EAST WEST BANCORP INC (EWBC) FY 2022 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. 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 focuses on the financial service needs of individuals and businesses that operate in both the U.S. and Asia. Through over 120 locations in the U.S. and Asia, including the Singapore representative office, that was opened in January 2023, the Company provides a full range of consumer and commercial products and services through the following three business segments: (1) Consumer and Business Banking, and (2) Commercial Banking, with the remaining operations recorded in (3) Other. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. As of December 31, 2022, the Company had $64.11 billion in assets and 3,155 full-time equivalent employees. For additional information on our strategy, and the products and services provided by the Bank, see Item 1. Business — Strategy and Banking Services in this Form 10-K.

Current Developments

Economic Developments

Heightened inflationary concerns continue to weigh on the economy. The Federal Reserve’s tight monetary policy has included multiple interest rate hikes to slow the pace of inflation, which boosted the value of the USD. Meanwhile, global supply chain disruptions persist due to a variety of factors, including Russia’s invasion of Ukraine and the lingering effects of the COVID-19 pandemic. The combination of higher interest rates, depressed global equity prices, elevated market volatility and a slowdown in global economies have led to concerns of a potential recession. The Company continues to closely monitor the economy and its effects on its business, customers, employees, communities and markets.

Further discussion of the potential impacts on the Company’s business due to interest rate hikes have been provided in Item 1A. — Risk Factors — Risks Related to Financial Matters in this Form 10-K.

LIBOR Transition

LIBOR was a widely referenced benchmark rate intended to reflect the rate at which banks could borrow wholesale funds from other banks on an unsecured and short-term basis. In March 2021, the United Kingdom’s Financial Conduct Authority and Intercontinental Exchange Benchmark Administration announced that the one-week and two-month USD LIBOR settings and non-USD LIBOR settings would cease to be published after December 31, 2021. The publication of the overnight, one-, three-, six- and 12-month USD LIBOR settings has been extended through June 30, 2023.

In March 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law. The LIBOR Act provides a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR after June 30, 2023. The LIBOR Act also establishes a litigation safe harbor for lenders that have the discretion to select a LIBOR replacement under certain situations, including the use of a Federal Reserve-selected replacement rate based on SOFR. On December 16, 2022, the Federal Reserve adopted a final rule that implements the LIBOR Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023.

The Company holds a significant volume of LIBOR-based products that are indexed to tenors that will cease to be published after June 30, 2023. The volume of these products continues to decrease as the Company works through the transition. A cross-functional team was created to manage this transition and communicate with both internal and external stakeholders. The Company developed and updated business and legal processes, contract language, and models, as well as invested in analytical tools and information and operational systems to facilitate the transition of legacy LIBOR products to ARRs.

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The Company offers loans based on ARRs, such as SOFR and the Bloomberg Short-Term Bank Yield Index. The Company ceased offering new loans or loan renewals based on LIBOR on January 1, 2022. The Company continues to engage with customers to proactively modify the remaining LIBOR-based product contracts and transition to a benchmark replacement prior to June 30, 2023. The Company will leverage relevant contractual and statutory solutions, if necessary, including the LIBOR Act and other relevant legislation, to transition any residual LIBOR-based product exposures maturing after June 2023 to appropriate benchmark replacements. The Company’s LIBOR transition is anticipated to continue through June 30, 2023.

The Company will continue to monitor the risks and impacts of this transition. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s business, see Item 1A. Risk Factors — Risks Related to Financial Matters in this Form 10-K.

Our MD&A analyzes the financial condition and results of operations of the Company for 2022 and 2021. 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 2021 and a comparison between 2021 and 2020 results, see Item 7. MD&A of our 2021 Form 10-K, which was filed with the SEC on February 28, 2022.

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Financial Review

(1)For additional information regarding the reconciliation of these non-U.S. GAAP financial measures, refer to Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.

(2)Efficiency ratio is calculated as noninterest expense divided by total revenue.

The Company’s 2022 net income was $1.13 billion, an increase of $255.1 million, or 29%, from 2021 net income of $873.0 million. The increase was primarily due to higher net interest income, partially offset by increases in the provision for credit losses and income tax expense. Noteworthy items about the Company’s performance for 2022 included:

•Net interest income growth and net interest margin expansion. Year-over-year net interest income before provision for (reversal of) credit losses grew by $514.3 million or 34% to $2.05 billion in 2022, from $1.53 billion in 2021. Full year 2022 net interest margin was 3.45%, up 73 bps year-over-year.

•Expanding profitability. The Company’s 2022 ROA, ROE and tangible return on average tangible equity of 1.80%, 19.51% and 21.29%, respectively, all expanded year-over-year by 33 bps, 381 bps and 405 bps, respectively. Tangible return on average tangible equity is a non-GAAP financial measure. For additional details, see the reconciliation of non-GAAP financial measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.

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•Improved efficiency. Efficiency ratio of 36.65% and adjusted efficiency ratio of 31.74% in 2022 both improved year-over-year. Adjusted efficiency ratio is a non-GAAP financial measure. For additional details, see the reconciliation of non-GAAP financial measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.

•Asset growth. Total assets reached $64.11 billion, growing $3.24 billion or 5% year-over-year, primarily driven by loan growth.

•Loan growth. Total loans were $48.23 billion as of December 31, 2022, a year-over-year increase of $6.53 billion or 16% from $41.69 billion. This was primarily driven by well-balanced growth in the CRE, residential mortgage and commercial and industrial (“C&I”) loan segments.

•Deposit growth. Total deposits were $55.97 billion as of December 31, 2022, a year-over-year increase of $2.62 billion or 5% from $53.35 billion, primarily driven by growth in time deposits, partially offset by decreases in noninterest-bearing demand and money market deposits.

•Equity growth. Book value per common share was $42.46 as of December 31, 2022, a year-over-year increase of $1.33 or 3%. Tangible equity per common share of $39.10 as of December 31, 2022, increased by $1.31 or 3% year-over-year. Tangible equity per common share is a non-GAAP financial measure. For additional details, see the reconciliation of non-GAAP financial measures presented under Item 7. MD&A — Reconciliation of GAAP to Non-GAAP Financial Measures in this Form 10-K.

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.

Net interest income before provision for (reversal of) credit losses in 2022 was $2.05 billion, an increase of $514.3 million or 34%, compared with $1.53 billion in 2021. Net interest margin was 3.45% in 2022, an increase of 73 bps from 2.72% in 2021. The year-over-year changes in net interest income and net interest margin primarily reflected higher interest-earning asset yields and strong loan growth, partially offset by a higher average cost of deposits. The changes in yields and rates reflected rising benchmark interest rates.

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Average interest-earning assets were $59.31 billion in 2022, an increase of $3.05 billion or 5% from $56.26 billion in 2021. The increase in average interest-earning assets primarily reflected growth in loans and debt securities, partially offset by a decrease in interest-bearing cash and deposits with banks.

The yield on average interest-earning assets was 3.91% in 2022, an increase of 103 bps from 2.88% in 2021. The year-over-year increase in the yield on average interest-earning assets primarily resulted from rising benchmark interest rates.

The average loan yield was 4.52% in 2022, an increase of 93 bps from 3.59% in 2021. The year-over-year change in the average loan yield reflected the loan portfolio’s sensitivity to rising benchmark interest rates. Approximately 62% and 66% of loans held-for-investment were variable-rate or hybrid loans in their adjustable-rate period as of December 31, 2022 and 2021, respectively.

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Deposits are an important source of funds and impact both net interest income and net interest margin. Average deposits were $54.30 billion in 2022, an increase of $2.82 billion or 5% from $51.48 billion in 2021. Average noninterest-bearing deposits were $22.78 billion, an increase of $1.51 billion or 7% from $21.27 billion in 2021. Average noninterest-bearing deposits made up 42% and 41% of average deposits for 2022 and 2021, respectively.

The average cost of deposits was 0.46% in 2022, an increase of 33 bps from 0.13% in 2021. The year-over-year increase reflected higher rates paid on money market and time deposits in response to the rising interest rate environment.

The average cost of funds calculation includes deposits, FHLB advances, repurchase agreements, long-term debt and short-term borrowings. In 2022, the average cost of funds was 0.50%, an increase of 33 bps from 0.17% in 2021. The year-over-year increase was mainly driven by the change in the average cost of deposits discussed above.

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 2022, 2021 and 2020:

(1)Average balances of resale and repurchase agreements for the year ended December 31, 2020 have been reported net, pursuant to Accounting Standards Codification (“ASC”) 210-20-45-11, Balance Sheet Offsetting: Repurchase and Reverse Repurchase Agreements. The weighted-average yield/rate of gross resale and gross repurchase agreements for the year ended December 31, 2020 were 1.94% and 3.25%, respectively.

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

(3)Includes the amortization of net premiums on AFS debt securities of $71.8 million, $92.8 million and $33.9 million for 2022, 2021 and 2020, respectively.

(4)Includes the amortization of net premiums on HTM debt securities of $499 thousand in 2022.

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

(6)Loans include the accretion of net deferred loan fees and amortization of net premiums, which totaled $49.6 million, $61.7 million and $52.4 million for 2022, 2021 and 2020, respectively.

(7)Primarily includes average balances of the Paycheck Protection Program Liquidity Facility, 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 yield/rate.

Noninterest Income

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

Noninterest income comprised 13% and 16% of total revenue in 2022 and 2021, respectively. Noninterest income for 2022 was $298.7 million, an increase of $12.8 million or 4%, compared with $285.9 million in 2021. The increase was primarily due to growth in deposit account fees, and interest rate contracts and other derivative income, partially offset by a decrease in other investment income.

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Deposit account fees were $88.4 million in 2022, an increase of $17.2 million or 24%, compared with $71.3 million in 2021. This growth was primarily driven by higher treasury management and deposit-related fees from commercial deposits.

Interest rate contracts and other derivative income was $29.1 million in 2022, an increase of $6.1 million or 27%, compared with $22.9 million in 2021. The year-over-year increase was primarily due to favorable credit valuation adjustments and higher transaction volume, which drove growth in interest rate contract premiums.

Other investment income was $7.0 million in 2022, a decrease of $9.8 million or 58%, compared with $16.9 million in 2021. The decrease primarily reflected unfavorable equity valuation adjustments in the Company’s CRA investments in 2022, compared with the prior year.

Noninterest Expense

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

Noninterest expense was $859.4 million in 2022, an increase of $63.3 million or 8%, compared with $796.1 million in 2021. The increase was primarily due to higher compensation and employee benefits, other operating expense, and deposit account expense, partially offset by a decrease in the amortization of tax credit and other investments.

Compensation and employee benefits were $477.6 million in 2022, an increase of $43.9 million or 10%, compared with $433.7 million in 2021. The increase was primarily due to higher average compensation.

Other operating expense was $118.2 million in 2022, an increase of $21.8 million or 23%, compared with $96.3 million in 2021. This increase was primarily due to higher interest expense on cash collateral, foreclosure and travel-related expenses, and miscellaneous operating losses, partially offset by lower legal expenses.

Deposit account expense was $25.5 million in 2022, an increase of $9.4 million or 58%, compared with $16.2 million in 2021. The increase primarily reflected higher deposit referral fees and commercial customer account expenses.

Amortization of tax credit and other investments was $113.4 million in 2022, a decrease of $9.1 million or 7%, compared with $122.5 million in 2021. The year-over-year change largely reflected investments that close in a given period and the mix of tax credits being recognized, all of which have differing amortization periods.

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Income Taxes

The following table presents the income before income taxes, income tax expense and effective tax rate for the periods indicated:

Income tax expense was $283.6 million in 2022, compared with $183.4 million in 2021, resulting in an effective tax rate of 20.1% and 17.4%, respectively. The increase in the income tax expense was primarily related to an increase in pre-tax net income and a decrease in tax credits. The differences between the 2022 and 2021 effective tax rates from the federal statutory rate of 21% were primarily due to tax credits associated with renewable energy, historic and new market tax credit related projects and state taxes as described in Note 11 — Income Taxes to the Consolidated Financial Statements in this 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 served, and the related products and services provided. The segments reflect how financial information is currently evaluated by management. For a 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:

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 through the Company’s branch network. 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:

Consumer and Business Banking segment net income increased $299.5 million or 97% year-over-year to $608.1 million in 2022, due to revenue growth, partially offset by higher income tax expense, noninterest expense and provision for credit losses. Net interest income before provision for credit losses increased $473.7 million or 68% year-over-year to $1.17 billion. The increase was primarily driven by higher deposit fund transfer pricing credits due to noninterest-bearing deposit growth, and higher loan interest income, mainly from growth in residential mortgage loans. Noninterest income increased $16.0 million or 17% to $110.1 million, primarily driven by higher deposit account fees and foreign exchange income. Provision for credit losses increased $32.2 million, or 644%, year-over-year to $27.2 million, primarily driven by changes to the macroeconomic outlook and mortgage loan growth. Noninterest expense increased $33.2 million, or 9%, to $397.9 million, primarily due to higher compensation and employee benefits and allocated corporate overhead expenses.

Commercial Banking

The Commercial Banking segment primarily generates commercial loan and deposit products. Commercial loan products include CRE lending, construction finance, commercial business lending, working capital lines of credit, trade finance, letters of credit, 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.

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

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Commercial Banking segment net income increased $18.2 million, or 4%, year-over-year to $507.5 million in 2022. This increase reflected revenue growth, partially offset by higher provision for credit losses and noninterest expense. Net interest income before provision for credit losses increased $126.2 million, or 16%, to $892.4 million, driven by higher loan interest income from commercial loan growth. Noninterest income increased $15.5 million, or 9%, to $179.2 million, primarily driven by higher interest rate contracts and other derivative income, deposit account fees and foreign exchange income. Provision for credit losses increased $76.3 million, or 254%, year-over-year to $46.3 million, primarily driven by changes to the macroeconomic outlook and commercial loan growth. Noninterest expense increased $38.5 million, or 14%, to $314.2 million, primarily due to higher compensation and employee benefits, other operating expenses and allocated corporate overhead expenses.

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:

The Other segment reported segment loss before income taxes of $155.4 million and segment net income of $12.5 million, reflecting an income tax benefit of $167.9 million in 2022. The increase in segment loss before income taxes was primarily driven by lower revenue. The $85.6 million year-over-year decrease in net interest income 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 debt securities yield in 2022.

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, and reflects the impact of tax credit investment activity. Income tax expense is allocated to the Consumer and Business Banking and the Commercial Banking segments by applying statutory income tax rates to the segment income before income taxes. Tax credit investment amortization is allocated to the Other segment.

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.

While the Company does not intend to sell its debt securities, it may sell AFS securities in response to changes in the balance sheet and related interest rate risk to meet liquidity, regulatory and strategic requirements.

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The following table presents the distribution of the Company’s AFS and HTM debt securities portfolio as of December 31, 2022 and 2021, and by credit rating as of December 31, 2022:

(1)Credit ratings express opinions about the credit quality of a debt security. The Company determines the credit rating of a security according to the lowest credit rating made available by nationally recognized statistical rating organizations (“NRSROs”). Debt securities rated investment grade, which are those with ratings similar to BBB- or above (as defined by NRSROs), are generally considered by the rating agencies and market participants to be low credit risk. Ratings percentages are allocated based on fair value.

(2)For debt securities not rated by NRSROs, the Company uses other factors which include but are not limited to the priority in collections within the securitization structure, and whether the contractual payments have historically been on time.

As of both December 31, 2022 and 2021, 98% of the carrying value of the Company’s debt securities portfolio was rated investment grade by NRSROs.

The Company’s AFS and HTM debt securities portfolio had an effective duration, defined as the sensitivity of the value of the portfolio to interest rate changes, of 5.2 as of December 31, 2022. This increased from 5.0 as of December 31, 2021, primarily due to the upshifting of the yield curve while the portfolio has seasoned.

Available-for-Sale Debt Securities

The fair value of AFS debt securities totaled $6.03 billion as of December 31, 2022, a decrease of $3.93 billion or 39% from $9.97 billion as of December 31, 2021. The decrease was primarily due to the Company’s transfer of $3.01 billion of AFS securities to HTM securities during the first quarter of 2022, and a decline in the portfolio valuation within the rising interest rate environment. For further discussion regarding the transfer, refer to the Held-to-Maturity Debt Securities section below. 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 $844.2 million as of December 31, 2022, compared with $121.8 million as of December 31, 2021.

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As of December 31, 2022, 97% of the carrying value of the AFS debt securities portfolio was rated investment grade by NRSROs, compared with 98% as of December 31, 2021. Of the AFS debt securities with gross unrealized losses, substantially all were rated investment grade as of both December 31, 2022 and 2021. There was no allowance for credit losses provided against the AFS debt securities as of both December 31, 2022 and 2021. Additionally, there were no credit losses recognized in earnings for both 2022 and 2021.

Held-to-Maturity Debt Securities

During the first quarter of 2022, the Company transferred $3.01 billion in aggregate fair value of U.S. Treasury, government agency and government-sponsored enterprise debt and mortgage-backed securities, and municipal securities from AFS to HTM. In comparison, there were no HTM debt securities as of December 31, 2021. The Company’s HTM debt securities are carried at amortized cost. The unrealized gains or losses at the date of transfer of these securities continue to be reported in Accumulated other comprehensive income (loss) (“AOCI”), net of tax on the Consolidated Balance Sheet and are amortized over the remaining life of the securities.

All HTM debt securities were issued, guaranteed, or supported by the U.S. government or government-sponsored enterprises. Accordingly, the Company applied a zero credit loss assumption for these securities and no allowance for credit loss was recorded as of December 31, 2022. For additional discussion on the allowance for credit losses, see Note 4 — Securities to the Consolidated Financial Statements in this Form 10-K.

For additional information on AFS and HTM securities, 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.

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, as well as consumer loans, which consist of single-family residential, home equity lines of credit (“HELOCs”) and other consumer loans. Total loans held-for-investment were $48.20 billion as of December 31, 2022, an increase of $6.51 billion, or 16%, from $41.69 billion as of December 31, 2021. This increase was primarily driven by well-balanced growth across all our major loan categories including increases of $2.89 billion or 18% in total CRE loans, $2.11 billion, or 19%, in total residential mortgage loans, and $1.56 billion, or 11%, in C&I loans. The composition of the loan portfolio as of December 31, 2022 was similar to the composition as of December 31, 2021.

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The following table presents the composition of the Company’s total loan portfolio by loan type as of December 31, 2022 and 2021:

(1)Includes $99.0 million and $534.2 million of Paycheck Protection Program (“PPP”) loans as of December 31, 2022 and 2021, respectively.

(2)Includes $(70.4) million and $(50.7) million of net deferred loan fees and net unamortized premiums as of December 31, 2022, and 2021, respectively.

(3)Consists of C&I loans as of December 31, 2022 and single-family residential loans as of December 31, 2021.

Commercial

The commercial loan portfolio comprised 72% and 73% of total loans as of December 31, 2022 and 2021, respectively. The Company actively monitors the 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 were $22.78 billion as of December 31, 2022, an increase of $2.49 billion or 12% from $20.29 billion as of December 31, 2021, with a utilization rate of 69% as of both dates. Total C&I loans were $15.71 billion as of December 31, 2022, an increase of $1.56 billion or 11% from $14.15 billion as of December 31, 2021. Total C&I loans made up 33% and 34% of total loans held-for-investment as of December 31, 2022 and 2021, respectively. The C&I loan portfolio includes loans and financing for businesses in a wide spectrum of industries, comprised of commercial business lending, working capital lines of credit, trade finance, letters of credit, asset-based lending, asset-backed finance, project finance and equipment financing. The C&I loan portfolio also includes PPP loans. Additionally, the Company has a portfolio of broadly syndicated C&I loans, which represent revolving or term loan facilities that are marketed and sold primarily to institutional investors. This portfolio totaled $855.9 million and $939.4 million as of December 31, 2022 and 2021, respectively. The majority of the C&I loans had variable interest rates as of both December 31, 2022, and 2021.

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The C&I portfolio is well-diversified by industry. The Company monitors concentrations within the C&I loan portfolio by industry and customer exposure, and has exposure limits by industry and loan product. The following charts illustrate the industry mix within the Company’s C&I loan portfolio as of December 31, 2022, and 2021:

(1) Includes loans held-for-sale.

(2) Revised segmentation to conform with the current presentation.

Commercial — Commercial Real Estate Loans. Total CRE loans totaled $19.07 billion as of December 31, 2022, which grew by $2.89 billion or 18% from $16.18 billion as of December 31, 2021, and accounted for 39% of total loans held-for-investment as of both dates. The total CRE portfolio consists of CRE, multifamily residential, and construction and land loans, and affordable housing lending. Year-over-year growth in 2022 was primarily driven by multifamily and industrial CRE loans.

The Company’s total CRE loan portfolio is diversified by property type with an average CRE loan size of $2.8 million and $2.5 million as of December 31, 2022 and 2021, respectively. The following table summarizes the Company’s total CRE loans by property type as of December 31, 2022 and 2021:

(1)Included in CRE loans, which are a subset of Total CRE loans.

(2)In the fourth quarter of 2022, the Company updated its presentation in the table to include a healthcare property type. The prior-period was revised to conform with the current presentation.

The weighted-average loan-to-value (“LTV”) ratio of the total CRE loan portfolio was 51% as of both December 31, 2022 and 2021. All our CRE loan property types had a low weighted-average LTV ratio. Approximately 90% and 89% of total CRE loans had an LTV ratio of 65% or lower as of December 31, 2022 and 2021, respectively. The consistency of the Company’s low LTV underwriting standards has historically resulted in lower credit losses for CRE and multifamily residential loans.

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The following tables provide a summary of the Company’s CRE, multifamily residential, and construction and land loans by geography as of December 31, 2022 and 2021. The distribution of the total CRE loan portfolio reflects the Company’s geographical footprint, which is primarily concentrated in California:

Because 71% and 75% of total CRE loans were concentrated in California as of December 31, 2022 and 2021, 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. For additional information related to the higher degree of risk from a downturn in the California real estate markets, 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 $13.86 billion as of December 31, 2022, compared with $12.16 billion as of December 31, 2021, and accounted for 29% of total loans held-for-investment as of both dates. Interest rates on CRE loans may be fixed, variable or hybrid. As of December 31, 2022, 65% of our CRE portfolio was variable rate, of which 47% had customer-level interest rate derivative contracts in place. These are hedging contracts offered by the Company to help our customers manage their interest rate risk while the Bank’s own exposure remained variable rate. In comparison, as of December 31, 2021, 75% of our CRE portfolio was variable rate, of which 52% had customer-level interest rate derivative contracts in place. 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, 2022 and 2021. The remainder were non-owner-occupied properties, where 50% or more of the debt service for the loan is typically provided by rental income from an unaffiliated third party.

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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 $4.57 billion as of December 31, 2022, compared with $3.68 billion as of December 31, 2021, and accounted for 9% of total loans held-for-investment as of both dates. The Company offers a variety of first lien mortgages, including fixed- and variable-rate loans, as well as hybrid loans with interest rates that adjust annually after an initial fixed rate period of three to ten years. As of December 31, 2022, 57% of our multifamily residential portfolio was variable rate, of which 34% had customer-level interest rate derivative contracts in place. These are hedging contracts offered by the Company to help our customers manage their interest rate risk while the Bank’s own exposure remained variable rate. In comparison, as of December 31, 2021, 66% of our multifamily residential portfolio was variable rate, of which 39% had customer-level interest rate derivative contracts in place.

Commercial — Construction and Land Loans. Construction and land loans provide financing for a portfolio of projects diversified by real estate property type. Construction and land loans totaled $638.4 million as of December 31, 2022, compared with $346.5 million as of December 31, 2021, and accounted for 1% of total loans held-for-investment as of both dates. Construction loan exposure was made up of $536.8 million in loans outstanding, plus $611.4 million in unfunded commitments, as of December 31, 2022, compared with $297.9 million in loans outstanding, plus $361.2 million in unfunded commitments as of December 31, 2021. Land loans totaled $101.7 million as of December 31, 2022, compared with $48.6 million as of December 31, 2021.

Consumer

The following tables summarize the Company’s single-family residential and HELOC loan portfolios by geography as of December 31, 2022 and 2021:

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Consumer — Single-Family Residential Loans. Single-family residential loans totaled $11.22 billion or 23% of total loans held-for-investment as of December 31, 2022, compared with $9.09 billion or 22% of total loans held-for-investment as of December 31, 2021. Year-over-year, single-family residential loans increased $2.13 billion or 23%, primarily driven by growth in mortgages on residential properties in California and New York. The Company was in a first lien position for all of its single-family residential loans as of both December 31, 2022 and 2021. Many of these loans are reduced documentation loans, for which a substantial down payment is required, resulting in a low LTV ratio at origination, typically 65% or less. The weighted-average LTV ratio was 53% and 52% as of December 31, 2022 and 2021, respectively. 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 annually, after an initial fixed rate period.

Consumer — Home Equity Lines of Credit. Total HELOC commitments were $3.38 billion as of December 31, 2022, which grew by $883.8 million or 35% from $2.49 billion as of December 31, 2021. Unfunded HELOC commitments are unconditionally cancellable. HELOCs outstanding totaled $2.12 billion as of December 31, 2022, compared with $2.14 billion as of December 31, 2021, and accounted for 5% of total loans held-for-investment as of both dates. Year-over-year, HELOCs outstanding decreased $22.2 million, or 1%. The Company was in a first lien position for 83% and 87% of total outstanding HELOCs as of December 31, 2022 and 2021, 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 65% or less. The weighted-average LTV ratio was 49% on HELOC commitments as of both December 31, 2022 and 2021. 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, 2022 and 2021.

All originated commercial and consumer loans are subject to the Company’s conservative 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.

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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, 2022:

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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 regulatory, economic and political uncertainties. As such, the Company’s international operation risk exposure is largely concentrated in China and Hong Kong. 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 following table presents the major financial assets held in the Company’s overseas offices as of December 31, 2022 and 2021:

(1)Comprised of U.S. Treasury securities and foreign government bonds as of both December 31, 2022 and 2021.

(2)Primarily comprised of C&I loans as of both December 31, 2022 and 2021.

(3)Comprised of foreign government bonds as of both December 31, 2022 and 2021.

The following table presents the total revenue generated by the Company’s overseas offices in 2022, 2021 and 2020:

Capital

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

On March 3, 2020, the Company’s Board of Directors authorized the repurchase of $500.0 million of the Company’s common stock. During the second quarter of 2022, the Company repurchased $100.0 million of common stock or 1,385,517 shares, at an average price of $72.17 per share. The Company did not repurchase any shares during 2021. The total remaining available capital authorized for repurchase as of December 31, 2022 was $254.0 million.

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The Company’s stockholders’ equity was $5.98 billion as of December 31, 2022, an increase of $147.4 million or 3% from $5.84 billion as of December 31, 2021. The increase in the Company’s stockholders’ equity was primarily due to 2022 net income of $1.13 billion, partially offset by a negative change in AOCI of $675.2 million, cash dividends declared of $229.2 million, and common stock repurchases of $100.0 million. The negative change in AOCI was primarily due to increased unrealized losses in AFS debt securities. For other factors that contributed to the changes in stockholders’ equity, refer to Item 8. Financial Statements — Consolidated Statement of Changes in Stockholders’ Equity in this Form 10-K.

Book value was $42.46 per common share as of December 31, 2022, an increase of 3% from $41.13 per common share as of December 31, 2021, primarily due to the factors described above. Tangible equity per common share was $39.10 as of December 31, 2022, compared with $37.79 as of December 31, 2021. 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 paid a cash dividend of $1.60 per common share in 2022, compared with $1.32 per common share in 2021, an increase of 21%. In January 2023, the Company’s Board of Directors declared a first quarter 2023 cash dividend of $0.48 per common share, which represents a 20% increase or eight cents per common share, from the previous quarterly cash dividend of $0.40 per common share. The dividend was paid on February 21, 2023, to stockholders of record as of February 6, 2023.

Deposits and Other Sources of Funding

Deposits are the Company’s primary source of funding, the cost of which has a significant impact on the Company’s net interest income and net interest margin. Additional funding may be provided by short- and long-term borrowings, and long-term debt. See Item 7. MD&A — Risk Management — Liquidity Risk Management — Liquidity in this Form 10-K for a discussion of the Company’s liquidity management. The following table summarizes the Company’s sources of funds as of December 31, 2022 and 2021: