EAST WEST BANCORP INC (EWBC) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

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Overview

The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of the Company, and its subsidiaries, including its subsidiary bank, East West Bank and its subsidiaries. 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 Form 10-K.

The Bank is an independent commercial bank headquartered in California that has a focus on the financial service needs of the Asian-American community. Through over 120 locations in the U.S. and China, the Company provides a full range of consumer and commercial products and services through the following business segments: Consumer and Business Banking and Commercial Banking, with the remaining operations recorded in Other. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primary source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and debt securities and interest paid on deposits and other funding sources. As of December 31, 2021, the Company had $60.87 billion in assets and approximately 3,100 full-time equivalent employees.

Coronavirus Disease 2019 Global Pandemic

The Coronavirus Disease 2019 (“COVID-19”) pandemic has created a historic public health crisis and caused unprecedented disruptions to global economies. Although the COVID-19 pandemic continues to present public health challenges, including the emergence of new variants, great progress has been made and continues to be made in containing the virus through vaccination efforts. While these responses have largely mitigated the impact from the COVID-19 pandemic and propelled the U.S. economy to recovery, a resurgence of the pandemic, the adoption and long-term effectiveness of the vaccines, and other factors including the continuing impact on global supply chains may slow down such progress. As a result, we are unable to quantify all the specific impacts, and the extent to which the COVID-19 pandemic may negatively affect our business, financial condition, results of operations, regulatory capital, and liquidity ratios. Throughout the COVID-19 pandemic, the Company has been focused on serving our customers and communities and maintaining the well-being of our employees. The Company has been, and may continue to be, impacted by the pandemic.

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 to provide additional relief for individuals and businesses affected by the COVID-19 pandemic, including additional funding for the PPP. The PPP Extension Act of 2021, enacted on March 30, 2021, extended the PPP through May 31, 2021. The Company was a participating lender in the PPP in 2020 and 2021. As of December 31, 2021, the Company had approximately 1,800 PPP loans outstanding with balances totaling $534.2 million, which were recorded in the commercial and industrial (“C&I”) loan portfolio. During 2021, the Company submitted and received SBA approval for the forgiveness of approximately 9,500 PPP loans, totaling $1.93 billion.

The Company also participated in the Board of Governors of the Federal Reserve’s MSLP and funded $233.6 million in MSLP loans as of December 31, 2020. The Company did not fund any MSLP loans in 2021. As part of the MSLP, the related Main Street special purpose vehicle purchased 95% participations in the loans originated. The portion retained by the Company totaled $10.2 million and $9.5 million as of December 31, 2021 and 2020, respectively. The MSLP was terminated on January 8, 2021.

In response to the COVID-19 pandemic, the Company implemented protocols and processes to execute its business resumption plans to protect its employees and support its customers. As state and local governments have relaxed restrictions on temporary business closures, we have started phasing in the return of our corporate associates to the office. As we resume normal operations, our highest priority continues to be the health and safety of our associates and our customers. We have prepared our facilities with employee safety protocols, including badge or key fob access for fully vaccinated associates, personal protection equipment, visual safety reminders related to social distancing and mask requirements, and sanitizing products. The Company continues to monitor the external environment and make changes to its safety protocols as appropriate.

Further discussion of the potential impacts on our business due to the COVID-19 pandemic is provided under Part I, Item 1A. — Risk Factors in this Form 10-K.

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Our MD&A reviews the financial condition and results of operations of the Company for 2021 and 2020. Some tables include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When reading the discussion in the MD&A, readers should also refer to the Consolidated Financial Statements and related notes in this Form 10-K. The page locations of specific sections that we refer to are presented in the table of contents. To review our financial condition and results of operations for 2020 and a comparison between 2020 and 2019 results, see Item 7. MD&A of our 2020 Form 10-K filed with the SEC on February 26, 2021.

Financial Review

(1)Includes $55.2 million and $43.3 million of interest income related to PPP loans in 2021 and 2020, respectively.

(2)2020 includes $10.7 million of recovery related to DC Solar and affiliates (“DC Solar”) tax credit investments, of which $1.1 million was recorded as an impairment recovery. 2020 also includes $8.7 million in extinguishment costs related to assets sold under repurchase agreements (“repurchase agreements”).

(3)For a discussion of non-GAAP tangible common equity per share, return on average non-GAAP tangible equity, and non-GAAP efficiency ratio, refer to Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.

(4)The efficiency ratio is noninterest expense divided by total revenue.

(5)Includes $534.2 million and $1.57 billion of PPP loans as of December 31, 2021 and 2020, respectively.

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The Company’s 2021 net income was $873.0 million, an increase of $305.2 million, or 54%, from 2020 net income of $567.8 million. The increase was driven by higher net interest income and noninterest income, and the reversal of provision for credit losses, partially offset by higher noninterest expense and income tax expense.

Noteworthy items about the Company’s performance for 2021 included:

•Profitability in 2021 expanded substantially, reflecting robust net interest income and fee income growth, efficient expense management, and materially improved asset quality. 2021 ROA was 1.47%, an increase of 31 bps, from 1.16% for 2020. 2021 ROE was 15.70%, an increase of 453 bps, from 11.17% for 2020. 2021 non-GAAP return on average tangible equity was 17.24%, compared with 12.42% for 2020. For additional details, see the reconciliation of non-GAAP measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.

•The Company’s 2021 net interest income of $1.53 billion grew by $154.4 million, or 11.2%, from 2020 net interest income of $1.38 billion.

•The efficiency ratio was 43.80% and 44.42% for 2021 and 2020, respectively. The non-GAAP efficiency ratio was 36.91% in 2021, an improvement of 239 bps from 39.30% in 2020. The non-GAAP efficiency ratio is adjusted for the amortization of tax credit and other investments, the amortization of core deposit intangibles, and repurchase agreements’ extinguishment cost. For additional details, see the reconciliations of non-GAAP measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.

•The Company recorded a reversal of provision for credit losses of $35.0 million in 2021, primarily due to an improved macroeconomic outlook, compared with a provision for credit losses of $210.7 million in 2020.

•Total assets reached $60.87 billion, growing by $8.71 billion or 17% year-over-year, primarily reflecting growth in loans and AFS debt securities.

•Total loans reached a record $41.69 billion as of December 31, 2021, growing by $3.30 billion or 9% year-over-year. Loan growth was well-diversified across the Company’s major loan portfolios, including residential mortgage, CRE and C&I.

•Total deposits reached $53.35 billion as of December 31, 2021, growing by $8.49 billion or 19% year-over-year. The growth was primarily driven by noninterest-bearing demand deposits and money market accounts, partially offset by a decrease in time deposits.

•Asset quality metrics improved substantially. Criticized loans totaled $833.1 million as of December 31, 2021, decreasing by $384.4 million or 32% from $1.22 billion as of December 31, 2020. The criticized loans ratio was 2.00% of loans held-for-investment as of December 31, 2021, an improvement of 117 bps from 3.17% as of December 31, 2020. Nonperforming assets were $103.5 million, or 0.17% of total assets, as of December 31, 2021, a decrease of $131.4 million or 56%, from $234.9 million, or 0.45% of total assets, as of December 31, 2020.

Results of Operations

Net Interest Income

The Company’s primary source of revenue is net interest income, which is the interest income earned on interest-earning assets less interest expense paid on interest-bearing liabilities. Net interest margin is the ratio of net interest income to average interest-earning assets. Net interest income and net interest margin are impacted by several factors, including changes in average balances and the composition of interest-earning assets and funding sources, market interest rate fluctuations and the slope of the yield curve, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities, the volume of noninterest-bearing sources of funds and asset quality.

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2021 net interest income before provision for credit losses was $1.53 billion, an increase of $154.4 million or 11%, compared with $1.38 billion in 2020. The year-over year growth in net interest income was primarily driven by a decrease in interest expense, reflecting a lower cost of funds, and an increase in interest income from AFS debt securities due to average balance growth, partially offset by a decrease in interest income from loans, reflecting lower loan yields. Net interest margin for 2021 was 2.72%, a decrease of 26 basis points (“bps”) from 2.98% in 2020. The year-over year net interest margin compression primarily reflected lower yields on earning assets, a change in the interest-earning assets mix in favor of more lower-yielding assets, partially offset by lower cost of funds.

Average interest-earning assets were $56.26 billion in 2021, an increase of $10.02 billion or 22% from $46.24 billion in 2020. The increase in average interest-earning assets was due to growth in the average balances of AFS debt securities, loans, interest-bearing cash and deposits with banks, and resale agreements. The growth in AFS debt securities, loans, and resale agreements reflected the Company’s deployment of excess cash.

The yield on average interest-earning assets for 2021 was 2.88%, a decrease of 57 bps from 3.45% in 2020. The year-over-year yield compression reflected lower yields on interest-earning assets in response to the low interest rate environment.

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The average loan yield for 2021 was 3.59%, a decrease of 39 bps from 3.98% in 2020. Excluding the impact of PPP loans, the adjusted average loan yield was 3.57%, a decrease of 43 bps from 4.00% in 2020. For additional details, see the reconciliations of non-GAAP measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K. Approximately 66% and 65% of loans held-for-investment were variable-rate or hybrid loans in their adjustable rate period as of December 31, 2021 and 2020, respectively.

Deposits are an important source of funds and impact both net interest income and net interest margin. The average cost of deposits was 0.13% in 2021, a 32 bps decrease from 0.45% in 2020. The year-over-year decrease reflected a lower interest rate environment in 2021, the year-over-year run-off of higher-cost time deposits, and a higher proportion of noninterest-bearing demand deposits in the deposit mix. Noninterest-bearing demand deposits comprised 41% of average total deposits in 2021, compared with 34% in 2020. Time deposits comprised 16% of average total deposits in 2021, compared with 23% in 2020. The average cost of interest-bearing deposits decreased 46 bps to 0.23% in 2021, from 0.69% in 2020.

The average cost of funds in 2021 was 0.17%, a decrease of 34 bps from 0.51% in 2020. The decrease in the average cost of funds reflected the lower cost of deposits, as well as decreases in the cost of other funding sources due to changes in the interest rate environment. Other sources of funding primarily consist of FHLB advances, repurchase agreements, long-term debt and short-term borrowings.

The Company utilizes various tools to manage interest rate risk. Refer to the Interest Rate Risk Management section of Item 7. MD&A — Risk Management — Market Risk Management for details.

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The following table presents the interest spread, net interest margin, average balances, interest income and expense, and the average yield/rate by asset and liability component in 2021, 2020 and 2019:

(1)Average balances of resale and repurchase agreements for the years ended December 31, 2020 and 2019 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 1.94% and 2.66% for 2020 and 2019, respectively. The weighted-average interest rates of gross repurchase agreements were 3.25% and 4.74% for 2020 and 2019, respectively.

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

(3)Includes the amortization of premiums on debt securities of $92.8 million, $33.9 million and $10.9 million for 2021, 2020 and 2019, respectively.

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

(5)Loans include the accretion of net deferred loan fees, unearned fees and amortization of premiums, which totaled $61.7 million, $52.4 million and $36.8 million for 2021, 2020 and 2019, respectively.

(6)Primarily includes average balances of PPPLF, which was repaid in full during the fourth quarter of 2020.

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The following table summarizes the extent to which changes in (1) interest rates; and (2) volume of average interest-earning assets and average interest-bearing liabilities affected the Company’s net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average rate.

Noninterest Income

The following table presents the components of noninterest income for the periods indicated:

Noninterest income comprised 16% and 15% of total revenue in 2021 and 2020, respectively. 2021 noninterest income was $285.9 million, an increase of $50.4 million or 21%, compared with $235.5 million in 2020. This increase was primarily due to increases in foreign exchange income, deposit account fees, wealth management fees, and other investment income, partially offset by decreases in gains on sales of AFS debt securities, and interest rate contracts and other derivative income.

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Deposit account fees were $71.3 million in 2021, an increase of $23.2 million or 48%, compared with $48.1 million in 2020. This increase primarily reflected higher treasury management and deposit-related fees resulting from commercial deposit growth.

Interest rate contracts and other derivative income was $22.9 million in 2021, a decrease of $8.8 million or 28%, compared with $31.7 million in 2020. This decrease was primarily due to a lower volume of customer-driven transactions, partially offset by favorable credit valuation adjustments.

Foreign exchange income was $49.0 million in 2021, an increase of $26.6 million or 119%, compared with $22.4 million in 2020. This increase primarily reflected new customer acquisitions and growth in customer-driven transactions.

Wealth management fees were $25.8 million in 2021, an increase of $8.3 million or 47%, compared with $17.5 million in 2020. This increase primarily reflected growth in customer transactions.

Gains on sales of AFS debt securities were $1.6 million in 2021, a decrease of $10.7 million or 87%, compared with $12.3 million in 2020. This decrease reflected a lower volume of AFS debt securities sold.

Other investment income was $16.9 million in 2021, an increase of $6.3 million or 58%, compared with $10.6 million in 2020. This increase primarily reflected higher earnings from equity method investments, partially offset by lower distributions from affordable housing partnership investments.

Noninterest Expense

The following table presents the components of noninterest expense for the periods indicated:

2021 noninterest expense was $796.1 million, an increase of $79.8 million or 11%, compared with $716.3 million in 2020. This increase primarily reflected higher amortization of tax credit and other investments, and compensation and employee benefits.

Compensation and employee benefits were $433.7 million in 2021, an increase of $29.6 million or 7%, compared with $404.1 million in 2020. This increase primarily reflected higher bonuses.

Amortization of tax credit and other investments was $122.5 million in 2021, an increase of $52.4 million or 75%, compared with $70.1 million in 2020. This increase was primarily due to a higher number of new tax credit investments in 2021 and the timing of tax credit recognition in each period, based on when tax credit projects were put into service.

During the second quarter of 2020, the Company prepaid $150.0 million of repurchase agreements and incurred a debt extinguishment cost of $8.7 million. No such expense was incurred in 2021.

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Income Taxes

Income tax expense was $183.4 million for the year ended December 31, 2021, an increase of $65.4 million, compared with income tax expense of $118.0 million for the year ended December 31, 2020. The year-over-year increase in income tax expense was predominantly driven by higher level of income before income taxes. 2021 effective tax rate was 17.4%, compared with 2020 effective tax rate of 17.2%.

Operating Segment Results

The Company organizes its operations into three reportable operating segments: (1) Consumer and Business Banking; (2) Commercial Banking; and (3) Other. These segments are defined by the type of customers served and the related products and services provided. The segments reflect how financial information is currently evaluated by management. For an additional description of the Company’s internal management reporting process, including the segment cost allocation methodology, see Note 17 — Business Segments to the Consolidated Financial Statements in this Form 10-K.

Segment net interest income represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for funding charges or credits through the Company’s internal funds transfer pricing (“FTP”) process.

The following table presents the results by operating segment for the periods indicated:

(1)During the fourth quarter of 2021, the Company enhanced its segment allocation methodology related to the fair values of interest rate and commodity derivative contracts, which are included in noninterest income. These fair values that were previously allocated to the “Commercial Banking” segment, have been reclassified between “Consumer and Business Banking” and “Commercial Banking.” Prior years’ balances have been reclassified to conform to the 2021 presentation.

Consumer and Business Banking

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

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The following table presents additional financial information for the Consumer and Business Banking segment for the periods indicated:

(1)During the fourth quarter of 2021, the Company enhanced its segment allocation methodology related to the fair values of interest rate and commodity derivative contracts, which are included in noninterest income. These fair values that were previously allocated to the “Commercial Banking” segment, have been reclassified between “Consumer and Business Banking” and “Commercial Banking.” Prior years’ balances have been reclassified to conform to the 2021 presentation.

Consumer and Business Banking segment net income increased $122.8 million or 66% year-over-year to $308.6 million in 2021, due to revenue growth and a lower provision for credit losses, partially offset by higher income tax expense and noninterest expense. Net interest income before (reversal of) provision for credit losses increased $166.3 million, or 31%, to $697.1 million, driven by higher interest income, primarily due to growth in residential mortgage loans, and lower interest expense, primarily due to lower interest rates and growth in noninterest-bearing demand deposits. Noninterest income increased $30.0 million, or 47%, to $94.1 million, primarily driven by higher deposit account fees, foreign exchange income and wealth management fees, reflecting growth in customer-driven transactions. Noninterest expense increased $32.9 million, or 10%, to $364.6 million, primarily due to higher allocated corporate overhead expense, and compensation and employee benefits.

Commercial Banking

The Commercial Banking segment primarily offers commercial loan and deposit products. Commercial loan products include commercial real estate lending, construction finance, working capital lines of credit, trade finance, letters of credit, commercial business lending, affordable housing lending, asset-based lending, asset-backed finance, project finance and equipment financing. Commercial deposit products and other financial services include treasury management, foreign exchange services, and interest rate and commodity risk hedging.

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The following table presents additional financial information for the Commercial Banking segment for the periods indicated:

(1)During the fourth quarter of 2021, the Company enhanced its segment allocation methodology related to the fair values of interest rate and commodity derivative contracts, which are included in noninterest income. These fair values that were previously allocated to the “Commercial Banking” segment, have been reclassified between “Consumer and Business Banking” and “Commercial Banking.” Prior years’ balances have been reclassified to conform to the 2021 presentation.

Commercial Banking segment net income increased $223.8 million or 83% year-over-year to $492.3 million in 2021, reflecting a lower provision for credit losses and higher revenue, partially offset by increased income tax expense and noninterest expense. Net interest income before (reversal of) provision for credit losses increased $59.9 million, or 8%, to $766.2 million, driven by lower interest expense, primarily due to lower interest rates and growth in noninterest-bearing demand deposits. Noninterest income increased $21.4 million, or 15%, to $163.8 million, primarily driven by higher foreign exchange income, deposit account fees and net gains on sales of loans, partially offset by lower interest rate contracts and other derivative income.

Other

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

The following table presents additional financial information for the Other segment for the periods indicated:

Other segment net income decreased $41.4 million or 37% year-over-year to $72.1 million in 2021, primarily driven by lower revenue and higher noninterest expense, partially offset by an increased income tax benefit. Net interest income before provision for credit losses decreased $71.8 million, or 51%, to $68.3 million. The decrease was primarily driven by lower FTP spread income absorbed by the Other segment, partially offset by an increase in interest income from investments due to a higher volume of AFS debt securities, and lower interest expense from borrowings. Noninterest expense increased $42.4 million, or 36%, to $160.0 million, primarily due to higher amortization of tax credits and other investments.

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Balance Sheet Analysis

Debt Securities

The Company maintains a portfolio of high quality and liquid debt securities with a moderate duration profile. It closely manages the overall portfolio interest rate and liquidity risks. The Company’s debt securities provide:

•interest income for earnings and yield enhancement;

•availability for funding needs arising during the normal course of business;

•the ability to execute interest rate risk management strategies in response to changes in economic or market conditions; and

•collateral to support pledging agreements as required and/or to enhance the Company’s borrowing capacity.

Available-for-Sale Debt Securities

Debt securities classified as AFS are carried at their fair value with the corresponding changes in fair value recorded in Accumulated other comprehensive income (loss), net of tax, as a component of Stockholders’ equity on the Consolidated Balance Sheet.

The following table presents the distribution of the Company’s AFS debt securities portfolio by fair value and percentage of fair value as of December 31, 2021 and 2020, and by credit rating as of December 31, 2021:

(1)Primarily based upon the credit ratings issued by S&P, Moody’s Investors Service (“Moody’s”) or Fitch Ratings (“Fitch”), applying the lowest rating, if split rated. Rating percentages are allocated based on fair value.

The fair value of AFS debt securities totaled $9.97 billion as of December 31, 2021, an increase of $4.42 billion or 80% from $5.54 billion as of December 31, 2020. The largest net change came from U.S. government agency and U.S. government-sponsored enterprise mortgage-backed securities, which increased $1.34 billion, followed by U.S. Treasury securities, which increased $981.9 million, and non-agency mortgage-backed securities, which increased $848.8 million. These changes were mainly driven by purchases during 2021 to deploy cash from deposit growth and to enhance the return of the overall AFS debt securities portfolio.

The Company’s AFS debt securities portfolio had an effective duration, defined as the sensitivity of the value of the portfolio to interest rate changes, of 5.0 as of December 31, 2021. This increased from 4.2 as of December 31, 2020, primarily due to an increase in the target duration of securities purchased to achieve enhancement in portfolio yield, and portfolio duration extension because of the steepening of the yield curve. As of December 31, 2021, 90% of the carrying value of the Company’s debt securities portfolio was rated “AA-” or “Aa3” or higher by nationally recognized credit rating agencies, compared with 88% as of December 31, 2020. Credit ratings of BBB- or higher by S&P and Fitch, or Baa3 or higher by Moody’s, are considered investment grade.

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The Company’s AFS debt securities are carried at fair value with non-credit related unrealized gains and losses, net of tax, reported in Other comprehensive income (loss) on the Consolidated Statement of Comprehensive Income. Pre-tax net unrealized losses on AFS debt securities were $121.8 million as of December 31, 2021, compared with pre-tax net unrealized gains on AFS debt securities of $74.1 million as of December 31, 2020. This change was primarily due to interest rate movement. As of December 31, 2021, 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 costs.

Of the securities with gross unrealized losses, substantially all were rated investment grade as of both December 31, 2021 and 2020. The Company believes that the gross unrealized losses were due to non-credit related factors and were primarily attributable to interest rate movement and widened spreads for certain securities. The Company believes that the credit support levels of the AFS debt securities are strong and, based on current assessments and macroeconomic forecasts, expects that full contractual cash flows will be received, even if near term credit performance is negatively impacted.

The Company assesses individual securities for credit losses for each reporting period. If a credit loss is identified, the Company records an impairment through the allowance for credit losses with a corresponding Provision for credit losses on the Consolidated Statement of Income. There were no credit losses recognized in earnings for both 2021 and 2020. For additional information of the Company’s accounting policies, valuation and composition, see Note 1 — Summary of Significant Accounting Policies, Note 2 — Fair Value Measurement and Fair Value of Financial Instruments, and Note 4 — Securities to the Consolidated Financial Statements in this Form 10-K.

The following table presents the amortized cost and weighted-average yields by contractual maturity distribution, excluding periodic principal payments, of the Company’s AFS debt securities as of December 31, 2021. Actual maturities of certain securities can differ from contractual maturities as the borrowers have the right to prepay obligations with or without prepayment penalties. In addition, factors such as prepayments and interest rates may affect the yields on the carrying values of these securities.

(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.

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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 were $41.15 billion as of December 31, 2021, an increase of $3.38 billion or 9% from $37.77 billion as of December 31, 2020. This was primarily driven by well-diversified growth throughout our major loan categories including $1.45 billion or 15% in residential mortgage loans, $1.37 billion or 9% in total CRE loans, and $518.9 million or 4% in C&I loans. Excluding PPP loans, total net loans grew $4.41 billion or 12%, and C&I loans grew $1.55 billion or 13% year-over-year. The composition of the loan portfolio as of December 31, 2021 was similar to the composition as of December 31, 2020.

The following table presents the composition of the Company’s total loan portfolio by loan type as of December 31, 2021 and 2020:

(1)Includes $534.2 million and $1.57 billion of PPP loans as of December 31, 2021 and 2020, respectively.

(2)Includes net deferred loan fees, unearned fees, unamortized premiums and unaccreted discounts of $(50.7) million and $(58.8) million as of December 31, 2021, and 2020, respectively. Net origination fees related to PPP loans were $(5.7) million and $(12.7) million as of December 31, 2021 and 2020, respectively.

(3)Consists of single-family residential loans as of both December 31, 2021 and 2020.

Actions to Support Customers during the COVID-19 Pandemic

In response to the COVID-19 pandemic, the Company assisted customers by offering SBA PPP loans in 2020 and 2021 to help struggling businesses in our communities pay their employees and sustain their businesses. The SBA stopped accepting new loan applications on May 31, 2021. For more information on PPP loans, refer to Item 7. MD&A — Overview — Coronavirus Disease 2019 Global Pandemic and Note 1 — Summary of Significant Accounting Policies — Significant Accounting Policies — Paycheck Protection Program to the Consolidated Financial Statements in this Form 10-K. The Company was also a participating lender in the MSLP, which was established by the Federal Reserve to support lending to small- and medium-sized businesses and nonprofit organizations.

In addition, the Company has provided payment relief through various loan modification programs. For a summary of the loans that the Company has modified in response to the COVID-19 pandemic, refer to Item 7. MD&A — Risk Management — Credit Risk Management — Loan Modifications Due to the COVID-19 Pandemic in this Form 10-K.

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Commercial

The commercial loan portfolio made up 73% and 75% of total loans as of December 31, 2021 and 2020, respectively. The Company actively monitors this commercial lending portfolio for elevated levels of credit risk and reviews credit exposures for sensitivity to changing economic conditions.

Commercial — Commercial and Industrial Loans. Total C&I loan commitments (loans outstanding plus unfunded credit commitments, excluding issued letters of credit) were $20.29 billion as of December 31, 2021, an increase of $1.60 billion or 9% from $18.69 billion as of December 31, 2020. Total C&I loans were $14.15 billion as of December 31, 2021, an increase of $518.9 million or 4% from $13.63 billion as of December 31, 2020. Total C&I loans made up 34% and 36% of total loans held-for-investment as of December 31, 2021 and 2020, respectively. The C&I loan portfolio includes loans and financing for businesses in a wide spectrum of industries, comprised of working capital lines of credit, trade finance, letters of credit, affordable housing lending, asset-based lending, asset-backed finance, project finance and equipment financing. The C&I loan portfolio also includes PPP loans. Additionally, the Company has a portfolio of broadly syndicated C&I loans, which represent revolving or term loan facilities that are marketed and sold primarily to institutional investors, totaling $939.4 million and $892.1 million as of December 31, 2021 and 2020, respectively. The majority of the C&I loans had variable interest rates as of both December 31, 2021, and 2020.

The C&I portfolio is well-diversified by industry. The Company monitors concentrations within the C&I loan portfolio by customer exposure and industry classification, setting diversification targets and exposure limits by industry or loan product. The following charts illustrate the industry mix within the Company’s C&I loan portfolio as of December 31, 2021, and 2020:

Commercial — Commercial Real Estate Loans. Total CRE loans outstanding were $16.18 billion or 39% of total loans held-for-investment as of December 31, 2021, which grew by $1.37 billion or 9% from $14.81 billion or 39% of total loans held-for-investment as of December 31, 2020. The total CRE portfolio consists of CRE, multifamily residential, and construction and land loans. CRE consists of customers with diversified property types listed in the table below. The year-over-year growth in total CRE loans was driven by growth in CRE and multifamily residential loans, partially offset by declines in construction and land loans.

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The Company’s total CRE loan portfolio is diversified by property type with an average CRE loan size of $2.5 million and $2.4 million as of December 31, 2021 and 2020, respectively. The following table summarizes the Company’s total CRE loans by property type as of December 31, 2021 and 2020:

(1)Included in CRE loans.

The weighted-average loan-to-value (“LTV”) ratio of the total CRE loan portfolio was 51% as of both December 31, 2021 and 2020. The low weighted-average LTV ratio was consistent by CRE loan property type. Approximately 89% of total CRE loans had an LTV ratio of 65% or lower as of both December 31, 2021, and 2020. The consistency of the Company’s low LTV underwriting standards has historically resulted in lower credit losses for CRE and multifamily residential loans.

The following tables provide a summary of the Company’s CRE, multifamily residential, and construction and land loans by geography as of December 31, 2021 and 2020. The distribution of the total CRE loan portfolio reflects the Company’s geographical footprint, which is primarily concentrated in California:

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Because 75% and 77% of total CRE loans were concentrated in California as of December 31, 2021 and 2020, 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 credit losses. For additional information related to the higher degree of risk from a downturn in real estate markets in California, see Item 1A. Risk Factors — Risks Related to Geopolitical Uncertainties in this Form 10-K.

Commercial — Commercial Real Estate Loans. The Company focuses on providing financing to experienced real estate investors and developers who have moderate levels of leverage, many of whom are long-time customers of the Bank. CRE loans totaled $12.16 billion as of December 31, 2021, compared with $11.17 billion as of December 31, 2020, and accounted for 29% of total loans held-for-investment as of both dates. Interest rates on CRE loans may be fixed, variable or hybrid. As of both December 31, 2021 and 2020, the majority of CRE loans were variable rate loans. Loans are underwritten with conservative standards for cash flows, debt service coverage and LTV.

Owner-occupied properties comprised 20% of the CRE loans as of both December 31, 2021 and 2020. The remainder were non-owner-occupied properties, where 50% or more of the debt service for the loan is typically provided by rental income from an unaffiliated third party.

Commercial — Multifamily Residential Loans. The multifamily residential loan portfolio is largely comprised of loans secured by residential properties with five or more units. Multifamily residential loans totaled $3.68 billion or 9% of total loans held-for-investment as of December 31, 2021, compared with $3.03 billion or 8% of total loans held-for-investment as of December 31, 2020. The Company offers a variety of first lien mortgages, including fixed- and variable-rate loans, as well as hybrid loans with interest rates that adjust annually after an initial fixed rate period of three to ten years.

Commercial — Construction and Land Loans. Construction and land loans provide financing for a portfolio of projects diversified by real estate property type. These loans totaled $346.5 million or 1% of total loans held-for-investment as of December 31, 2021, compared with $599.7 million or 2% of total loans held-for-investment as of December 31, 2020. Construction loan exposure was made up of $297.9 million in loans outstanding, plus $361.2 million in unfunded commitments, as of December 31, 2021, compared with $554.7 million in loans outstanding, plus $288.2 million in unfunded commitments as of December 31, 2020. Land loans totaled $48.6 million as of December 31, 2021, compared with $45.0 million as of December 31, 2020.

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Consumer

The following tables summarize the Company’s single-family residential and HELOCs loan portfolios by geography as of December 31, 2021 and 2020:

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Consumer — Single-Family Residential Loans. Single-family residential loans totaled $9.09 billion or 22% of total loans held-for-investment as of December 31, 2021, compared with $8.19 billion or 21% of total loans held-for-investment as of December 31, 2020. Year-over-year, single-family residential loans increased $907.7 million or 11%, primarily driven by growth in New York. The Company was in a first lien position for all of its single-family residential loans as of both December 31, 2021 and 2020. Many of these loans are reduced documentation loans, for which a substantial down payment is required, resulting in a low LTV ratio at origination, typically 65% or less. These loans have historically experienced low delinquency and loss rates. The Company offers a variety of single-family residential first lien mortgage loan programs, including fixed- and variable-rate loans, as well as hybrid loans with interest rates that adjust on a regular basis, typically each year, after an initial fixed rate period.

Consumer — Home Equity Lines of Credit. Total HELOC commitments were $2.49 billion as of December 31, 2021, which grew by $739.8 million or 42% from $1.75 billion as of December 31, 2020. Unfunded HELOC commitments are unconditionally cancellable. HELOCs outstanding totaled $2.14 billion or 5% of total loans held-for-investment as of December 31, 2021, compared with $1.60 billion or 4% of total loans held-for-investment as of December 31, 2020. Year-over-year, HELOCs increased $543.1 million or 34%, primarily driven by growth in California. The Company was in a first lien position for 87% and 86% of its HELOCs as of December 31, 2021 and 2020, respectively. Many of these loans are reduced documentation loans, for which a substantial down payment is required, resulting in a low LTV ratio at origination, typically 60% or less. These loans have historically experienced low delinquency and loss rates. Substantially all of the Company’s HELOCs were variable-rate loans as of both December 31, 2021 and 2020.

All originated commercial and consumer loans are subject to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks associated with these products. The Company conducts a variety of quality control procedures and periodic audits, including the review of lending and legal requirements, to ensure that the Company is compliant with these requirements.

The following table presents the contractual loan maturities by loan category and the contractual distribution of loans to changes in interest rates as of December 31, 2021:

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Loans Held-for-Sale

As of December 31, 2021 and 2020, loans held-for-sale totaled $635 thousand and $1.8 million, respectively, and consisted of single-family residential loans. At the time of commitment to originate or purchase a loan, a loan is determined to be held-for-investment if it is the Company’s intent to hold the loan to maturity or for the foreseeable future, subject to periodic reviews under the Company’s evaluation processes, including liquidity and credit risk management. If the Company subsequently changes its intent to hold certain loans, those loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value.

Sales of Originated Loans and Purchased Loans

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

The following tables provide information on loan sales during the years ended December 31, 2021, 2020 and 2019. Refer to Note 6 — Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements in this Form 10-K for additional information on loan purchases and transfers.