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, with more than 120 locations in the United States and China. Its principal activities are commercial and consumer lending, deposit-taking, treasury management, foreign exchange, wealth management, and related risk-management services. The filing covers the unaudited quarter ended March 31, 2021, compared primarily with the quarter ended March 31, 2020 and December 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Comparable period |
|---|---|---|
| Total revenue | $426.6 million | $418.2 million in Q1 2020 |
| Net interest income before provision | $353.7 million | $362.7 million in Q1 2020 |
| Noninterest income | $72.9 million | $55.5 million in Q1 2020 |
| Net income | $205.0 million | $144.8 million in Q1 2020 |
| Diluted EPS | $1.44 | $1.00 in Q1 2020 |
| Net interest margin | 2.71% | 3.44% in Q1 2020 |
| ROA / ROE | 1.50% / 15.57% | 1.30% / 11.60% in Q1 2020 |
| Noninterest expense | $191.1 million | $180.3 million in Q1 2020 |
| Efficiency ratio | 44.79% | 43.12% in Q1 2020 |
| Cash flow from operating activities | $371.5 million | $91.7 million in Q1 2020 |
As of March 31, 2021, total assets were $56.87 billion, loans held-for-investment were $39.59 billion, deposits were $49.55 billion, and stockholders’ equity was $5.29 billion. Cash and cash equivalents were $4.62 billion. Unencumbered liquid assets totaled $14.11 billion, and available borrowing capacity was approximately $20.78 billion.
Long-term debt was $147.4 million, FHLB advances were $653.0 million, and repurchase agreements were $300.0 million. There were no short-term borrowings at quarter-end. The loan-to-deposit ratio was 80%.
Regulatory capital remained strong: company CET1, Tier 1, total capital, and Tier 1 leverage ratios were 12.7%, 12.7%, 14.3%, and 9.1%, respectively. The Company and Bank exceeded applicable well-capitalized requirements.
Material changes versus prior comparable periods
- Net income increased 42% year over year, primarily because the Company recorded no provision for credit losses in Q1 2021 versus $73.9 million in Q1 2020, together with higher noninterest income.
- Net interest income declined 2% year over year and net interest margin fell 73 basis points, reflecting the low-rate environment and lower asset yields. The average yield on interest-earning assets decreased to 2.93% from 4.26%.
- Noninterest income increased 31% to $72.9 million, led by higher derivative income, deposit account fees, lending fees, foreign exchange income, and wealth management fees.
- Noninterest expense increased 6% to $191.1 million, primarily due to higher compensation and employee benefits and increased amortization of tax credit investments.
- Total assets increased 9% from December 31, 2020, driven by purchases of available-for-sale securities, loan growth, and increased resale agreements.
- Total loans increased 3% from year-end 2020. Commercial and industrial loans rose to $14.08 billion, including $2.07 billion of PPP loans; CRE loans increased to $15.09 billion; and residential mortgage loans increased to $10.27 billion.
- Total deposits increased 10% to $49.55 billion, with noninterest-bearing demand deposits rising 16% to $18.92 billion.
- The allowance for loan losses decreased to $607.5 million, or 1.53% of loans, from $620.0 million, or 1.61%, at year-end. Total allowance for credit losses, including unfunded commitments, was $640.0 million.
- Net charge-offs increased to $13.4 million, or an annualized 0.14% of average loans, from $0.9 million, or 0.01%, in Q1 2020.
- Nonperforming assets increased 10% from year-end to $258.1 million, while nonaccrual loans increased to $232.0 million. Criticized loans were essentially unchanged at $1.22 billion, or 3.07% of loans.
- Available-for-sale debt securities increased 40% from year-end to $7.79 billion. Rising rates and wider spreads produced a $134.4 million net-of-tax decline in other comprehensive income and reduced AOCI to a $90.0 million loss.
- The Company did not repurchase shares during the quarter. It paid $48.2 million in dividends and declared a second-quarter dividend of $0.33 per share.
Cash flow, outlook, commentary, and risks
Cash and cash equivalents increased $601.2 million during the quarter. Operating activities provided $371.5 million, investing activities used $4.38 billion, primarily for securities purchases, loan growth, and resale agreements, and financing activities provided $4.48 billion, primarily from deposit growth.
Management stated that the Company remained profitable and well positioned from a capital and liquidity perspective despite the COVID-19 pandemic. Management expects liquidity sources to be sufficient for reasonably foreseeable needs over the next 12 months. The filing does not provide formal earnings or revenue guidance.
COVID-19 remains a significant uncertainty. As of March 31, 2021, $1.14 billion of loans remained under pandemic-related payment deferral or forbearance programs, including $836.4 million of CRE loans. Management noted that such programs may delay recognition of delinquencies, nonaccrual loans, and charge-offs. New variants, economic weakness, real estate declines, and changes in government relief programs could adversely affect credit quality, liquidity, capital, and results.
Other important exposures include the concentration of 77% of CRE loans in California, commercial real estate sectors such as hospitality and retail, the low-rate environment’s pressure on net interest margin, and the transition away from LIBOR. The Company stated that a significant volume of LIBOR-based products extends beyond applicable cessation dates and could create financial, operational, legal, compliance, and reputational risks.
The Company adopted reference-rate reform guidance and income-tax simplification guidance in January 2021; neither adoption had a material effect on the financial statements. Goodwill was not impaired as of March 31, 2021. The Company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the absence of a credit-loss provision remains sustainable as pandemic relief expires and loan deferrals unwind.
- The performance and risk migration of CRE, hospitality, retail, oil and gas, and other criticized or classified loans.
- The level and duration of net interest margin pressure in a near-zero-rate environment.
- The effect of rising rates and spread movements on the $7.79 billion AFS securities portfolio and AOCI.
- Future trends in nonaccrual loans, nonperforming assets, net charge-offs, and allowance coverage.
- The resolution of $1.14 billion of COVID-19-related loan modifications and the associated delayed-credit-recognition risk.
- Progress in transitioning LIBOR-based contracts to alternative reference rates.
- The capacity and terms of available borrowing facilities, deposit stability, and continued liquidity coverage.
- Potential obligations from $8.19 billion of loan commitments and letters of credit, $334.7 million of tax-credit investment commitments, and loan-sale recourse arrangements.