East West Bancorp, Inc. — 2017 Q2 Form 10-Q Summary
Business context and reporting period
East West Bancorp is a bank holding company operating through East West Bank, serving individuals and businesses in the United States and Greater China through more than 130 locations. The filing covers the quarter and six months ended June 30, 2017. Financial statements are unaudited and presented under U.S. GAAP.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net income | $118.3 million | $103.3 million | $288.1 million | $210.8 million |
| Diluted EPS | $0.81 | $0.71 | $1.98 | $1.45 |
| Net interest income before provision | $290.1 million | $253.6 million | $562.2 million | $505.8 million |
| Provision for credit losses | $10.7 million | $6.1 million | $17.8 million | $7.5 million |
| Noninterest income | $47.4 million | $44.3 million | $163.4 million | $84.8 million |
| Noninterest expense | $169.1 million | $148.9 million | $322.2 million | $295.5 million |
| Effective tax rate | 25.0% | 27.7% | 25.3% | 26.7% |
| Net interest margin | 3.49% | 3.31% | 3.41% | 3.31% |
| Return on average assets | 1.36% | 1.27% | 1.66% | 1.30% |
| Return on average equity | 13.05% | 12.71% | 16.29% | 13.15% |
For the six months, reported net income included a $41.5 million after-tax gain from the sale and leaseback of a San Francisco commercial property. Excluding that gain, non-GAAP net income was $246.5 million and diluted EPS was $1.70, compared with $210.8 million and $1.45, respectively, in the prior-year period.
Balance sheet, liquidity, debt and capital
- Total assets increased 3% to $35.92 billion from December 31, 2016.
- Gross loans held for investment increased 7% to $27.21 billion. Net total loans, including loans held for sale, were $26.95 billion.
- Customer deposits increased 4% to $31.15 billion. Core deposits represented 81% of total deposits; noninterest-bearing demand deposits represented 34%.
- Cash and cash equivalents increased 47% to $2.75 billion. Cash, interest-bearing deposits and available-for-sale securities totaled approximately $5.87 billion, or 16% of total assets.
- Long-term debt declined 5% to $176.5 million. FHLB advances were $322.8 million, and net repurchase agreements were $50.0 million.
- Available borrowing capacity was $6.44 billion with the FHLB and $3.17 billion with the Federal Reserve Bank; unsecured federal funds lines totaled $721.0 million.
- Net cash provided by operating activities was $380.3 million for the six months. Investing activities used $643.7 million, primarily reflecting loan growth, while financing activities provided $1.13 billion, primarily from deposit growth.
- Stockholders’ equity increased 7% to $3.67 billion. Book value per common share increased to $25.40 from $23.78 at year-end 2016.
- At June 30, 2017, the Company reported CET1, total risk-based capital and Tier 1 leverage ratios of 11.3%, 12.8% and 9.3%, respectively, and was considered well-capitalized.
Material changes versus prior comparable periods
- Q2 net income increased 15%, while six-month net income increased 37%; six-month growth was materially affected by the commercial property gain.
- Revenue, defined by management as net interest income before provision plus noninterest income, increased 13% in Q2 and 23% for the six months.
- Net interest income increased 14% in Q2 and 11% for the six months, driven by loan growth and higher yields following short-term interest-rate increases. Deposit funding costs also increased.
- Loan growth was broad-based: residential loans increased 13%, C&I loans 6%, CRE loans 5% and consumer loans 2% from year-end 2016.
- Provision for credit losses increased substantially year over year, reflecting loan portfolio growth, although the allowance-to-loans ratio remained 1.02%.
- Noninterest expense increased 14% in Q2 and 9% for the six months, principally due to higher compensation, staffing for growth and compliance, and amortization of tax credit and other investments.
- Noninterest income growth for the six months was dominated by the $71.7 million pretax gain recognized on the property sale. Q2 noninterest income growth was driven mainly by derivative fees, ancillary loan fees and foreign exchange and trade-finance income.
- Nonaccrual loans increased 7% to $130.8 million, but nonaccrual loans remained 0.48% of loans held for investment. Nonperforming assets were $133.0 million, or 0.37% of total assets.
Guidance, outlook, management commentary, risks and unusual items
Management described Q2 performance as strong, citing consistent loan and deposit growth, favorable asset sensitivity and expense discipline. The Company expects to continue pursuing its cross-border U.S.–Greater China banking strategy while strengthening risk management, compliance and BSA/AML infrastructure.
- The Company is asset-sensitive: modeled net interest income volatility was positive 11.2% under a 100-basis-point rate increase and positive 20.1% under a 200-basis-point increase, but negative 9.5% and 11.7% under equivalent rate declines. Actual results may differ because of deposit migration, prepayments and other modeling assumptions.
- The Bank remains subject to a 2015 Federal Reserve Written Agreement and related California Department of Business Oversight memorandum concerning BSA/AML programs. Management reported progress, but warned that additional regulatory actions, costs, restrictions, fines or penalties could materially affect results.
- Commercial lending represented approximately 71% of the loan portfolio. CRE exposure was concentrated in California, which represented 75% of CRE loans; changes in California real estate values and economic conditions could affect credit losses.
- Outstanding off-balance-sheet commitments included $4.72 billion of loan commitments and $1.75 billion of commercial letters of credit and standby letters of credit. The allowance for unfunded credit exposures was $15.2 million.
- The investment portfolio had $41.4 million of gross unrealized losses at June 30, 2017. Management considered these losses temporary and recorded no OTTI credit losses.
- The Company adopted several accounting updates in 2017, including stock-compensation guidance that produced approximately $4.5 million of net excess tax benefits for the six months. The Company expected no material impact from the forthcoming revenue-recognition standard and was evaluating the effects of other pending standards, including expected credit losses and leases.
- The Board declared a quarterly dividend of $0.20 per common share payable August 15, 2017.
Most important facts for investors to verify
- Separate recurring operating performance from the $41.5 million after-tax commercial property gain included in six-month results.
- Assess whether loan growth, particularly in C&I and California CRE, is accompanied by sustained credit quality and adequate allowance coverage.
- Monitor the $130.8 million of nonaccrual loans, the increase in nonperforming TDRs, and future charge-offs and provisions.
- Evaluate the effect of rising deposit costs and potential migration from noninterest-bearing deposits on net interest margin.
- Track remediation of the BSA/AML Written Agreement and MOU, including compliance spending and any additional regulatory actions.
- Review liquidity capacity, pledged securities, off-balance-sheet commitments and reliance on subsidiary bank dividends.
- Reconcile reported GAAP results with non-GAAP measures and assess the impact of pending accounting standards, especially the expected credit-loss model.