East West Bancorp, Inc. 2021 Q3 Form 10-Q Summary
Business context and reporting period
East West Bancorp, Inc. is a bank holding company operating through East West Bank, serving consumer, business, and commercial customers through more than 120 locations in the United States and China. The company focuses on the financial needs of the Asian-American community and reports Consumer and Business Banking, Commercial Banking, and Other segments.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons primarily to the corresponding 2020 periods and December 31, 2020 balance-sheet data.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $468.8 million | $378.6 million | $1.340 billion | $1.196 billion |
| Net interest income before credit-loss provision | $395.7 million | $324.1 million | $1.126 billion | $1.031 billion |
| Noninterest income | $73.1 million | $54.5 million | $214.4 million | $165.7 million |
| Net income | $225.4 million | $159.5 million | $655.2 million | $403.7 million |
| Diluted EPS | $1.57 | $1.12 | $4.58 | $2.82 |
| Net interest margin | 2.70% | 2.72% | 2.72% | 3.05% |
| Efficiency ratio | 43.81% | 45.58% | 43.72% | 44.94% |
| ROA | 1.46% | 1.26% | 1.50% | 1.13% |
| ROE | 15.75% | 12.50% | 15.98% | 10.73% |
Provision for credit losses was reversed by $10.0 million in the third quarter and $25.0 million for the first nine months, compared with provisions of $10.0 million and $186.3 million, respectively, in the prior-year periods. Noninterest expense was $205.4 million in the third quarter and $586.0 million for the first nine months.
At September 30, 2021, total assets were $60.96 billion, loans held-for-investment were $40.48 billion, net loans were $39.92 billion, and deposits were $53.36 billion. Stockholders’ equity was $5.69 billion, or $40.10 per common share of book value. Cash and cash equivalents were $4.85 billion.
Liquidity remained strong, with $16.52 billion of unencumbered liquid assets and reported available borrowing capacity of $22.40 billion. The loan-to-deposit ratio was 76%. Other funding included $248.9 million of FHLB advances, $300.0 million of repurchase agreements, and $147.6 million of long-term debt. The company reported September 30 capital ratios of 12.8% CET1, 12.8% Tier 1, 14.2% total capital, and 8.8% Tier 1 leverage.
For the first nine months, operating activities provided $745.8 million of cash, investing activities used $7.82 billion, and financing activities provided $7.90 billion. The resulting increase in cash and cash equivalents was $834.9 million.
Material changes versus comparable periods
- Third-quarter net income increased 41% year over year; nine-month net income increased 62%. Growth reflected higher net interest income and noninterest income, lower credit-loss expense, and improved operating leverage.
- Net interest income increased 22% in the third quarter and 9% for the first nine months. However, the nine-month net interest margin declined 33 basis points to 2.72%, primarily from loan-yield compression and growth in lower-yielding cash and securities.
- Noninterest income increased 34% in the third quarter and 29% for the first nine months. Foreign exchange income, deposit account fees, wealth-management fees, other investment income, and loan-sale gains were key contributors.
- Noninterest expense increased 19% in the third quarter and 9% for the first nine months, driven primarily by compensation and higher amortization of tax-credit and other investments. The 2020 repurchase-agreement extinguishment cost of $8.7 million did not recur.
- Deposits grew $8.49 billion, or 19%, from year-end 2020, led by a $6.88 billion increase in noninterest-bearing demand deposits. Time deposits declined $761.7 million.
- Net loans grew $2.15 billion, or 6%, from year-end 2020. Growth was led by residential mortgage, CRE, and C&I loans. PPP loans declined to $807.3 million from $1.57 billion.
- Asset quality improved: criticized loans declined 17% to $1.01 billion, nonaccrual loans declined 38% to $133.2 million, and nonperforming assets declined 26% to $172.6 million. OREO increased 82% to $28.8 million, primarily from a CRE office property acquired during the third quarter.
- The allowance for credit losses declined to $588.4 million from $653.6 million at year-end 2020. Net charge-offs for the first nine months were $40.2 million, or 0.14% annualized of average loans.
- Accumulated other comprehensive income shifted to a $57.6 million loss from $44.3 million of income at year-end 2020, primarily because of unrealized losses on AFS debt securities as interest rates and liquidity spreads changed.
Outlook, management commentary, risks, and unusual items
Management described the business as benefiting from economic recovery, strong deposit growth, loan growth, and improved credit trends. The filing does not provide formal earnings, revenue, or margin guidance. Management expected the Federal Reserve’s first rate increase to occur in 2022 and reported that the company is asset sensitive; modeled twelve-month net interest income increased 7.8% under an instantaneous 100-basis-point rise and 16.3% under a 200-basis-point rise.
COVID-19 remained a material uncertainty. Loans under COVID-related payment deferral or forbearance programs declined to $747.0 million from $983.2 million at year-end 2020, but management noted that relief programs could delay recognition of delinquencies, nonaccrual loans, and charge-offs. Future allowance levels may change with economic conditions, portfolio performance, loan growth, and regulatory or accounting developments.
LIBOR transition is a significant operational, legal, compliance, and financial risk because a majority of the company’s LIBOR-based products mature after relevant cessation dates. Beginning in the fourth quarter of 2021, the company planned to stop offering new LIBOR-based loans as a primary product and use alternative reference rates.
Additional risks include interest-rate and deposit-behavior sensitivity, California real-estate concentration, commercial credit performance, China and Hong Kong operations, foreign-exchange exposure, cybersecurity and technology disruptions, regulatory changes, litigation, capital-market volatility, climate and natural-disaster exposure, and potential deterioration related to COVID-19 variants. The company stated that there had been no material change to the risk factors disclosed in its 2020 Form 10-K.
The board declared a fourth-quarter 2021 cash dividend of $0.33 per share, payable November 15, 2021. No common-stock repurchases occurred during the first nine months of 2021, although $354.0 million remained available under the repurchase authorization.
Facts investors should verify
- Whether deposit growth, especially noninterest-bearing deposits, remains durable as interest rates and liquidity conditions change.
- Whether the lower credit-loss provision and improved asset-quality metrics persist after pandemic-related deferrals and other relief measures expire.
- The sensitivity of net interest income and AOCI to rising rates, deposit repricing, loan prepayments, securities duration, and spread widening.
- Exposure to California CRE, hospitality, office, C&I, and energy-related borrowers, including collateral values and criticized-loan migration.
- Progress and contractual outcomes of the LIBOR-to-alternative-rate transition across loans, derivatives, debt, and funding agreements.
- The sustainability of noninterest-income growth, particularly foreign exchange, derivative, loan-sale, and investment-related income.
- The effect of higher tax-credit investment amortization, compensation costs, and other operating expenses on future efficiency ratios.
- Whether liquidity sources, borrowing capacity, regulatory capital, and parent-company cash remain sufficient under stressed funding and market conditions.
- The ultimate exposure from $8.70 billion of loan commitments and letters of credit, recourse guarantees, affordable-housing and tax-credit commitments, and unresolved litigation.