East West Bancorp, Inc. — Form 10-Q Summary
Business Context and Reporting Period
East West Bancorp is a bank holding company whose principal subsidiary, East West Bank, provides commercial and retail banking services in the United States and Greater China, with a focus on cross-border financial services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; comparisons are primarily with September 30, 2016 or December 31, 2016.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income before provision | $303.2 million, up 19% | $865.4 million, up 14% |
| Provision for credit losses | $13.0 million, up 36% | $30.7 million, up 81% |
| Noninterest income | $49.6 million, up 1% | $213.0 million, up 59% |
| Noninterest expense | $164.5 million, down 4% | $486.7 million, up 4% |
| Net income | $132.7 million, up 20% | $420.7 million, up 31% |
| Diluted EPS | $0.91, versus $0.76 | $2.88, versus $2.21 |
| Net interest margin | 3.52%, versus 3.26% | 3.45%, versus 3.29% |
| Return on average assets | 1.46%, versus 1.33% | 1.59%, versus 1.31% |
| Return on average equity | 14.01%, versus 13.08% | 15.50%, versus 13.12% |
Revenue, defined by management as net interest income before provision plus noninterest income, was $352.8 million in the third quarter and $1.08 billion for the first nine months, increases of 16% and 21%, respectively.
- Total assets were $36.31 billion at September 30, 2017, up 4% from December 31, 2016.
- Loans held for investment were $28.53 billion, up 12%; the allowance for loan losses was $285.9 million, or 1.00% of loans.
- Customer deposits were $31.31 billion, up 5%; core deposits represented 81% of total deposits.
- Cash and cash equivalents were $1.74 billion. Liquid assets consisting of cash and cash equivalents, interest-bearing deposits and available-for-sale securities totaled approximately $5.10 billion, or 14% of assets.
- Operating cash flow for the first nine months was $665.0 million, compared with $417.6 million in the prior-year period. Investing activities used $2.07 billion, primarily due to loan growth, while financing activities provided $1.24 billion, primarily from deposit growth. Cash and cash equivalents declined by $141.8 million from year-end.
- Long-term debt was $176.5 million, FHLB advances were $323.3 million, and net repurchase agreements were $50.0 million.
- Stockholders’ equity was $3.78 billion, up 10% from year-end; book value per share was $26.17.
- Regulatory capital remained strong: the Company reported CET1 of 11.4%, total risk-based capital of 12.9% and Tier 1 leverage capital of 9.4%. The Company and Bank were considered well-capitalized.
Material Changes Versus Comparable Periods
- Net interest income benefited from 12% loan growth, higher loan and other asset yields, and 2017 short-term interest-rate increases. The cost of interest-bearing deposits rose to 0.60% in the third quarter from 0.44% in the prior-year quarter, partially offsetting asset-yield gains.
- Credit-loss provision increased with portfolio growth, although net charge-offs declined to $3.8 million in the third quarter and $6.7 million year to date, compared with $22.5 million and $28.2 million, respectively, in the prior-year periods.
- Noninterest income for the first nine months included a $71.7 million pretax gain from a San Francisco commercial property sale-and-leaseback and a $3.8 million pretax gain from the sale of East West Insurance Services. The after-tax EPS effects were approximately $0.28 and $0.02, respectively.
- Excluding these gains, management reported non-GAAP nine-month net income of $377.0 million and diluted EPS of $2.58, compared with GAAP net income of $420.7 million and diluted EPS of $2.88.
- Third-quarter noninterest expense decreased primarily because of lower tax-credit investment amortization and legal expense. Year-to-date expense increased due to compensation, employee growth, compliance resources and tax-credit investment amortization.
- Nonaccrual loans declined to $114.7 million from $122.8 million at year-end, and total nonperforming assets declined to $117.0 million from $129.6 million. However, nonperforming TDRs increased to $65.0 million from $39.0 million.
- The Company transferred a $115.6 million non-agency commercial mortgage-backed security from held-to-maturity to available-for-sale to support active liquidity management. No other-than-temporary impairment was recorded.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that it remained focused on loan, deposit and revenue growth, profitability, risk management, compliance, expenses and capital while pursuing its cross-border banking strategy. Management believes liquidity sources are sufficient for reasonably foreseeable needs.
- The Bank remains subject to a 2015 Federal Reserve Written Agreement and related California Department of Business Oversight memorandum concerning Bank Secrecy Act and Anti-Money Laundering programs. Management reported progress but cautioned that regulators may determine that compliance is unsatisfactory, potentially resulting in additional costs, restrictions, fines, penalties or other adverse actions.
- Principal risk exposures include commercial and consumer real estate markets, California real estate concentration, commercial and industrial credit quality, interest-rate movements, deposit pricing and migration, China economic and monetary conditions, foreign-exchange movements, regulatory and tax changes, litigation, cybersecurity and operational failures.
- Commercial lending represented approximately 70% of the loan portfolio. CRE exposure was concentrated in California, which represented 74% of CRE loans, and 81% of CRE loans were non-owner occupied.
- Off-balance-sheet exposure included $4.96 billion of loan commitments and $1.76 billion of commercial letters of credit and standby letters of credit. The allowance for unfunded credit exposures was $14.7 million.
- The Company expects future adoption of the current expected credit loss standard to potentially increase the allowance for credit losses, although the amount was not determinable in the filing. Lease accounting adoption is expected to add assets and liabilities but not materially affect operating lease expense.
- The Board declared a fourth-quarter dividend of $0.20 per common share, payable November 15, 2017.
Most Important Facts for Investors to Verify
- Whether loan growth, deposit growth and higher asset yields can continue without materially increasing funding costs or credit losses.
- The sustainability of reported earnings after removing the $71.7 million property-sale gain and $3.8 million insurance-business-sale gain.
- Progress and regulatory resolution of the Written Agreement and related BSA/AML requirements.
- Credit performance in the C&I and CRE portfolios, including the increase in nonperforming TDRs and California real estate concentration.
- The future effect of expected-credit-loss accounting, interest-rate changes, deposit migration and China-related economic or currency developments.
- The adequacy of liquidity and capital relative to 12% loan growth, $4.96 billion of loan commitments and other contingent exposures.