East West Bancorp, Inc. — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
East West Bancorp is a bank holding company operating primarily through East West Bank, serving individuals and businesses in the United States and Greater China through more than 130 locations. The filing covers the unaudited three months ended March 31, 2017, with comparisons to the three months ended March 31, 2016 and the December 31, 2016 balance sheet.
Key Financial Metrics
| Metric | Q1 2017 | Comparable / Prior Period |
|---|---|---|
| Net income | $169.7 million | $107.5 million in Q1 2016 |
| Diluted EPS | $1.16 | $0.74 in Q1 2016 |
| Revenue | $388.1 million | $292.7 million in Q1 2016 |
| Net interest income | $272.1 million | $252.2 million in Q1 2016 |
| Net interest margin | 3.33% | 3.32% in Q1 2016 |
| Provision for credit losses | $7.1 million | $1.4 million in Q1 2016 |
| Noninterest income | $116.0 million | $40.5 million in Q1 2016 |
| Noninterest expense | $153.1 million | $146.6 million in Q1 2016 |
| Effective tax rate | 25.6% | 25.7% in Q1 2016 |
| Return on average assets | 1.97% | 1.33% in Q1 2016 |
| Return on average equity | 19.71% | 13.59% in Q1 2016 |
| Cash and cash equivalents | $2.43 billion | $1.88 billion at December 31, 2016 |
| Total assets | $35.34 billion | $34.79 billion at December 31, 2016 |
| Loans held for investment | $26.46 billion | $25.50 billion at December 31, 2016 |
| Total deposits | $30.54 billion | $29.89 billion at December 31, 2016 |
| Stockholders’ equity | $3.57 billion | $3.43 billion at December 31, 2016 |
| Allowance for loan losses | $263.1 million, or 0.99% of loans | 1.02% at December 31, 2016 |
Material Changes Versus Prior Comparable Period
- Net income increased 58% year over year, primarily due to a $41.5 million after-tax gain from a San Francisco commercial property sale and higher net interest income.
- Diluted EPS increased 57%. Excluding the property gain, non-GAAP net income was $128.2 million and non-GAAP diluted EPS was $0.88, compared with $107.5 million and $0.74, respectively, in Q1 2016.
- Net interest income increased 8%, supported by 10% growth in average loans and higher yields on investment securities and interest-bearing cash. Net interest margin was broadly stable.
- Noninterest income increased 186%, largely because of the property transaction. Excluding that unusual item, fee and trading-related results showed more moderate growth.
- Noninterest expense increased 4%, primarily from higher compensation and employee benefits, including $4.0 million of severance expense and increased staffing for business growth and regulatory compliance. Consulting expense declined substantially as BSA/AML-related consulting costs fell.
- Loans held for investment grew 4% from year-end 2016, with increases across CRE, C&I, residential and consumer portfolios. Deposits grew 2%, while core deposits remained 81% of total deposits.
- Nonaccrual loans increased to $141.2 million from $122.8 million at year-end, primarily due to two unrelated, fully collateralized loans. Nonperforming assets increased to $144.8 million from $129.6 million.
- Net cash provided by operating activities was $185.3 million. Investing activities used $212.4 million, primarily reflecting loan growth, while financing activities provided $580.5 million, largely from deposit growth. Cash and cash equivalents increased $556.1 million.
Unusual Items, Outlook, Risks and Contingencies
- Commercial property sale: The Company sold and leased back a San Francisco commercial property for $120.6 million. The transaction generated an $85.4 million pretax profit, of which $71.7 million was recognized in Q1 2017 and $13.7 million was deferred over the lease term. The after-tax impact on diluted EPS was $0.28.
- Management outlook: Management characterized performance as strong and emphasized continued loan and deposit growth, asset sensitivity to interest rates, expense discipline, risk management, compliance and BSA/AML program improvements. The filing does not provide formal earnings or revenue guidance.
- Liquidity: Liquid assets, consisting of cash and cash equivalents, interest-bearing deposits and available-for-sale securities, totaled approximately $5.65 billion, or 16% of total assets. Available borrowing capacity with the FHLB and Federal Reserve Bank was $6.02 billion and $3.36 billion, respectively; unsecured federal funds lines totaled $741.0 million.
- Capital: The Company remained well capitalized. CET1, total risk-based capital and Tier 1 leverage ratios were 11.1%, 12.6% and 9.0%, respectively, at March 31, 2017.
- Regulatory matters: East West Bank remained 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.
- Credit and market risks: The loan portfolio is concentrated in commercial lending, with significant California CRE exposure. Interest-rate sensitivity, deposit repricing, commercial and consumer real estate conditions, credit quality, the U.S. and China economies, foreign exchange movements, cybersecurity, regulatory changes and litigation remain important risks.
- Off-balance-sheet exposure: Loan commitments were $5.01 billion and commercial letters of credit and standby letters of credit were $1.70 billion at March 31, 2017. The allowance for unfunded credit reserves was $15.2 million.
- Accounting developments: Adoption of ASU 2016-09 increased Q1 2017 basic and diluted EPS by approximately $0.03 per share through recognition of excess stock-compensation tax benefits in income tax expense. The Company was evaluating the future effects of revenue recognition, lease accounting and the expected credit loss standard.
- Dividend: The Board declared a $0.20 per-share second-quarter dividend payable May 15, 2017.
Investor Verification Checklist
- Reconcile GAAP earnings and EPS to the non-GAAP results excluding the $41.5 million after-tax property gain.
- Assess the sustainability of loan and deposit growth, including the 88% average loans-to-deposits ratio and the 71% commercial composition of the loan portfolio.
- Monitor nonaccrual loans, nonperforming assets, C&I and California CRE concentrations, charge-offs and allowance coverage.
- Review the effect of higher interest rates on deposit costs, net interest margin, demand-deposit migration and the Company’s asset-sensitive profile.
- Follow progress under the Federal Reserve Written Agreement and related BSA/AML remediation requirements, including incremental compliance costs and potential regulatory consequences.
- Evaluate liquidity availability, collateral requirements and reliance on core deposits, FHLB and Federal Reserve borrowing capacity.
- Consider the recurring earnings contribution of fee income after excluding the one-time property transaction.
- Review pending litigation, loan-sale recourse obligations, tax-credit investment commitments and other contingent liabilities.
- Confirm adoption impacts and implementation status for the expected credit loss, lease and revenue recognition standards.