East West Bancorp, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; comparable periods are primarily 2015 and 2014. East West Bancorp is a bank holding company whose principal subsidiary, East West Bank, provides retail, commercial, real estate, trade finance and cross-border banking services in the United States and Greater China. The Company operated more than 130 locations and had 2,873 employees at year-end.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total assets | $34.79 billion | $32.35 billion | +8% |
| Net loans held-for-investment | $25.24 billion | $23.38 billion | +8% |
| Total deposits | $29.89 billion | $27.48 billion | +9% |
| Stockholders’ equity | $3.43 billion | $3.12 billion | +10% |
| Revenue before provision for credit losses | $1.22 billion | Approximately $1.13 billion | +$81.7 million, +7% |
| Net interest income | $1.03 billion | $950.4 million | +$82.2 million, +9% |
| Provision for credit losses | $27.5 million | $14.2 million | +$13.3 million |
| Net income | $431.7 million | $384.7 million | +$47.0 million, +12% |
| Diluted EPS | $2.97 | $2.66 | +12% |
| Net interest margin | 3.30% | 3.35% | -5 basis points |
| Return on average assets | 1.30% | 1.27% | +3 basis points |
| Return on average equity | 13.06% | 12.74% | +32 basis points |
Cash Flow, Liquidity and Capital
- Net cash provided by operating activities was $641.9 million, compared with $469.6 million in 2015.
- Net cash used in investing activities was $1.79 billion, primarily reflecting loan growth and investment activity.
- Net cash provided by financing activities was $1.68 billion, principally from a $2.45 billion increase in deposits, partly offset by repayment of $700.0 million of FHLB advances and $115.8 million of common dividends.
- Cash and cash equivalents increased to $1.88 billion from $1.36 billion.
- Liquid assets, consisting of cash and cash equivalents, interest-bearing bank deposits and available-for-sale securities, totaled approximately $5.54 billion, or 16% of assets.
- Available borrowing capacity was $5.58 billion from the FHLB, $3.25 billion from the Federal Reserve and $729.0 million through unsecured federal funds lines.
- Year-end debt included $321.6 million of FHLB advances, $350.0 million of net repurchase agreements, $60.1 million of short-term borrowings and $186.3 million of long-term debt.
- The Company and Bank remained well capitalized. Company ratios were 10.9% CET1, 12.4% total risk-based capital and 8.7% Tier I leverage, compared with fully phased-in minimum ratios of 7.0%, 10.5% and 4.0%, respectively.
Material Changes Versus the Prior Comparable Period
- Loan growth was broad-based: C&I loans increased $649.0 million, CRE loans $590.8 million, residential loans $501.4 million and consumer loans $118.2 million.
- Core deposits increased 16% to $24.28 billion and represented 81% of total deposits, compared with 76% in 2015. Time deposits declined 15% to $5.62 billion.
- Net interest income increased because of higher average loan balances, but the net interest margin declined because of lower loan yields and lower accretion income from acquired credit-impaired loans. Accretion income declined to $45.4 million from $61.3 million.
- Noninterest expense increased 14% to $615.9 million. Compensation and employee benefits increased 14% to $300.1 million, while amortization of tax credit and other investments increased 131% to $83.4 million.
- The effective tax rate declined to 24.6% from 33.5%, mainly because of additional tax credits from affordable housing, historic rehabilitation and renewable energy investments.
- Credit metrics were mixed. Non-PCI nonperforming assets remained low at $129.6 million, or 0.37% of assets, while net charge-offs increased to $36.2 million from $3.3 million, primarily due to four larger C&I loans. The allowance for loan losses declined to 1.02% of loans from 1.12%.
- Available-for-sale securities declined 12% to $3.34 billion, and net unrealized losses increased to $49.6 million from $10.6 million, primarily due to higher interest rates. No other-than-temporary impairment was recorded.
- Retail Banking pretax income declined to $170.1 million from $212.0 million, while Commercial Banking pretax income declined slightly to $377.9 million from $382.2 million. The Other segment improved to $24.1 million of pretax income from a $15.5 million pretax loss.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative earnings or revenue guidance. Management emphasized continued loan and deposit growth, the Company’s cross-border banking strategy between the United States and Greater China, and increased investment in risk management, compliance and BSA/AML infrastructure.
- The Bank remained subject to a November 2015 Federal Reserve Written Agreement and related California Department of Business Oversight memorandum concerning deficiencies in BSA/AML programs. Management reported progress but stated that regulatory satisfaction is not assured. Additional findings or enforcement actions could increase costs, restrict operations or materially affect results.
- The Company’s principal market risks include interest-rate changes, deposit repricing and migration, credit losses, California commercial and residential real estate exposure, and economic conditions in the United States and China.
- The Company is asset sensitive: modeled 12-month net interest income increased 12.0% under an instantaneous 100-basis-point rate increase and declined 6.8% under a 100-basis-point decrease as of December 31, 2016. Results depend materially on deposit beta, deposit migration and prepayment assumptions.
- Unfunded loan commitments totaled $5.08 billion, and commercial letters of credit and standby letters of credit totaled $1.53 billion. The related allowance for unfunded credit exposures was approximately $15.7 million.
- The Company agreed to pay $25.0 million in January 2017 to settle the F&F, LLC and 618 Investment, Inc. litigation. Management stated that pending legal matters are not expected to have a material aggregate effect, although litigation outcomes remain uncertain.
- Future adoption of the expected-credit-loss standard, ASU 2016-13, may increase the allowance for credit losses and could reduce earnings and regulatory capital. Other pending accounting standards, including lease accounting, were not expected to have a material income statement impact based on the filing’s preliminary assessment.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2016.
Most Important Facts for Investors to Verify
- Progress, remaining requirements and potential consequences under the Federal Reserve Written Agreement and DBO memorandum relating to BSA/AML compliance.
- Sustainability of loan and core-deposit growth, particularly within C&I and California CRE portfolios.
- Whether net interest margin stabilizes as interest rates rise and deposit balances reprice or migrate into higher-cost products.
- Trends in C&I charge-offs, nonaccrual loans, troubled debt restructurings and allowance coverage.
- Future effects of expected-credit-loss accounting on reserves, retained earnings and regulatory capital.
- Exposure to unrealized losses in the investment securities portfolio and the effect of further rate increases on accumulated other comprehensive loss.
- Capacity to fund growth while maintaining well-capitalized ratios, liquidity buffers and shareholder dividends.
- Outstanding legal, tax-credit investment, lease, recourse and off-balance-sheet commitments, including the $25.0 million litigation settlement.