East West Bancorp, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
East West Bancorp, Inc. is a Delaware bank holding company whose principal subsidiary, East West Bank, provides consumer, business, commercial and cross-border banking services through more than 120 locations in the United States and Greater China. The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. Operations are reported through Consumer and Business Banking, Commercial Banking and Other segments. The company had approximately 3,200 full-time equivalent employees and $52.16 billion of assets at year-end.
Financial performance and condition
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1.613 billion | $1.690 billion | Down 5% |
| Net interest income before provision | $1.377 billion | $1.468 billion | Down 6% |
| Noninterest income | $235.5 million | $222.2 million | Up 6% |
| Provision for credit losses | $210.7 million | $98.7 million | Up 113% |
| Net income | $567.8 million | $674.0 million | Down 16% |
| Diluted EPS | $3.97 | $4.61 | Down 14% |
| Net interest margin | 2.98% | 3.64% | Down 66 bps |
| ROA / ROE | 1.16% / 11.17% | 1.59% / 14.16% | Both decreased |
| Operating cash flow | $693.3 million | $735.8 million | Down 6% |
At December 31, 2020, total assets were $52.16 billion, total loans were $38.39 billion, deposits were $44.86 billion and stockholders’ equity was $5.27 billion. Loans increased 10%, primarily from commercial and industrial lending, PPP loans, single-family residential loans and commercial real estate. Deposits increased 20%, led by a 47% increase in noninterest-bearing demand deposits to $16.30 billion. The loan-to-deposit ratio declined to 86% from 93%.
Liquidity remained strong. Unencumbered liquid assets were $10.68 billion, available borrowing capacity was $17.04 billion, and cash and cash equivalents were $4.02 billion. The company repaid its $1.44 billion Paycheck Protection Program Liquidity Facility borrowing in October 2020. Long-term debt was $151.7 million, FHLB advances were $652.6 million and repurchase agreements were $300.0 million.
Credit performance weakened. The allowance for loan losses rose to $620.0 million, or 1.61% of loans held-for-investment, from $358.3 million, or 1.03%, in 2019. Nonperforming assets increased 93% to $234.9 million, or 0.45% of total assets, while net charge-offs increased to $63.2 million, or 0.17% of average loans. The company remained well capitalized with a 12.7% CET1 ratio, 14.3% total capital ratio and 9.4% Tier 1 leverage ratio.
Cash flow from operations was $693.3 million. Investing activities used $6.85 billion, principally for loan growth and purchases of available-for-sale securities, while financing activities provided $6.91 billion, primarily from deposit growth. Cash and cash equivalents increased by $756.8 million.
Material changes versus the prior comparable period
- Net income declined $106.2 million, reflecting higher credit-loss provisions and lower net interest income.
- Net interest margin compressed because of the near-zero interest-rate environment and the Federal Reserve’s 150-basis-point rate reduction in March 2020.
- Noninterest income increased due mainly to higher lending fees, deposit account fees and gains on AFS securities sales.
- Noninterest expense decreased 4% to $716.3 million, although the company incurred an $8.7 million repurchase-agreement extinguishment cost.
- Commercial Banking provision expense increased substantially and represented nearly all of the company’s provision for credit losses, reflecting COVID-19-related economic deterioration and sensitivity in C&I and CRE portfolios.
- Available-for-sale debt securities increased 67% to $5.54 billion; the portfolio had a $74.1 million pretax net unrealized gain at year-end.
- The company repurchased 4.47 million shares for $146.0 million in the first quarter. The remaining authorization was $354.0 million at year-end.
- Annual dividends increased to $1.10 per share from $1.055. In January 2021, the board declared a first-quarter dividend of $0.33 per share.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management described the company as well positioned in capital and liquidity but emphasized that the COVID-19 pandemic, economic recovery and borrower performance remained uncertain. The company’s CECL allowance incorporated multiple macroeconomic scenarios, including downside assumptions, and management indicated that future allowance levels could change materially as conditions evolve.
As of December 31, 2020, $1.57 billion of PPP loans were outstanding, covering approximately 6,200 loans. PPP loans carry a 1% rate and are 100% guaranteed by the SBA. Through February 25, 2021, the SBA had approved forgiveness for approximately 2,700 loans totaling $341.9 million. The company had also funded more than 4,300 additional PPP loans totaling $700.3 million in the new 2021 round.
COVID-19 loan payment deferrals and forbearance outstanding at year-end totaled $965.8 million, down from $2.82 billion at June 30, 2020. Regulatory relief allowed certain COVID-19 modifications to avoid TDR classification and froze delinquency aging, which could delay recognition of future delinquencies, nonaccrual loans and charge-offs.
Other significant matters include the January 1, 2020 adoption of CECL, which increased the allowance for loan losses by $125.2 million and reduced opening retained earnings by $98.0 million after tax. Regulatory capital relief delays the effect of CECL on capital through 2021, followed by a three-year phase-in. The company also recorded $5.1 million of income-tax expense related to an uncertain tax position involving DC Solar and received $10.7 million of DC Solar-related recoveries. The company’s investigation of the failed DC Solar tax-credit investments remains ongoing.
Key risks include deterioration in California commercial real estate and other collateral values, concentration in California and Greater China, interest-rate and margin pressure, LIBOR transition, credit losses, liquidity and funding conditions, cyber and operational risks, regulatory and AML/OFAC compliance, litigation, tax-credit investment performance and potential changes in banking regulation. The company had $7.93 billion of loan commitments and letters of credit outstanding at year-end.
Most important facts for an investor to verify
- Whether COVID-19-related deferrals and other accommodations convert into higher nonaccrual loans, TDRs, charge-offs or additional CECL provisions.
- The credit performance of the C&I, oil and gas, hospitality, retail and California CRE portfolios.
- The sustainability of the 2.98% net interest margin in a prolonged low-rate environment.
- The timing and financial impact of PPP loan forgiveness, fee recognition and any additional 2021 PPP activity.
- Whether capital ratios remain comfortably above well-capitalized requirements as CECL effects phase in after 2021 and as distributions or repurchases continue.
- The company’s progress and contractual exposure in transitioning loans, derivatives and debt from LIBOR to alternative reference rates.
- The ultimate tax, legal and regulatory consequences of the DC Solar investment and related uncertain tax position.
- Changes in liquidity, deposit composition, borrowing capacity and uninsured or large time deposits under stressed market conditions.