EAST WEST BANCORP INC quarterly report, Q1 FY2020

East West Bancorp, Inc. 10-Q Summary

Business Context and Reporting Period

East West Bancorp, Inc. is a bank holding company operating through East West Bank, serving consumer, commercial and Chinese-American communities through more than 125 locations in the United States and Greater China. The filing covers the unaudited quarter ended March 31, 2020. Results were materially affected by the emerging COVID-19 pandemic, economic deterioration, oil-price declines and the January 1, 2020 adoption of the current expected credit loss model.

Financial Results and Key Metrics

Metric	Q1 2020	Comparable period
Net interest income before provision	$362.7 million	$362.5 million, Q1 2019
Provision for credit losses	$73.9 million	$22.6 million, Q1 2019
Noninterest income	$54.0 million	$42.1 million, Q1 2019
Noninterest expense	$178.9 million	$186.9 million, Q1 2019
Net income	$144.8 million	$164.0 million, Q1 2019
Diluted EPS	$1.00	$1.12, Q1 2019
Net interest margin	3.44%	3.79%, Q1 2019
Return on average assets	1.30%	1.63%, Q1 2019
Return on average equity	11.60%	14.66%, Q1 2019
Efficiency ratio	42.92%	46.20%, Q1 2019

Total revenue, defined as net interest income before provision plus noninterest income, increased 3% to $416.8 million.
Average loans increased 8% year over year to $35.15 billion, while average interest-earning assets increased 9% to $42.36 billion.
Lower interest rates reduced the average loan yield to 4.71% from 5.30% and reduced the average cost of funds to 0.90% from 1.15%.
Noninterest income increased 28%, led by higher derivative income, foreign exchange income, wealth management fees and other income.
Noninterest expense declined 4%, primarily because of lower tax-credit investment amortization and the absence of the prior-year DC Solar impairment.
Income tax expense was $19.2 million, producing an effective tax rate of 11.7%, compared with 15.9% in Q1 2019.

Balance Sheet, Credit, Debt and Liquidity

Total assets increased 4% from December 31, 2019 to $45.95 billion.
Total loans increased 3% to $35.89 billion, including growth in C&I, CRE and single-family residential loans. Commercial loans represented 75% of the portfolio and consumer loans 25%.
Total deposits increased 4% to $38.69 billion, driven primarily by noninterest-bearing demand deposits and money market accounts. The loan-to-deposit ratio was approximately 93%.
Cash and cash equivalents were $3.08 billion. Unencumbered liquid assets totaled $6.73 billion, and management reported total available borrowing capacity of approximately $13.0 billion.
Debt and other funding included $646.3 million of FHLB advances, $450.0 million of repurchase agreements, $66.9 million of short-term borrowings and $147.2 million of long-term debt.
Stockholders’ equity declined 2% to $4.90 billion, primarily due to share repurchases, the CECL opening-retained-earnings adjustment and dividends, partially offset by quarterly net income.
Regulatory capital remained strong: Company CET1 capital was 12.4%, total capital was 13.9% and Tier 1 leverage was 10.2%. The Company and Bank exceeded well-capitalized requirements. Regulatory capital ratios benefited from the permitted CECL phase-in.
The allowance for loan losses increased to $557.0 million, or 1.55% of loans held for investment, from $358.3 million, or 1.03%, at December 31, 2019. Net charge-offs were $0.9 million, or 0.01% annualized.
Nonperforming assets increased to $150.9 million, or 0.33% of assets, from $121.5 million, or 0.27%. Nonaccrual loans were $126.7 million, and foreclosed assets increased to $19.5 million.
Cash flow from operations was $91.7 million. Investing activities used $1.41 billion, primarily for loan growth and securities purchases, while financing activities provided $1.12 billion, primarily from deposit growth. Cash and cash equivalents declined by $181.1 million during the quarter.

Material Changes Versus Prior Comparable Period

Net income fell 12% and diluted EPS declined from $1.12 to $1.00, primarily because of the higher credit-loss provision.
The provision for credit losses increased to $73.9 million from $22.6 million, reflecting CECL adoption and deteriorating COVID-19-related economic forecasts.
Net interest income was essentially unchanged, but net interest margin declined 35 basis points because of lower market rates and loan repricing.
Noninterest income increased $11.9 million, or 28%, while noninterest expense declined $8.0 million, or 4%.
Q1 2020 did not include a nonrecurring impairment charge. Q1 2019 included a $7.0 million pre-tax DC Solar impairment, resulting in Q1 2019 non-GAAP net income of $168.9 million versus $144.8 million in Q1 2020.
On January 1, 2020, CECL adoption increased the loan-loss allowance by $125.2 million and the unfunded-commitment allowance by $10.5 million, reducing opening retained earnings by $98.0 million after tax.
The Company repurchased 4.47 million shares for $146.0 million during the quarter under a new $500.0 million authorization; $354.0 million remained available at March 31, 2020.

Guidance, Outlook, Commentary and Risks

The filing provides no formal earnings or financial guidance. Management stated that COVID-19 could cause material declines in revenue, profitability and cash flow during 2020, but the magnitude and duration remained uncertain.
The Company participated in the SBA Paycheck Protection Program and reported funding more than $1.84 billion of PPP loans to over 6,700 customers through May 6, 2020, a subsequent-period update.
Management implemented payment accommodations, paused certain collection and residential foreclosure activities, consolidated some branches and shifted many employees to remote or alternating work arrangements.
COVID-19, real estate-market deterioration, unemployment, lower interest rates, borrower defaults, liquidity-market disruption, cybersecurity threats and operational disruption were identified as key risks.
The oil and gas portfolio totaled approximately $1.37 billion, or 11% of C&I loans, with total exposure of $1.77 billion including unfunded commitments. Coverage increased to 8% from 5% because of oil-price volatility and sector risk.
Approximately 69% of loans were variable-rate or in an adjustable-rate period, making earnings sensitive to short-term interest rates. The Company reported an asset-sensitive interest-rate position.
The Company had significant exposure to LIBOR-indexed loans, derivatives, securities and funding instruments and continued transition planning toward alternative reference rates such as SOFR.
Off-balance-sheet exposures included $4.91 billion of loan commitments and $1.86 billion of commercial letters of credit and standby letters of credit. The allowance for unfunded credit commitments was $20.8 million.

Most Important Facts for Investors to Verify

Whether COVID-19-related payment deferrals, PPP lending and borrower accommodations lead to higher future delinquencies, nonaccrual loans, charge-offs and CECL provisions.
The adequacy of the $557.0 million loan-loss allowance under changing unemployment, real estate, oil-price and broader economic assumptions.
Credit performance and concentration risk in C&I, oil and gas, hospitality, retail CRE and California-related portfolios.
The sustainability of the 3.44% net interest margin amid near-zero short-term rates and repricing of variable-rate loans.
The effect of continued share repurchases and the $0.275 quarterly dividend on capital and liquidity during the pandemic.
Actual utilization and credit losses associated with loan commitments, standby letters of credit, recourse guarantees and derivative collateral requirements.
Progress and contractual effects of the LIBOR transition, including fallback language and potential legal, operational and valuation risks.
Subsequent-quarter developments after March 31, 2020, since management stated that the first-quarter balance sheet and asset-quality trends did not yet fully reflect the pandemic’s potential effects.