest income before provision for credit losses | $538,568 | $448,128 | $30,396 | $1,017,092 |
| Provision for credit losses | 7,212 | 39,084 | — | 46,296 |
| Noninterest income | 72,170 | 86,043 | 11,001 | 169,214 |
| Noninterest expense | 259,416 | 179,251 | 87,702 | 526,369 |
| Segment income (loss) before income taxes | 344,110 | 315,836 | (46,305) | 613,641 |
| Segment net income | $246,555 | $226,798 | $57,330 | $530,683 |

### 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.

The Consumer and Business Banking segment reported segment net income of $67.6 million for the third quarter of 2019, compared with $76.7 million for the same period in 2018. The $9.1 million or 12% decrease in segment net income was primarily driven by a decrease in net interest income before provision for credit losses and an increase in provision for credit losses, partially offset by a corresponding decrease in income tax expense. Third quarter 2019 net interest income before provision for credit losses for this segment was $170.2 million, a decrease of $12.1 million or 7% compared with $182.3 million for the third quarter of 2018, reflecting higher interest expense paid on customer deposits. The provision for credit losses was $4.3 million for the third quarter of 2019, up from $705 thousand for the same period in 2018, an increase of $3.5 million or 503%, primarily due to growth in this segment’s loan portfolio. The decrease in income tax expense reflected the decrease in segment income before income taxes.

The Consumer and Business Banking segment reported segment net income of $223.5 million for the first nine months of 2019, compared with $246.6 million for the same period in 2018. The $23.1 million or 9% decrease in segment net income was primarily driven by a decrease in noninterest income, partially offset by a corresponding decrease in income tax expense. Noninterest income was $43.4 million for the first nine months of 2019, a decrease of $28.8 million or 40%, compared with $72.2 million for the same period in 2018. Noninterest income for the first nine months of 2018 included a non-recurring pre-tax gain of $31.5 million from the sale of the Bank’s eight DCB branches, recognized in the first quarter of 2018. The decrease in income tax expense reflected the decrease in segment income before income taxes.

### 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 lending, affordable housing loans and letters of credit, asset-based lending, and equipment financings. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity hedging risk management.

The Commercial Banking segment reported segment net income of $74.1 million for the third quarter of 2019, compared with $79.3 million for the same period in 2018. The $5.2 million or 7% decrease in segment net income primarily reflected an increase in the provision for credit losses, partially offset by an increase in net interest income before provision for credit losses. Third quarter 2019 provision for credit losses for this segment was $34.0 million, an increase of $24.2 million or 246% from $9.8 million for the third quarter of 2018. This increase was primarily due to loan portfolio growth, increased charge-offs on C&I loans, and a deterioration in the credit risk ratings of C&I loans. Net interest income before provision for credit losses was $166.1 million for the third quarter of 2019, an increase of $16.3 million or 11% from $149.8 million for the same period in 2018, primarily driven by growth in this segment’s loan portfolio.

The Commercial Banking segment reported segment net income of $213.3 million for the first nine months of 2019, compared with $226.8 million for the same period in 2018. The $13.5 million or 6% decrease in segment net income was primarily driven by increases in the provision for credit losses and noninterest expense, partially offset by an increase in net interest income before provision for credit losses. Provision for credit losses for this segment was $71.2 million for the first nine months of 2019, an increase of $32.1 million or 82%, compared with $39.1 million for the same period in 2018. This increase was primarily due loan portfolio growth, increased charge-offs on C&I loans, and a deterioration in the credit risk ratings of C&I loans. Noninterest expense for this segment was $200.1 million for the first nine months of 2019, an increase of $20.8 million or 12% from $179.3 million for the same period in 2018, primarily due to an increase in compensation and employee benefits expense. Net interest income before provision for credit losses was $477.8 million for the first nine months of 2019, an increase of $29.6 million or 7% from $448.1 million for the same period in 2018, primarily driven by growth in this segment’s loan portfolio.

### 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, the Consumer and Business Banking and the Commercial Banking segments.

The Other segment reported segment income before income taxes of $8.3 million and segment net income of $29.7 million for the third quarter of 2019, reflecting an income tax benefit of $21.5 million. The Other segment reported segment loss before income taxes of $12.6 million and segment net income of $15.2 million for the third quarter of 2018, reflecting an income tax benefit of $27.9 million. The increase in segment income before income taxes was primarily driven by an increase in net interest income before provision for credit losses and a decrease in noninterest expense. Net interest income before provision for credit losses was $33.5 million for the third quarter of 2019, an increase of $16.8 million or 101% from $16.7 million for the same period in 2018. This change reflected an increase in the net spread between the total internal FTP charges for loans and total internal FTP credits for deposits, which widened due to the inverted yield curve. Noninterest expense was $27.9 million for the third quarter of 2019, a $6.9 million or 20% decrease from $34.8 million for the third quarter of 2018, primarily due to a decrease in the amortization of tax credit and other investments. The decrease in the amortization of tax credit and other investments was due to fewer tax credit investments placed in service during this period, partially offset by $1.7 million in OTTI charges related to two historic tax credit investments.

The Other segment reported segment income before income taxes of $13.7 million and segment net income of $49.0 million for the first nine months of 2019, reflecting an income tax benefit of $35.3 million. The Other segment reported segment loss before income taxes of $46.3 million and segment net income of $57.3 million for the first nine months of 2018, reflecting an income tax benefit of $103.6 million. The increase in segment income before income taxes was primarily driven by an increase in net interest income before provision for credit losses, which increased $55.3 million or 182% to $85.7 million for the first nine months of 2019 from $30.4 million for the same period in 2018. This change reflected an increase in the net spread between the total internal FTP charges for loans and total internal FTP credits for deposits, which widened due to the inverted yield curve.

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, as well as the Commercial Banking segments by applying segment effective tax rates to the segment income before income taxes.

### Balance Sheet Analysis

The following table presents a discussion of the significant changes between September 30, 2019 and December 31, 2018:

### Selected Consolidated Balance Sheet Data

*($ in thousands)*

*(Unaudited)*

| ASSETS | September 30, 2019 $% | December 31, 2018 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $3,042,281 | $3,001,377 | $40,904 | 1% |
| Interest-bearing deposits with banks | 160,423 | 371,000 | (210,577) | (57)% |
| Resale agreements | 860,000 | 1,035,000 | (175,000) | (17)% |
| Available-for-sale investment securities, at fair value | 3,284,034 | 2,741,847 | 542,187 | 20% |
| Restricted equity securities, at cost | 78,334 | 74,069 | 4,265 | 6% |
| Loans held-for-sale | 294 | 275 | 19 | 7% |
| Loans held-for-investment (net of allowance for loan losses of $345,576 in 2019 and $311,322 in 2018) | 33,679,400 | 32,073,867 | 1,605,533 | 5% |
| Investments in qualified affordable housing partnerships, net | 190,000 | 184,873 | 5,127 | 3% |
| Investments in tax credit and other investments, net | 211,603 | 231,635 | (20,032) | (9)% |
| Premises and equipment | 120,859 | 119,180 | 1,679 | 1% |
| Goodwill | 465,697 | 465,547 | 150 | 0% |
| Operating lease right-of-use assets | 103,894 | — | 103,894 | 100% |
| Other assets | 1,077,840 | 743,686 | 334,154 | 45% |
| **TOTAL** | **$43,274,659** | **$41,042,356** | **$2,232,303** | **5%** |
| **LIABILITIES** |  |  |  |  |
| Noninterest-bearing | $10,806,937 | $11,377,009 | $(570,072) | (5)% |
| Interest-bearing | 25,852,589 | 24,062,619 | 1,789,970 | 7% |
| Total deposits | 36,659,526 | 35,439,628 | 1,219,898 | 3% |
| Short-term borrowings | 47,689 | 57,638 | (9,949) | (17)% |
| FHLB advances | 745,494 | 326,172 | 419,322 | 129% |
| Repurchase agreements | 50,000 | 50,000 | — | —% |
| Long-term debt and finance lease liabilities | 152,390 | 146,835 | 5,555 | 4% |
| Operating lease liabilities | 112,142 | — | 112,142 | 100% |
| Accrued expenses and other liabilities | 624,754 | 598,109 | 26,645 | 4% |
| Total liabilities | 38,391,995 | 36,618,382 | 1,773,613 | 5% |
| **STOCKHOLDERS’ EQUITY** | 4,882,664 | 4,423,974 | 458,690 | 10% |
| **TOTAL** | **$43,274,659** | **$41,042,356** | **$2,232,303** | **5%** |

As of September 30, 2019, total assets were $43.27 billion, an increase of $2.23 billion or 5% from December 31, 2018, primarily due to loan growth and an increase in available-for-sale investment securities. The loan growth was driven by strong increases in single-family residential, CRE, C&I, as well as construction and land loans. These increases were partially offset by decreases in interest-bearing deposits with banks and resale agreements.

As of September 30, 2019, total liabilities were $38.39 billion, an increase of $1.77 billion or 5% from December 31, 2018, primarily due to a $1.22 billion increase in deposits and $419.3 million increase in FHLB advances. The increase in deposits was largely driven by increases in time deposits.

As of September 30, 2019, total stockholders’ equity was $4.88 billion, an increase of $458.7 million or 10% from December 31, 2018. This increase was primarily due to $485.8 million in net income and a $57.2 million increase in accumulated other comprehensive income, partially offset by $114.8 million of cash dividends declared on common stock.

### Investment Securities

The Company maintains an investment 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 available-for-sale investment securities provide:

- interest income for earnings and yield enhancement;
- availability for funding needs that arise 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 Investment Securities

As of September 30, 2019 and December 31, 2018, the Company’s available-for-sale investment securities portfolio was primarily comprised of mortgage-backed securities and debt securities issued by U.S. government agency and U.S. government sponsored enterprises, foreign bonds, and U.S. Treasury securities. Investment securities classified as available-for-sale 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 by major categories of available-for-sale investment securities as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Available-for-sale investment securities: | September 30, 2019 Amortized Cost | Fair Value | December 31, 2018 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. Treasury securities | $427,535 | $426,113 | $577,561 | $564,815 |
| U.S. government agency and U.S. government sponsored enterprise debt securities | 688,529 | 691,368 | 219,485 | 217,173 |
| U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities | 1,454,336 | 1,475,180 | 1,377,705 | 1,355,296 |
| Municipal securities | 76,948 | 78,159 | 82,965 | 82,020 |
| Non-agency mortgage-backed securities | 98,727 | 101,738 | 35,935 | 35,983 |
| Corporate debt securities | 11,250 | 11,022 | 11,250 | 10,869 |
| Foreign bonds | 454,431 | 453,179 | 489,378 | 463,048 |
| Asset-backed securities | 48,028 | 47,275 | 12,621 | 12,643 |
| **Total available-for-sale investment securities** | **$3,259,784** | **$3,284,034** | **$2,806,900** | **$2,741,847** |

The fair value of available-for-sale investment securities totaled $3.28 billion as of September 30, 2019, compared with $2.74 billion as of December 31, 2018. The $542.2 million or 20% increase was primarily attributable to the purchases of U.S. government agency and U.S. government sponsored enterprise debt securities, U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities, and U.S. Treasury securities, partially offset by the sales, repayments, and maturities of U.S. Treasury securities and U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities.

The Company’s investment securities portfolio had an effective duration of 2.4 as of September 30, 2019, which shortened from 4.1 as of December 31, 2018, primarily due to the decline in interest rates. As of both September 30, 2019 and December 31, 2018, 99% of the carrying value of the investment securities portfolio was rated “AA-” or “Aa3” or higher by nationally recognized statistical rating organizations. 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.

Net unrealized gains on available-for-sale investment securities were $24.3 million as of September 30, 2019, which improved from net unrealized losses of $65.1 million as of December 31, 2018. This change was primarily due to the decrease in interest rates. Gross unrealized losses on available-for-sale investment securities totaled $8.1 million as of September 30, 2019, compared with $70.8 million as of December 31, 2018. Of the securities with gross unrealized losses, approximately 99% and 100% were rated investment grade as of September 30, 2019 and December 31, 2018, respectively, classified primarily based upon the lowest of the credit ratings issued by S&P, Moody’s, or Fitch. As of September 30, 2019, 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.

The Company assesses individual securities for OTTI for each reporting period. There were no OTTI credit losses recognized in earnings for both the third quarters and first nine months of 2019 and 2018. For additional information on our accounting policies, valuation and composition, see *Note 1 — Summary of Significant Accounting Policies* in the Company’s 2018 Form 10-K, *Note 4 — Fair Value Measurement and Fair Value of Financial Instruments* and *Note 6 — Securities* to the Consolidated Financial Statements in this Form 10-Q.

The following table presents the weighted-average yields and contractual maturity distribution of the Company’s investment securities as of September 30, 2019 and December 31, 2018. Actual maturities of the investment securities can differ from contractual maturities due to prepayments or embedded call options. In addition, factors such as interest rate changes may affect the yields on the carrying value of the investment securities.

*($ in thousands)*

| Available-for-sale investment securities: U.S. Treasury securities: | September 30, 2019 Amortized Cost | Fair Value | Yield (1) | December 31, 2018 Amortized Cost | Fair Value | Yield (1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Maturing in one year or less | $199,786 | $199,711 | 1.80% | $50,134 | $49,773 | 1.08% |
| Maturing after one year through five years | 227,749 | 226,402 | 1.35% | 527,427 | 515,042 | 1.69% |
| Total | 427,535 | 426,113 | 1.56% | 577,561 | 564,815 | 1.64% |
| **U.S. government agency and U.S. government sponsored enterprise debt securities:** |  |  |  |  |  |  |
| Maturing in one year or less | 406,381 | 406,572 | 2.17% | 26,955 | 26,909 | 3.51% |
| Maturing after one year through five years | 133,500 | 133,713 | 2.71% | 10,181 | 10,037 | 2.18% |
| Maturing after five years through ten years | 94,900 | 95,510 | 2.21% | 114,771 | 113,812 | 2.30% |
| Maturing after ten years | 53,748 | 55,573 | 2.78% | 67,578 | 66,415 | 2.79% |
| Total | 688,529 | 691,368 | 2.33% | 219,485 | 217,173 | 2.59% |
| **U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:** |  |  |  |  |  |  |
| Maturing in one year or less | 2,986 | 2,983 | 1.76% | 2,633 | 2,600 | 1.62% |
| Maturing after one year through five years | 26,631 | 26,841 | 2.25% | 30,808 | 30,487 | 2.11% |
| Maturing after five years through ten years | 78,533 | 81,705 | 2.74% | 96,822 | 95,365 | 2.68% |
| Maturing after ten years | 1,346,186 | 1,363,651 | 2.64% | 1,247,442 | 1,226,844 | 2.74% |
| Total | 1,454,336 | 1,475,180 | 2.63% | 1,377,705 | 1,355,296 | 2.72% |
| **Municipal securities (2):** |  |  |  |  |  |  |
| Maturing in one year or less | 35,580 | 35,720 | 2.65% | 29,167 | 28,974 | 2.60% |
| Maturing after one year through five years | 24,777 | 25,080 | 2.47% | 48,398 | 47,681 | 2.39% |
| Maturing after five years through ten years | 12,200 | 12,766 | 3.15% | 500 | 476 | 2.38% |
| Maturing after ten years | 4,391 | 4,593 | 3.40% | 4,900 | 4,889 | 5.03% |
| Total | 76,948 | 78,159 | 2.71% | 82,965 | 82,020 | 2.62% |
| **Non-agency mortgage-backed securities:** |  |  |  |  |  |  |
| Maturing after one year through five years | 7,920 | 7,914 | 3.90% | — | — | —% |
| Maturing after ten years | 90,807 | 93,824 | 3.30% | 35,935 | 35,983 | 3.67% |
| Total | 98,727 | 101,738 | 3.35% | 35,935 | 35,983 | 3.67% |
| **Corporate debt securities:** |  |  |  |  |  |  |
| Maturing in one year or less | 1,250 | 1,247 | 5.42% | 1,250 | 1,231 | 5.50% |
| Maturing after one year through five years | 10,000 | 9,775 | 4.00% | 10,000 | 9,638 | 4.00% |
| Total | 11,250 | 11,022 | 4.16% | 11,250 | 10,869 | 4.17% |
| **Foreign bonds:** |  |  |  |  |  |  |
| Maturing in one year or less | 454,431 | 453,179 | 2.33% | 439,378 | 414,065 | 2.19% |
| Maturing after one year through five years | — | — | —% | 50,000 | 48,983 | 3.12% |
| Total | 454,431 | 453,179 | 2.33% | 489,378 | 463,048 | 2.28% |
| **Asset-backed securities:** |  |  |  |  |  |  |
| Maturing after ten years | 48,028 | 47,275 | 2.53% | 12,621 | 12,643 | 3.22% |
| **Total available-for-sale investment securities** | **$3,259,784** | **$3,284,034** | **2.42%** | **$2,806,900** | **$2,741,847** | **2.43%** |
| **Total:** |  |  |  |  |  |  |
| Maturing in one year or less | $1,100,414 | $1,099,412 | 2.19% | $549,517 | $523,552 | 2.18% |
| Maturing after one year through five years | 430,577 | 429,725 | 2.00% | 676,814 | 661,868 | 1.91% |
| Maturing after five years through ten years | 185,633 | 189,981 | 2.50% | 212,093 | 209,653 | 2.47% |
| Maturing after ten years | 1,543,160 | 1,564,916 | 2.68% | 1,368,476 | 1,346,774 | 2.78% |
| **Total available-for-sale investment securities** | **$3,259,784** | **$3,284,034** | **2.42%** | **$2,806,900** | **$2,741,847** | **2.43%** |

(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.

### Total Loan Portfolio

### 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 $33.68 billion as of September 30, 2019, an increase of $1.61 billion or 5% from $32.07 billion as of December 31, 2018. This was primarily driven by year-to-date increases of $774.6 million or 13% in single-family residential loans, $489.4 million or 5% in CRE loans and $244.0 million or 2% in C&I loans. The composition of the loan portfolio was similar as of September 30, 2019 compared with December 31, 2018.

The following table presents the composition of the Company’s total loan portfolio by loan type as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Commercial: | September 30, 2019 Amount (1) | December 31, 2018 Amount (1) | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| C&I | $12,301,002 | $12,056,970 | $244,032 | 2% |
| CRE | 9,749,583 | 9,260,199 | 489,384 | 5% |
| Multifamily residential | 2,589,203 | 2,470,668 | 118,535 | 5% |
| Construction and land | 719,900 | 538,794 | 181,106 | 34% |
| Total commercial | 25,359,688 | 24,326,631 | 1,033,057 | 4% |
| **Consumer:** |  |  |  |  |
| Single-family residential | 6,811,014 | 6,036,454 | 774,560 | 13% |
| HELOCs | 1,540,121 | 1,690,834 | (150,713) | (9)% |
| Other consumer | 314,153 | 331,270 | (17,117) | (5)% |
| Total consumer | 8,665,288 | 8,058,558 | 606,730 | 8% |
| Total loans held-for-investment (2) | $34,024,976 | $32,385,189 | $1,639,787 | 5% |
| Allowance for loan losses | (345,576) | (311,322) | (34,254) | 11% |
| Loans held-for-sale | 294 | 275 | 19 | 7% |
| **Total loans, net** | **$33,679,694** | **$32,074,142** | **$1,605,552** | 5% |

(1) Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(39.8) million and $(48.9) million as of September 30, 2019 and December 31, 2018, respectively.

(2) Includes ASC 310-30 discount of $16.7 million and $22.2 million as of September 30, 2019 and December 31, 2018, respectively.

### Commercial

The commercial loan portfolio, which comprised 75% of total loans as of both September 30, 2019 and December 31, 2018, is discussed as follows.

***Commercial — Commercial and Industrial Loans.*** C&I loans totaled $12.30 billion or 36% of total loans, as of September 30, 2019, and $12.06 billion or 37% of total loans, as of December 31, 2018. The C&I loan portfolio is well-diversified by industry, with higher concentrations in the wholesale trade, energy, private equity, manufacturing, entertainment, and technology and life sciences. The Company monitors concentrations within the C&I loan portfolio by customer exposure and industry classifications, setting diversification targets and limits for specialized portfolios.The Company’s wholesale trade exposure largely consists of U.S. domiciled companies, many of which are based in California that import goods from Greater China for U.S. consumer consumption. The Company also had a portfolio of broadly syndicated C&I term loans, which totaled $876.5 million and $778.7 million as of September 30, 2019 and December 31, 2018, respectively. The majority of the C&I loans have variable interest rates.

***Commercial — Commercial Real Estate Loans.*** CRE loans totaled $9.75 billion or 29% of total loans as of September 30, 2019, and $9.26 billion or 28% of total loans as of December 31, 2018. 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. Loans are underwritten with conservative standards for cash flows, debt service coverage and loan-to-value. As of both September 30, 2019 and December 31, 2018, 21% of the total CRE loans were owner occupied properties; the remainder were non-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 following tables provide a summary of the Company’s CRE, multifamily residential, and construction and land loans by geographic market as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Geographic markets: | September 30, 2019 CRE% |  | Multifamily Residential% |  | Construction and Land% |  | Total% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Southern California | $5,245,303 |  | $1,584,951 |  | $258,133 |  | $7,088,387 |  |
| Northern California | 2,250,000 |  | 585,412 |  | 168,707 |  | 3,004,119 |  |
| California | 7,495,303 | 77% | 2,170,363 | 84% | 426,840 | 60% | 10,092,506 | 78% |
| New York | 684,403 | 7% | 108,550 | 4% | 93,065 | 13% | 886,018 | 7% |
| Texas | 566,688 | 6% | 119,404 | 5% | 8,720 | 1% | 694,812 | 5% |
| Washington | 283,451 | 3% | 66,780 | 3% | 42,566 | 6% | 392,797 | 3% |
| Arizona | 131,324 | 1% | 36,999 | 1% | 22,501 | 3% | 190,824 | 1% |
| Nevada | 112,717 | 1% | 36,354 | 1% | 82,596 | 11% | 231,667 | 2% |
| Other markets | 475,697 | 5% | 50,753 | 2% | 43,612 | 6% | 570,062 | 4% |
| **Total loans (1)** | **$9,749,583** | **100%** | **$2,589,203** | **100%** | **$719,900** | **100%** | **$13,058,686** | **100%** |

*($ in thousands)*

| Geographic markets: | December 31, 2018 CRE% |  | Multifamily Residential% |  | Construction and Land% |  | Total% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Southern California | $5,106,098 |  | $1,512,753 |  | $215,370 |  | $6,834,221 |  |
| Northern California | 2,112,789 |  | 600,566 |  | 133,828 |  | 2,847,183 |  |
| California | 7,218,887 | 79% | 2,113,319 | 86% | 349,198 | 65% | 9,681,404 | 79% |
| New York | 651,510 | 7% | 110,840 | 4% | 46,702 | 9% | 809,052 | 7% |
| Texas | 508,473 | 5% | 72,585 | 3% | 12,055 | 2% | 593,113 | 5% |
| Washington | 288,522 | 3% | 58,294 | 2% | 29,079 | 5% | 375,895 | 3% |
| Arizona | 108,102 | 1% | 24,808 | 1% | 24,890 | 5% | 157,800 | 1% |
| Nevada | 94,924 | 1% | 44,052 | 2% | 47,897 | 9% | 186,873 | 2% |
| Other markets | 389,781 | 4% | 46,770 | 2% | 28,973 | 5% | 465,524 | 3% |
| **Total loans (1)** | **$9,260,199** | **100%** | **$2,470,668** | **100%** | **$538,794** | **100%** | **$12,269,661** | **100%** |

(1) Loans net of ASC 310-30 discount.

As illustrated by the above tables, the distribution of the CRE loan portfolio reflects the Company’s geographical footprint, with a primary concentration in California accounting for 77% and 79% of the CRE loan portfolio as of September 30, 2019 and December 31, 2018, respectively. Changes in California’s economy and real estate values could have a significant impact on the collectability of these loans and the required level of allowance for loan losses.

The Company’s 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 CRE loan portfolio by property type as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Property types: | September 30, 2019 Amount% |  | December 31, 2018 Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Retail | $3,251,398 | 33% | $3,171,374 | 34% |
| Offices | 2,216,628 | 23% | 2,160,382 | 23% |
| Industrial | 2,042,733 | 21% | 1,883,444 | 20% |
| Hotel/Motel | 1,785,148 | 18% | 1,619,905 | 17% |
| Other | 453,676 | 5% | 425,094 | 6% |
| **Total CRE loans (1)** | **$9,749,583** | **100%** | **$9,260,199** | **100%** |

(1) Loans net of ASC 310-30 discount.

***Commercial — Multifamily Residential Loans.*** Multifamily residential loans totaled $2.59 billion and $2.47 billion as of September 30, 2019 and December 31, 2018, respectively, and accounted for 8% of total loans as of both dates. The multifamily residential loan portfolio is largely made up of loans secured by residential properties with five or more units in the Bank’s primary lending areas. As of September 30, 2019 and December 31, 2018, 84% and 86%, respectively, 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.

***Commercial — Construction and Land Loans.*** Construction and land loans totaled $719.9 million and $538.8 million as of September 30, 2019 and December 31, 2018, respectively, and accounted for 2% of total loans as of both dates. Included in the portfolio were construction loans of $630.5 million with additional unfunded commitments of $365.3 million as of September 30, 2019, and construction loans of $477.2 million with additional unfunded commitments of $525.1 million as of December 31, 2018. The construction loans provide financing for hotels, offices, and industrial structures. 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 HELOC loan portfolios by geographic market as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Geographic markets: | September 30, 2019 Single- Family Residential% |  | HELOCs% |  | Total% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Southern California | $3,006,830 |  | $736,403 |  | $3,743,233 |  |
| Northern California | 1,033,662 |  | 324,743 |  | 1,358,405 |  |
| California | 4,040,492 | 59% | 1,061,146 | 69% | 5,101,638 | 61% |
| New York | 1,472,941 | 22% | 266,224 | 17% | 1,739,165 | 21% |
| Washington | 618,858 | 9% | 140,040 | 9% | 758,898 | 9% |
| Massachusetts | 225,533 | 3% | 34,380 | 2% | 259,913 | 3% |
| Texas | 188,544 | 3% | — | —% | 188,544 | 2% |
| Other markets | 264,646 | 4% | 38,331 | 3% | 302,977 | 4% |
| **Total (1)** | **$6,811,014** | **100%** | **$1,540,121** | **100%** | **$8,351,135** | **100%** |
| **Lien priority:** |  |  |  |  |  |  |
| First mortgage | $6,811,011 | 100% | $1,304,918 | 85% | $8,115,929 | 97% |
| Junior lien mortgage | 3 | 0% | 235,203 | 15% | 235,206 | 3% |
| **Total (1)** | **$6,811,014** | **100%** | **$1,540,121** | **100%** | **$8,351,135** | **100%** |

*($ in thousands)*

| Geographic markets: | December 31, 2018 Single- Family Residential% |  | HELOCs% |  | Total% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Southern California | $2,768,725 |  | $839,790 |  | $3,608,515 |  |
| Northern California | 954,835 |  | 350,008 |  | 1,304,843 |  |
| California | 3,723,560 | 62% | 1,189,798 | 70% | 4,913,358 | 64% |
| New York | 1,165,135 | 19% | 279,792 | 17% | 1,444,927 | 19% |
| Washington | 572,017 | 9% | 149,579 | 9% | 721,596 | 9% |
| Massachusetts | 206,920 | 3% | 32,333 | 2% | 239,253 | 3% |
| Texas | 165,873 | 3% | — | —% | 165,873 | 2% |
| Other markets | 202,949 | 4% | 39,332 | 2% | 242,281 | 3% |
| **Total (1)** | **$6,036,454** | **100%** | **$1,690,834** | **100%** | **$7,727,288** | **100%** |
| **Lien priority:** |  |  |  |  |  |  |
| First mortgage | $6,036,450 | 100% | $1,438,414 | 85% | $7,474,864 | 97% |
| Junior lien mortgage | 4 | 0% | 252,420 | 15% | 252,424 | 3% |
| **Total (1)** | **$6,036,454** | **100%** | **$1,690,834** | **100%** | **$7,727,288** | **100%** |

(1) Loans net of ASC 310-30 discount.

***Consumer — Single-Family Residential Loans.*** Single-family residential loans totaled $6.81 billion or 20% of total loans as of September 30, 2019, and $6.04 billion or 19% of total loans as of December 31, 2018. The Company was in a first lien position for virtually all of the single-family residential loans as of both September 30, 2019 and December 31, 2018. Many of these loans are reduced documentation loans where a substantial down payment is required, resulting in a low loan-to-value ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and default rates. As of September 30, 2019 and December 31, 2018, 59% and 62% of the Company’s single-family residential loans, respectively, were concentrated in California. The Company offers a variety of 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 totaled $1.54 billion or 4% of total loans as of September 30, 2019, and $1.69 billion or 5% of total loan portfolio as of December 31, 2018. The Company was in a first lien position for 85% of total HELOCs as of both September 30, 2019 and December 31, 2018. Many of the loans within this portfolio are reduced documentation loans, where a substantial down payment is required, resulting in a low loan-to-value ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and default rates. As of September 30, 2019 and December 31, 2018, 69% and 70% of the Company’s HELOCs, respectively, 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-Impaired Loans

Loans acquired with evidence of credit deterioration since their origination and where it is probable that the Company will not collect all contractually required principal and interest payments are PCI loans. PCI loans are recorded at fair value as of the date of acquisition. The carrying value of PCI loans totaled $240.7 million and $308.0 million as of September 30, 2019 and December 31, 2018, respectively. PCI loans are considered to be accruing due to the existence of the accretable yield, which represents the cash expected to be collected in excess of their carrying value, and which is not based on consideration given to contractual interest payments. The accretable yield was $56.9 million and $74.9 million as of September 30, 2019 and December 31, 2018, respectively. A nonaccretable difference is established for PCI loans to absorb losses expected on the contractual amounts of these loans, in excess of the fair value recorded as of the date of acquisition. Loss amounts absorbed by the nonaccretable difference do not affect the Consolidated Statement of Income or the allowance for credit losses. For additional details regarding PCI loans, see *Note 8 — Loans Receivable and Allowance for Credit Losses* to the Consolidated Financial Statements in this Form 10-Q.

### Loans Held-for-Sale

As of September 30, 2019 and December 31, 2018, loans held-for-sale of $294 thousand and $275 thousand, respectively, 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 asset/liability 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

During the third quarter and first nine months of 2019, the Company purchased loans held-for-investment of $69.0 million and $395.3 million, respectively, compared with $61.1 million and $450.9 million, respectively, during the same periods in 2018. The purchased loans held-for-investment for each of the third quarter and first nine months of 2019 and 2018 were primarily comprised of broadly syndicated C&I loans.

When purchased or originated loans are transferred from held-for-investment to held-for-sale, corresponding write-downs to the allowance for loan losses are recorded, as appropriate. Loans transferred from held-for-investment to held-for-sale were $49.0 million and $78.0 million during the third quarters of 2019 and 2018, respectively, and $222.4 million and $363.6 million during the first nine months of 2019 and 2018, respectively. The transferred loans were primarily C&I loans for all periods. Related to these loan transfers, the Company recorded $36 thousand and $426 thousand in write-downs to the allowance for loan losses during the third quarter and first nine months of 2019, respectively, and $110 thousand and $13.5 million, respectively, during the same periods in 2018.

During the third quarter and first nine months of 2019, the Company sold $47.8 million and $180.0 million of originated loans, respectively, resulting in net gains of $2.0 million and $3.0 million, respectively. C&I loans made up $30.1 million and $140.5 million of the originated loans sold in the third quarter and first nine months of 2019, respectively. In comparison, during the same periods in 2018, the Company sold $58.9 million and $252.1 million in originated loans, respectively, resulting in net gains of $1.1 million and $5.0 million, respectively. Originated loans sold during the third quarter of 2018 included $28.3 million of C&I loans and $20.8 million of single-family residential loans. Originated loans sold during the first nine months of 2018 included $170.9 million of C&I loans.

From time to time, the Company purchases and sells loans in the secondary market. During the third quarter and first nine months of 2019, the Company sold purchased loans of $7.9 million and $49.2 million, respectively, in the secondary market resulting in minimal net gains on sale of loans. In comparison, during the third quarter and first nine months of 2018, the Company sold purchased loans of $34.5 million and $134.5 million, respectively, in the secondary market, recording net gains on sale of $1 thousand and $33 thousand, respectively. These loans sold during the third quarters and first nine months of September 30, 2019 and 2018 were comprised of broadly syndicated C&I term loans.

### Non-PCI Nonperforming Assets

Non-PCI nonperforming assets are comprised of nonaccrual loans, 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. Generally, loans are 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 conditions and the adequacy of collateral, if any. The following table presents information regarding non-PCI nonperforming assets as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Nonaccrual loans: Commercial: | September 30, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| C&I | $90,830 | $43,840 |
| CRE | 18,942 | 24,218 |
| Multifamily residential | 551 | 1,260 |
| **Consumer:** |  |  |
| Single-family residential | 9,484 | 5,259 |
| HELOCs | 9,924 | 8,614 |
| Other consumer | 2,495 | 2,502 |
| Total nonaccrual loans | 132,226 | 85,693 |
| **OREO, net** | **1,122** | **133** |
| **Other nonperforming assets** | **1,167** | **7,167** |
| **Total nonperforming assets** | **$134,515** | **$92,993** |
| Non-PCI nonperforming assets to total assets (1) | 0.31% | 0.23% |
| Non-PCI nonaccrual loans to loans held-for-investment (1) | 0.39% | 0.26% |
| Allowance for loan losses to non-PCI nonaccrual loans | 261.35% | 363.30% |

(1) Total assets and loans held-for-investment include PCI loans of $240.7 million and $308.0 million as of September 30, 2019 and December 31, 2018, respectively.

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 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 and loan repayments. Nonaccrual loans increased to $132.2 million as of September 30, 2019, an increase of $46.5 million or 54% from $85.7 million as of December 31, 2018. Nonaccrual loans as a percentage of loans held-for-investment increased to 0.39% as of September 30, 2019 from 0.26% as of December 31, 2018. C&I nonaccrual loans were 69% and 51% of total nonaccrual loans as of September 30, 2019 and December 31, 2018, respectively. Credit risks related to the C&I nonaccrual loans were partially mitigated by the collateral in place. As of September 30, 2019, $41.8 million or 32% of non-PCI nonaccrual loans were less than 90 days delinquent. In comparison, $23.8 million or 28% of non-PCI nonaccrual loans were less than 90 days delinquent as of December 31, 2018.

For additional details regarding the Company’s non-PCI nonaccrual loan policy, see *Note 1 — Summary of Significant Accounting Policies — Loans Held-for-Investment* to the Consolidated Financial Statements of the Company’s 2018 Form 10-K.

A loan is classified as a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Loans with contractual terms that have been modified as a TDR and are current at the time of restructuring may remain on accrual status if there is demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, TDRs are placed on nonaccrual status and are reported as nonperforming, until the borrower demonstrates a sustained period of performance, generally six months, and the ability to repay the loan according to the contractual terms. If accruing TDRs cease to perform in accordance with their modified contractual terms, the loans are placed on nonaccrual status and reported as nonperforming TDRs.

The following table presents the performing and nonperforming TDRs by loan type as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Commercial: | September 30, 2019 Performing TDRs | Nonperforming TDRs | December 31, 2018 Performing TDRs | Nonperforming TDRs |
| --- | ---: | ---: | ---: | ---: |
| C&I | $30,273 | $62,261 | $13,248 | $10,715 |
| CRE | 5,934 | 12,044 | 6,134 | 17,272 |
| Multifamily residential | 4,188 | 237 | 4,300 | 260 |
| **Consumer:** |  |  |  |  |
| Single-family residential | 7,516 | 1,109 | 8,201 | 325 |
| HELOCs | 2,574 | 611 | 1,342 | 1,743 |
| **Total TDRs** | **$50,485** | **$76,262** | **$33,225** | **$30,315** |

Performing TDRs increased to $50.5 million as of September 30, 2019, an increase of $17.3 million or 52% from $33.2 million as of December 31, 2018. This increase reflects performing C&I loans that were newly designated as TDRs and the transfer of C&I, CRE and HELOC loans from nonperforming status. Nonperforming TDRs increased to $76.3 million as of September 30, 2019, an increase of $46.0 million or 152% from $30.3 million as of December 31, 2018. This increase reflects nonperforming C&I, single-family residential and HELOC loans that were newly designated as TDRs, partially offset by paydowns and payoffs of several nonperforming C&I and CRE loans, and the transfer of C&I, CRE and HELOC loans to performing status.

The Company’s impaired loans are predominantly made up of non-PCI loans held-for-investment on nonaccrual status and any non-PCI loans modified as a TDR, on either accrual or nonaccrual status. See *Note 1 — Summary of Significant Accounting Policies — Troubled Debt Restructurings* and *Impaired Loans* to the Consolidated Financial Statements of the Company’s 2018 Form 10-K for additional information regarding the Company’s TDR and impaired loan policies. The following table presents the recorded investment balances for non-PCI impaired loans as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Commercial: | September 30, 2019 Amount% |  | December 31, 2018 Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| C&I | $121,103 | 66% | $57,088 | 48% |
| CRE | 24,876 | 14% | 30,352 | 26% |
| Multifamily residential | 4,739 | 3% | 5,560 | 5% |
| Total commercial | 150,718 | 83% | 93,000 | 79% |
| **Consumer:** |  |  |  |  |
| Single-family residential | 17,000 | 9% | 13,460 | 11% |
| HELOCs | 12,498 | 7% | 9,956 | 8% |
| Other consumer | 2,495 | 1% | 2,502 | 2% |
| Total consumer | 31,993 | 17% | 25,918 | 21% |
| **Total non-PCI impaired loans** | **$182,711** | **100%** | **$118,918** | **100%** |

As of September 30, 2019, the allowance for loan losses included $16.5 million for impaired loans with a total recorded investment balance of $62.1 million. In comparison, the allowance for loan losses included $4.0 million for impaired loans with a total recorded investment balance of $31.1 million as of December 31, 2018.

### Allowance for Credit Losses

Allowance for credit losses consists of allowance for loan losses and allowance for unfunded credit reserves. Allowance for loan losses is comprised of reserves for two components, performing loans with unidentified incurred losses, as well as nonperforming loans and TDRs (collectively, impaired loans), and excludes loans held-for-sale. The allowance for loan losses is calculated after analyzing internal historical loan loss experience, internal loan risk ratings, economic conditions, bank risks, portfolio risks and any other pertinent information. Unfunded credit reserves include reserves provided for unfunded lending commitments, standby letters of credit (“SBLCs”), and recourse obligations for loans sold. The allowance for credit losses is increased by the provision for credit losses, which is charged against the current period’s results of operations, and increased or decreased by the net amount of recoveries or charge-offs during the period. The allowance for unfunded credit reserves is included in *Accrued expenses and other liabilities* on the Consolidated Balance Sheet. Net adjustments to the allowance for unfunded credit reserves are included in *Provision for credit losses* on the Consolidated Statement of Income.

The Company is committed to maintaining the allowance for credit losses at a level that is commensurate with the estimated inherent losses in the loan portfolio, including unfunded credit reserves. 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 loan losses is appropriate as of September 30, 2019, future allowance levels may increase or decrease based on a variety of factors, including but not limited to, loan growth, portfolio performance and general economic conditions. The 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 8 — Loans Receivable and Allowance for Credit Losses* to the Consolidated Financial Statements in this Form 10-Q and *Item 7. MD&A — Critical Accounting Policies and Estimates* and *Note 1 — Summary of Significant Accounting Policies — Allowance for Credit Losses* to the Consolidated Financial Statements of the Company’s 2018 Form 10-K.

The following table presents a summary of activities in the allowance for credit losses for the third quarters and first nine months of 2019 and 2018:

*($ in thousands)*

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Allowance for loan losses, beginning of period | $330,625 | $301,550 | $311,322 | $287,128 |
| Provision for loan losses | 37,879 | 12,642 | 79,250 | 47,695 |
| **Gross charge-offs:** |  |  |  |  |
| **Commercial:** |  |  |  |  |
| C&I | (25,098) | (4,462) | (54,087) | (36,441) |
| CRE | (1,021) | — | (1,021) | — |
| **Consumer:** |  |  |  |  |
| Single-family residential | (11) | — | (11) | (1) |
| Other consumer | (12) | (6) | (40) | (185) |
| Total gross charge-offs | (26,142) | (4,468) | (55,159) | (36,627) |
| **Gross recoveries:** |  |  |  |  |
| **Commercial:** |  |  |  |  |
| C&I | 1,648 | 411 | 5,612 | 8,841 |
| CRE | 1,896 | 2 | 3,955 | 431 |
| Multifamily residential | 42 | 77 | 376 | 1,471 |
| Construction and land | 21 | 23 | 523 | 716 |
| **Consumer:** |  |  |  |  |
| Single-family residential | 60 | 295 | 134 | 1,108 |
| HELOCs | 5 | — | 7 | — |
| Other consumer | 7 | 1 | 14 | 2 |
| Total gross recoveries | 3,679 | 809 | 10,621 | 12,569 |
| Net charge-offs | (22,463) | (3,659) | (44,538) | (24,058) |
| Foreign currency translation adjustments | (465) | (492) | (458) | (724) |
| Allowance for loan losses, end of period | 345,576 | 310,041 | 345,576 | 310,041 |
| Allowance for unfunded credit reserves, beginning of period | 13,019 | 14,019 | 12,566 | 13,318 |
| Provision for (reversal of) unfunded credit reserves | 405 | (2,100) | 858 | (1,399) |
| Allowance for unfunded credit reserves, end of period | 13,424 | 11,919 | 13,424 | 11,919 |
| **Allowance for credit losses** | **$359,000** | **$321,960** | **$359,000** | **$321,960** |
| Average loans held-for-investment | $33,661,077 | $30,488,140 | $33,023,468 | $29,762,719 |
| Loans held-for-investment | $34,024,976 | $31,210,185 | $34,024,976 | $31,210,185 |
| Allowance for loan losses to loans held-for-investment | 1.02% | 0.99% | 1.02% | 0.99% |
| Annualized net charge-offs to average loans held-for-investment | 0.26% | 0.05% | 0.18% | 0.11% |

As of September 30, 2019, the allowance for loan losses amounted to $345.6 million or 1.02% of loans held-for-investment. This compares with $311.3 million or 0.96% of loans held-for-investment as of December 31, 2018 and $310.0 million or 0.99% of loans held-for-investment as of September 30, 2018, respectively. The increase in allowance for loan losses was largely due to loan growth, as well as a deterioration in the credit risk ratings of C&I loans.

The provision for credit losses includes the provision for loan losses and unfunded credit reserves. A provision for credit losses is charged to income to bring the allowance for credit losses to a level deemed appropriate by the Company based on its calculation methodology. The provision for credit losses was $38.3 million and $80.1 million for the third quarter and first nine months of 2019, respectively, compared with $10.5 million and $46.3 million for the same periods in 2018. The year-over-year increases in both periods, compared with the same periods in 2018, reflected loan growth, increased charge-offs in C&I loans and a deterioration in the credit risk ratings of C&I loans during the third quarter of 2019.

The Company believes that the allowance for credit losses as of September 30, 2019 and December 31, 2018 was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments.

The following table presents the Company’s allocation of the allowance for loan losses by loan type and the ratio of each loan type to total loans held-for-investment as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Commercial: | September 30, 2019 Allowance Allocation | Loans as % of Total Loans | December 31, 2018 Allowance Allocation | Loans as % of Total Loans |
| --- | ---: | ---: | ---: | ---: |
| C&I | $218,869 | 36% | $189,117 | 37% |
| CRE | 37,473 | 29% | 40,666 | 28% |
| Multifamily residential | 20,307 | 8% | 19,885 | 8% |
| Construction and land | 29,171 | 2% | 20,290 | 2% |
| **Consumer:** |  |  |  |  |
| Single-family residential | 29,935 | 20% | 31,340 | 19% |
| HELOCs | 5,856 | 4% | 5,774 | 5% |
| Other consumer | 3,965 | 1% | 4,250 | 1% |
| **Total** | **$345,576** | **100%** | **$311,322** | **100%** |

The Company maintains an allowance for loan losses for both non-PCI and PCI loans. An allowance for loan losses for PCI loans is based on the Company’s estimates of cash flows expected to be collected from PCI loans. PCI loan losses are estimated collectively for groups of loans with similar characteristics. As of September 30, 2019, the Company had no allowance for loan losses for $240.7 million of PCI loans. In comparison, the Company established an allowance for loan losses of $22 thousand for $308.0 million of PCI loans as of December 31, 2018, comprising of CRE loans.

### 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 — Asset Liability and Market Risk Management — Liquidity* in this Form 10-Q for a discussion of the Company’s liquidity management. The following table summarizes the Company’s sources of funds as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Deposits | September 30, 2019 Amount | December 31, 2018 Amount | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Noninterest-bearing demand | $10,806,937 | $11,377,009 | $(570,072) | (5)% |
| Interest-bearing checking | 4,837,391 | 4,584,447 | 252,944 | 6% |
| Money market | 8,400,353 | 8,262,677 | 137,676 | 2% |
| Savings | 2,094,638 | 2,146,429 | (51,791) | (2)% |
| Time deposits | 10,520,207 | 9,069,066 | 1,451,141 | 16% |
| **Total deposits** | **$36,659,526** | **$35,439,628** | **$1,219,898** | **3%** |
| **Other Funds** |  |  |  |  |
| Short-term borrowings | $47,689 | $57,638 | $(9,949) | (17)% |
| FHLB advances | 745,494 | 326,172 | 419,322 | 129% |
| Repurchase agreements | 50,000 | 50,000 | — | —% |
| Long-term debt | 147,033 | 146,835 | 198 | 0% |
| **Total other funds** | **$990,216** | **$580,645** | **$409,571** | **71%** |
| **Total sources of funds** | **$37,649,742** | **$36,020,273** | **$1,629,469** | **5%** |

92

### 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 $36.66 billion as of September 30, 2019, an increase of $1.22 billion or 3% from $35.44 billion as of December 31, 2018. Year-to-date change was primarily due to growth of $1.45 billion or 16% in time deposits. Noninterest-bearing demand deposits comprised 29% and 32% of total deposits as of September 30, 2019 and December 31, 2018, 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 Funds

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

The Company had $47.7 million of short-term borrowings outstanding as of September 30, 2019, compared with $57.6 million as of December 31, 2018. This funding was entered into by the Company’s subsidiary, East West Bank (China) Limited, and will mature in the fourth quarter of 2019 and in 2020. As of September 30, 2019, short-term borrowings had fixed interest rates ranging from 3.65% to 3.73%.

FHLB advances were $745.5 million as of September 30, 2019, an increase of $419.3 million or 129% from $326.2 million as of December 31, 2018. As of September 30, 2019, FHLB advances had fixed and floating interest rates ranging from 1.98% to 2.58% with remaining maturities between four months and 3.11 years.

Gross repurchase agreements totaled $450.0 million as of both September 30, 2019 and December 31, 2018. Resale and repurchase agreements are reported net, pursuant to ASC 210-20-45-11, *Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements*. Net repurchase agreements totaled $50.0 million as of both September 30, 2019 and December 31, 2018, after netting $400.0 million of gross repurchase agreements against gross resale agreements. As of September 30, 2019, gross repurchase agreements had interest rates ranging from 4.33% to 4.55%, original terms between 4.0 years and 9.0 years and remaining maturities between 3.1 years and 3.9 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 September 30, 2019, 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 funding from a diverse group of counterparties and entering into repurchase agreements with longer durations, when appropriate. For additional details, see *Note 5 — 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 $147.0 million and $146.8 million as of September 30, 2019 and December 31, 2018, respectively. Long-term debt is comprised of junior subordinated debt, which qualifies as Tier 2 capital for regulatory purposes. The junior subordinated debt was issued in connection with the Company’s various pooled trust preferred securities offerings 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 4.11% and 3.67% for the first nine months of 2019 and 2018, respectively, with remaining maturities between 15.2 years and 18 years as of September 30, 2019.

### 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 September 30, 2019 and December 31, 2018:

*($ in thousands)*

| Hong Kong Branch: | September 30, 2019 Amount | % of Total Consolidated Assets | December 31, 2018 Amount | % of Total Consolidated Assets |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $315,281 | 1% | $360,786 | 1% |
| Available-for-sale investment securities (1) | $204,829 | 0% | $221,932 | 1% |
| Loans held-for-investment (2)(3) | $684,058 | 2% | $653,860 | 2% |
| Total assets | $1,269,775 | 3% | $1,247,207 | 3% |
| **Subsidiary Bank in China:** |  |  |  |  |
| Cash and cash equivalents | $657,210 | 2% | $695,527 | 2% |
| Interest-bearing deposits with banks | $127,524 | 0% | $221,000 | 1% |
| Loans held-for-investment (3) | $837,118 | 2% | $777,412 | 2% |
| Total assets | $1,625,828 | 4% | $1,700,357 | 4% |

(1) Primarily comprised of foreign bonds and U.S. Treasury securities as of both September 30, 2019 and December 31, 2018.

(2) Includes ASC 310-30 discount of $45 thousand and $103 thousand as of September 30, 2019 and December 31, 2018, respectively.

(3) Primarily comprised of C&I loans as of both September 30, 2019 and December 31, 2018.

The following table presents the total revenue generated by the Company’s overseas offices for the third quarters and first nine months of 2019 and 2018:

*($ in thousands)*

| Hong Kong Branch: | Three Months Ended September 30, 2019 Amount | % of Total Consolidated Revenue | 2018 Amount | % of Total Consolidated Revenue | Nine Months Ended September 30, 2019 Amount | % of Total Consolidated Revenue | 2018 Amount | % of Total Consolidated Revenue |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total revenue | $8,161 | 2% | $8,001 | 2% | $25,909 | 2% | $22,859 | 2% |
| **Subsidiary Bank in China:** |  |  |  |  |  |  |  |  |
| Total revenue | $9,393 | 2% | $9,655 | 2% | $25,584 | 2% | $26,157 | 2% |

94

### Capital

The Company maintains an adequate capital base to support its anticipated asset growth, operating needs and credit risks, and to ensure that the Company and the Bank are in compliance with all regulatory capital guidelines. The Company engages in regular capital planning processes on at least an annual basis to optimize the use of available capital and to appropriately plan for future capital needs, allocating capital to existing and future business activities. Furthermore, the Company conducts capital stress tests as part of its capital planning process. The stress tests enable the Company to assess the impact of adverse changes in the economy and interest rates on its capital base.

The Company’s stockholders’ equity was $4.88 billion as of September 30, 2019, an increase of $458.7 million or 10% from $4.42 billion as of December 31, 2018. The Company’s primary source of capital is the retention of its operating earnings. Retained earnings were $3.55 billion as of September 30, 2019, an increase of $385.7 million or 12% from $3.16 billion as of December 31, 2018. The increase primarily reflected net income of $485.8 million, offset by $114.8 million of cash dividends declared during the first nine months of 2019. In addition, the beginning balance of retained earnings increased $14.7 million as of January 1, 2019, because the Company recognized a cumulative adjustment related to the deferred gains on the sale and leaseback transactions, which had occurred prior to the date of adoption of ASU 2016-02, *Leases* (Topic 842). For other factors that contributed to the changes in stockholders’ equity, refer to *Item 1. Consolidated Financial Statements — Consolidated Statement of Changes in Stockholders’ Equit*y in this Form 10-Q.

Book value was $33.54 per common share as of September 30, 2019, compared with $30.52 per common share as of December 31, 2018. The Company paid a quarterly cash dividend of $0.23 per common share for the first quarter of 2019, and $0.275 per common share for both the second and third quarters of 2019. In comparison, the Company paid a quarterly cash dividend of $0.20 per common share for the first and second quarters of 2018, and $0.23 per common share for the third quarter of 2018. In October 2019, the Company’s Board of Directors declared fourth quarter 2019 cash dividends of $0.275 per common share. The dividend will be paid on November 15, 2019 to stockholders of record as of November 1, 2019.

### 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 2018 Form 10-K for additional details.

The Basel III Capital Rules require that banking organizations maintain a minimum CET1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0% and a minimum total capital ratio of 8.0% to be considered adequately capitalized. In addition, the rules require banking organizations to maintain a capital conservation buffer of 2.5% above the capital minimums in order to avoid limitations on capital distributions (including common stock dividends and share repurchases) and certain discretionary incentive compensation payments. The capital conservation buffer has been fully phased-in over four years beginning in 2016. As of January 1, 2019, banking organizations are required to maintain a minimum CET1 capital ratio of 7.0%, a minimum Tier 1 capital ratio of 8.5% and a minimum total capital ratio of 10.5% in a fully phased-in basis.

The Company is committed to maintaining capital at a level sufficient to assure the Company’s investors, customers and regulators that the Company and the Bank are financially sound. As of September 30, 2019 and December 31, 2018, both the Company and the Bank were considered “well-capitalized,” meeting all capital requirements on a fully phased-in basis under the Basel III Capital Rules. The following table presents the Company’s and the Bank’s capital ratios as of September 30, 2019 and December 31, 2018 under the Basel III Capital Rules, and those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:

|  | Basel III Capital Rules September 30, 2019 Company | East West Bank | December 31, 2018 Company | East West Bank | Minimum Regulatory Requirements | Well- Capitalized Requirements | Fully Phased-in Minimum Regulatory Requirements |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| CET1 risk-based capital | 12.8% | 12.7% | 12.2% | 12.1% | 4.5% | 6.5% | 7.0% |
| Tier 1 risk-based capital | 12.8% | 12.7% | 12.2% | 12.1% | 6.0% | 8.0% | 8.5% |
| Total risk-based capital | 14.2% | 13.7% | 13.7% | 13.1% | 8.0% | 10.0% | 10.5% |
| Tier 1 leverage capital (1) | 10.3% | 10.2% | 9.9% | 9.8% | 4.0% | 5.0% | 4.0% |

(1) The Tier 1 leverage capital well-capitalized requirement applies to the Bank only since there is no Tier 1 leverage ratio component in the definition of a well-capitalized bank-holding company.

During the first nine months of 2019, the Company’s CET1 and Tier 1 risk-based capital ratios increased 54 basis points, the total risk-based capital ratio increased 56 basis points, and the Tier 1 leverage capital ratio increased 41 basis points. Tier 1 risk-based capital of $4.39 billion as of September 30, 2019 increased $422.4 million or 11% from $3.97 billion as of December 31, 2018. Total risk-based capital of $4.90 billion as of September 30, 2019 increased $457.5 million or 10% from $4.44 billion as of December 31, 2018. The Company’s risk-weighted assets were $34.42 billion as of September 30, 2019, an increase of $1.93 billion or 6% from $32.50 billion as of December 31, 2018.

### Other Matters

### LIBOR Transition

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (“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, investment securities, resale agreements, FHLB advances, and deposits, as well as all the 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 and securitizations. The International Swaps and Derivatives Association, Inc. is expected to provide guidance on fallback contract language.

Due to the uncertainty surrounding the future of LIBOR, the transition is anticipated to span several reporting periods through the end of 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) developing 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. The Company monitors this activity and continues to 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, see *Item 1A. Risk Factors* in the Company’s 2018 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, 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 12 — 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 12 — 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 12 — 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 16 — Employee Benefit Plans* to the Consolidated Financial Statements of the Company’s 2018 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 2018 Form 10-K.

### Asset Liability and Market 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 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.

***Liquidity Risk — Liquidity Sources.*** The Company’s primary source of funding is the core deposit base generated by its banking business, which is relatively stable and low-cost. The Company’s loan-to-deposit ratio was 93% and 91% as of September 30, 2019 and December 31, 2018, respectively. Total deposits amounted to $36.66 billion as of September 30, 2019, compared with $35.44 billion as of December 31, 2018, of which core deposits comprised 71% and 74% of total deposits as of September 30, 2019 and December 31, 2018, respectively. In addition, the Company has access to various sources of wholesale funding, and has borrowing capacity at the FHLB and Federal Reserve Bank 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 asset portfolio includes cash and cash equivalents, interest-bearing deposits with banks, short-term resale agreements and unencumbered available-for-sale investment securities. The following table presents the Company’s liquid asset portfolio as of September 30, 2019 and December 31, 2018:

*($ in thousands)*

|  | September 30, 2019 Encumbered | Unencumbered | Total | December 31, 2018 Encumbered | Unencumbered | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $— | $3,042,281 | $3,042,281 | $— | $3,001,377 | $3,001,377 |
| Interest-bearing deposits with banks | — | 160,423 | 160,423 | — | 371,000 | 371,000 |
| Short-term resale agreements | — | 300,000 | 300,000 | — | 375,000 | 375,000 |
| Available-for-sale investment securities | 524,413 | 2,759,621 | 3,284,034 | 435,833 | 2,306,014 | 2,741,847 |
| **Total** | **$524,413** | **$6,262,325** | **$6,786,738** | **$435,833** | **$6,053,391** | **$6,489,224** |

Unencumbered assets totaled $6.26 billion and $6.05 billion as of September 30, 2019 and December 31, 2018, respectively. Investment 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, foreign bonds, and U.S. Treasury securities. The Company believes these available-for-sale investment 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 was $6.49 billion and $3.04 billion, respectively, as of September 30, 2019. 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 with correspondent banks, subject to availability, totaled $585.0 million as of September 30, 2019. 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 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 2018 Form 10-K. During the first nine months of 2019 and 2018, the Bank paid total dividends of $140.0 million and $105.0 million to East West, respectively. East West’s cash flow obligations primarily consist of debt, operating expenses and dividends payments.

***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. As of September 30, 2019, the Company was not aware of any trends, events or uncertainties that would or were reasonably likely to, have a material effect on its liquidity position. Furthermore, the Company is not aware of any material commitments for capital expenditures in the foreseeable future.

### Consolidated Cash Flows Analysis

The following table presents a summary of the Company’s Consolidated Statement of Cash Flows for the first nine months of 2019 and 2018. In addition to this cash flow analysis, the discussion in *Item 2. MD&A — Asset Liability and Market Risk Management — Liquidity* may provide additional context in evaluating the Company’s liquidity position and related activity.

*($ in thousands)*

|  | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $389,019 | $693,316 |
| Net cash used in investing activities | (1,868,818) | (2,654,135) |
| Net cash provided by financing activities | 1,533,223 | 2,033,347 |
| Effect of exchange rate changes on cash and cash equivalents | (12,520) | (28,333) |
| Net increase in cash and cash equivalents | 40,904 | 44,195 |
| Cash and cash equivalents, beginning of period | 3,001,377 | 2,174,592 |
| **Cash and cash equivalents, end of period** | **$3,042,281** | **$2,218,787** |

***Operating Activities —*** Net cash provided by operating activities was $389.0 million and $693.3 million for the first nine months of 2019 and 2018, respectively. During the first nine months of 2019 and 2018, net cash provided by operating activities mainly reflected inflows of $485.8 million and $530.7 million from net income, respectively. During the first nine months of 2019, net operating cash inflows also benefited from non-cash adjustments of $184.9 million to reconcile net income to net operating cash, as well as $77.7 million of net changes in accrued expenses and other liabilities, partially offset by $363.2 million of net changes in accrued interest receivable and other assets. In comparison, during the first nine months of 2018, net operating cash inflows benefited from non-cash adjustments of $108.6 million to reconcile net income to net cash, as well as $92.0 million of changes in accrued expenses and other liabilities, partially offset by $38.2 million of net changes in accrued interest receivable and other assets.

***Investing Activities —*** Net cash used in investing activities was $1.87 billion and $2.65 billion for the first nine months of 2019 and 2018, respectively. During the first nine months of 2019, net cash used in investing activities primarily reflected cash outflows of $1.68 billion, $459.1 million and $103.3 million, respectively, from loans held-for-investment, available-for-sale investment securities, and investments in qualified affordable housing partnerships, tax credit and other investments. These cash outflows used in investing activities were partially offset by cash inflows of $204.5 million and $175.0 million from interest-bearing deposits with banks, and resale agreements, respectively. During the first nine months of 2018, net cash used in investing activities primarily reflected cash outflows of $2.25 billion and $503.7 million from loans held-for-investment and the sale of the Bank’s eight DCB branches, respectively. These cash outflows were partially offset by a $185.7 million net cash inflow from available-for-sale investment securities.

***Financing Activities —*** Net cash provided by financing activities was $1.53 billion and $2.03 billion for the first nine months of 2019 and 2018, respectively. During the first nine months of 2019, net cash provided by financing activities primarily reflected net increases of $1.25 billion in deposits and $418.0 million in FHLB advances, partially offset by $115.0 million in cash dividends. During the first nine months of 2018, net cash provided by financing activities primarily reflected net increases of $2.09 billion in deposits and $63.1 million in short-term borrowings, partially offset by $92.6 million in cash dividends.

### 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. Refer to *Item 2. MD&A — Asset Liability and Market Risk Management — Derivatives* in this Form 10-Q for additional information.

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, investment 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.

### Twelve-Month Net Interest Income Simulation

Net Interest Income simulation is a modeling technique that 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 changes in market rates 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 September 30, 2019 and December 31, 2018, to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions:

| Change in Interest Rates (Basis Points) | Net Interest Income Volatility (1) September 30, 2019 | December 31, 2018 |
| ---: | ---: | ---: |
| +200 | 15.4% | 16.6% |
| +100 | 7.8% | 8.4% |
| -100 | (6.6)% | (8.3)% |
| -200 | (12.1)% | (16.7)% |

(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.

The Company’s estimated twelve-month net interest income sensitivity as of September 30, 2019 was lower when compared with the sensitivity as of December 31, 2018, for both the upward 100 and 200 basis point rate scenarios. This reflects a greater rate of upward repricing in the Company’s deposit portfolio, offsetting simulated increases in interest income from higher interest rates on assets. In both of the simulated downward interest rate scenarios, sensitivity decreased mainly due to the impact of the changes in the yield curve between September 30, 2019 and December 31, 2018.

The Company’s net interest income profile as of September 30, 2019 reflects an asset sensitive position. Net interest income would be expected to increase if interest rates rise and to decrease if interest rates decline. 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 1.75% and 2.00% as of September 30, 2019 and between 2.25% and 2.50% as of December 31, 2018. In its statement released on September 18, 2019, the Federal Open Market Committee (“FOMC”) decided to lower the target range for the federal funds rate to a range of between 1.75% to 2.00%. As of October 30, 2019, the federal funds target rate was lowered to a range of between 1.50% to 1.75%, based on weakened economic data.

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) September 30, 2019 | December 31, 2018 |
| --- | ---: | ---: |
| +200 Rate Ramp | 6.1% | 6.3% |
| +100 Rate Ramp | 3.0% | 3.0% |
| -100 Rate Ramp | (2.6)% | (3.0)% |
| -200 Rate Ramp | (5.2)% | (6.3)% |

(1) The percentage change represents net interest income under a gradual non-parallel shift in even quarterly increments over 12 months.

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 September 30, 2019 and December 31, 2018, the Company’s modeled sensitivity slightly decreased under a ramp simulation. This reflects model refinements to better incorporate the current, inverted yield curve in the analysis, as well as the gradual spreading of interest rate changes over 12 months, rather than at the end of each quarter.

### 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 risk 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 September 30, 2019 and December 31, 2018 related to an instantaneous and sustained non-parallel shift in market interest rates of 100 and 200 basis points in both directions:

| Change in Interest Rates (Basis Points) | EVE Volatility (1) September 30, 2019 | December 31, 2018 |
| ---: | ---: | ---: |
| +200 | 6.4% | 6.3% |
| +100 | 3.6% | 1.2% |
| -100 | (1.3)% | (3.1)% |
| -200 | (3.4)% | (11.9)% |

(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.

The Company’s EVE sensitivity for the upward interest rate scenarios as of September 30, 2019 increased while the sensitivity for the downward interest rate scenarios as of September 30, 2019 decreased, as compared with the results as of December 31, 2018. The changes in EVE sensitivity during this period were primarily due to the shape of the yield curve being inverted.

The Company’s EVE profile as of September 30, 2019 reflects an asset sensitive EVE position. 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.

### 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 September 30, 2019, the Company had two cancellable interest rate swap contracts with original terms of 20 years. 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.

***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 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 USD 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. As of September 30, 2019, the outstanding foreign currency forwards effectively hedged approximately 50% of the Chinese Renminbi 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.

***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 a portion of the foreign exchange contracts entered into with its customers, the Company either enters into offsetting foreign exchange contracts with third-party financial institutions or acquires collateral primarily in the form of cash on a portfolio basis to manage its 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 common stock of technology and life sciences companies. 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 2018 Form 10-K*, Note 4 — Fair Value Measurement and Fair Value of Financial Instruments* and *Note 7 — Derivatives* to the Consolidated Financial Statements of this report.

### Critical Accounting Policies and Estimates

The Company’s significant accounting policies and use of estimates (see *Note 1 — Summary of Significant Accounting Policies* and *Item 7. MD&A — Critical Accounting Policies and Estimates* of the Company’s 2018 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 methods, valuation assumptions and may require significant judgment in applying complex accounting principles to individual transactions. The Company has procedures and processes in place to facilitate making these judgments. The following accounting policies are critical to the Company’s Consolidated Financial Statements 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* to the Consolidated Financial Statements in this Form 10-Q.

### Supplemental Information — Explanation of GAAP and 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 first quarter of 2019, the Company recorded a $7.0 million pre-tax impairment charge related to DC Solar. During the second quarter of 2019, the Company reversed $30.1 million of certain previously claimed tax credits related to DC Solar. During the first quarter of 2018, the Company sold its eight DCB branches and recognized a pre-tax gain on sale of $31.5 million. Management believes that by adjusting for these non-recurring items from net income, diluted EPS, ROA, ROE and effective tax rate, will provide clarity to financial statement users regarding the ongoing performance of the Company and allows comparability to prior periods.

Non-GAAP efficiency ratio represents non-GAAP noninterest expense divided by non-GAAP revenue. Non-GAAP revenue represents the aggregate of net interest income and non-GAAP noninterest income, where non-GAAP noninterest income excludes the gain on the sale of the DCB branches that were sold in the first quarter of 2018. Non-GAAP noninterest expense excludes the amortization of tax credit and other investments and the amortization of core deposit intangibles. Non-GAAP tangible common equity represents stockholders’ equity, which has been reduced by goodwill and other intangible assets.

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)*

|  | 2019 | Three Months Ended September 30, 2018 | 2019 | Nine Months Ended September 30, 2018 |  |
| --- | --- | ---: | ---: | ---: | ---: |
| Net income | (a) | $171,416 | $171,302 | $485,820 | $530,683 |
| Add: Impairment charge related to DC Solar (1) |  | — | — | 6,978 | — |
| Less: Gain on sale of business |  | — | — | — | (31,470) |
| Tax effect of adjustments (2) |  | — | — | (2,063) | 9,303 |
| Add: Reversal of certain previously claimed tax credits related to DC Solar |  | — | — | 30,104 | — |
| **Non-GAAP net income** | **(b)** | **$171,416** | **$171,302** | **$520,839** | **$508,516** |
| **Diluted weighted-average number of shares outstanding** |  | **146,120** | **146,173** | **146,088** | **146,158** |
| Diluted EPS |  | $1.17 | $1.17 | $3.33 | $3.63 |
| Diluted EPS impact of impairment charge related to DC Solar, net of tax |  | — | — | 0.03 | — |
| Diluted EPS impact of gain on sale of business, net of tax |  | — | — | — | (0.15) |
| Diluted EPS impact of reversal of certain previously claimed tax credits related to DC Solar |  | — | — | 0.21 | — |
| **Non-GAAP diluted EPS** |  | **$1.17** | **$1.17** | **$3.57** | **$3.48** |
| Average total assets | (c) | $43,136,273 | $38,659,262 | $41,815,490 | $37,874,434 |
| Average stockholders’ equity | (d) | $4,838,281 | $4,197,675 | $4,687,746 | $4,061,977 |
| **ROA (3)** | **(a)/(c)** | **1.58%** | **1.76%** | **1.55%** | **1.87%** |
| **Non-GAAP ROA (3)** | **(b)/(c)** | **1.58%** | **1.76%** | **1.67%** | **1.80%** |
| **ROE (3)** | **(a)/(d)** | **14.06%** | **16.19%** | **13.86%** | **17.47%** |
| **Non-GAAP ROE (3)** | **(b)/(d)** | **14.06%** | **16.19%** | **14.85%** | **16.74%** |

(1) Included in *Amortization of tax credit and other investments* on the Consolidated Statement of Income.

(2) Applied statutory rate of 29.56%.

(3) Annualized.

*($ in thousands)*

|  | 2019 | Three Months Ended September 30, 2018 | 2019 | Nine Months Ended September 30, 2018 |  |
| --- | --- | ---: | ---: | ---: | ---: |
| Income tax expense | (a) | $34,951 | $33,563 | $138,815 | $82,958 |
| Less: Reversal of certain previously claimed tax credits related to DC Solar | (b) | — | — | (30,104) | — |
| **Non-GAAP income tax expense** | **(c)** | **$34,951** | **$33,563** | **$108,711** | **$82,958** |
| Income before income taxes | **(d)** | **$206,367** | **$204,865** | **$624,635** | **$613,641** |
| Effective tax rate | (a)/(d) | 16.9% | 16.4% | 22.2% | 13.5% |
| Less: Reversal of certain previously claimed tax credits related to DC Solar | (b)/(d) | —% | —% | (4.8)% | —% |
| **Non-GAAP effective tax rate** | **(c)/(d)** | **16.9%** | **16.4%** | **17.4%** | **13.5%** |

105

*($ in thousands)*

|  | 2019 | Three Months Ended September 30, 2018 | 2019 | Nine Months Ended September 30, 2018 |  |
| --- | --- | ---: | ---: | ---: | ---: |
| Net interest income before provision for credit losses | (a) | $369,807 | $348,720 | $1,099,594 | $1,017,092 |
| Total noninterest income |  | 51,474 | 46,502 | 146,364 | 169,214 |
| **Total revenue** | **(b)** | **$421,281** | **$395,222** | **$1,245,958** | **$1,186,306** |
| Noninterest income |  | $51,474 | $46,502 | $146,364 | $169,214 |
| Less: Gain on sale of business |  | — | — | — | (31,470) |
| Non-GAAP noninterest income | (c) | $51,474 | $46,502 | $146,364 | $137,744 |
| **Non-GAAP revenue** | **(a)+(c)=(d)** | **$421,281** | **$395,222** | **$1,245,958** | **$1,154,836** |
| Total noninterest expense | (e) | $176,630 | $179,815 | $541,215 | $526,369 |
| Less: Amortization of tax credit and other investments |  | (16,833) | (20,789) | (58,477) | (58,670) |
| Amortization of core deposit intangibles |  | (1,148) | (1,369) | (3,474) | (4,227) |
| **Non-GAAP noninterest expense** | **(f)** | **$158,649** | **$157,657** | **$479,264** | **$463,472** |
| **Efficiency ratio** | **(e)/(b)** | **41.93%** | **45.50%** | **43.44%** | **44.37%** |
| **Non-GAAP efficiency ratio** | **(f)/(d)** | **37.66%** | **39.89%** | **38.47%** | **40.13%** |

*($ and shares in thousands, except per share data)*

|  |  | September 30, 2019 | June 30, 2019 | September 30, 2018 |
| --- | --- | ---: | ---: | ---: |
| Stockholders’ equity | (a) | $4,882,664 | $4,734,593 | $4,244,850 |
| Less: Goodwill |  | (465,697) | (465,697) | (465,547) |
| Other intangible assets (1) |  | (17,435) | (18,952) | (23,656) |
| **Non-GAAP tangible common equity** | **(b)** | **$4,399,532** | **$4,249,944** | **$3,755,647** |
| Number of common shares at period-end | (c) | 145,568 | 145,547 | 144,929 |
| **Non-GAAP tangible common equity per share** | **(b)/(c)** | **$30.22** | **$29.20** | **$25.91** |

(1) Includes core deposit intangibles and mortgage servicing assets.

### Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q contain 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. 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 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;
- 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 due to 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 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; 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;
- changes in consumer spending and savings habits;
- changes in the U.S. economy, including inflation, deflation, employment levels, rate of growth and general business conditions;
- government intervention in the financial system, including changes in government interest rate policies;
- impact of benchmark interest rate reform in the U.S. that resulted in the SOFR selected as the preferred alternative reference rate to LIBOR;
- impact of political developments, 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 FDIC, the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission (“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 Board or other regulatory agencies and their impact on critical accounting policies and assumptions;
- changes in income tax laws and regulations;
- 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;
- 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 the Company’s stock price;
- 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 available-for-sale investment securities portfolio; and
- impact of natural or man-made disasters or calamities or conflicts or other events that may directly or indirectly result in a negative impact on the Company’s financial performance.

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2018 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.

## Market risk

As filed, 258 characters.

For quantitative and qualitative disclosures regarding market risk in the Company’s portfolio, see *Item 1. Consolidated Financial Statements — Note 7 — Derivatives* and *Item 2. MD&A — Asset Liability and Market Risk Management* in Part I of this Form 10-Q.

## Controls and procedures

As filed, 1,824 characters.

### Disclosure Controls and Procedures

As of September 30, 2019, 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 design and operation 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 September 30, 2019.

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 has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2019, that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

## Risk factors

As filed, 273 characters.

The Company’s 2018 Form 10-K contains disclosure regarding the risks and uncertainties related to the Company’s business under the heading *Item 1A. Risk Factors*. There has been no material change to the Company’s risk factors as presented in the Company’s 2018 Form 10-K.

Filed Nov 8, 2019.
Source: SEC EDGAR, the filing index for accession 0001628280-19-013854. Last ingested by Listed: Nov 10, 2026, 04:41 ET. No prices; not investment advice.