Business Context and Reporting Period
East West Bancorp, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company is a bank holding company whose principal subsidiary, East West Bank, provides consumer, business, commercial, wealth management, foreign exchange and related banking services through more than 120 locations in the United States and China. The company reported approximately 3,200 full-time equivalent employees and $59.85 billion of assets at quarter-end.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 |
|---|---|---|
| Total revenue | $444.9 million | $871.5 million |
| Net interest income before credit-loss provision | $376.5 million | $730.2 million |
| Noninterest income | $68.4 million | $141.3 million |
| Net income | $224.7 million | $429.7 million |
| Diluted EPS | $1.57 | $3.01 |
| Net interest margin | 2.75% | 2.73% |
| ROA | 1.56% | 1.53% |
| ROE | 16.61% | 16.10% |
| Efficiency ratio | 42.60% | 43.67% |
- Credit-loss provision: a $15.0 million reversal in both the quarter and first half, compared with provisions of $102.4 million and $176.3 million, respectively, in the comparable 2020 periods.
- Net charge-offs were $13.3 million in the second quarter and $26.7 million in the first half; annualized net charge-offs were 0.13% and 0.14% of average loans, respectively.
- Total assets were $59.85 billion, up 15% from December 31, 2020. Loans held for investment were $40.07 billion, up 4%, and deposits were $52.58 billion, up 17%.
- Cash and cash equivalents totaled $6.00 billion. Unencumbered liquid assets totaled $16.30 billion, and available borrowing capacity was approximately $22.43 billion.
- Long-term debt was $147.5 million, FHLB advances were $248.5 million, and there were no short-term borrowings at June 30, 2021.
- Stockholders’ equity was $5.55 billion, or $39.10 per common share. CET1, total capital and Tier 1 leverage ratios were 12.8%, 14.3% and 9.1%, respectively, at the company level; the company and bank exceeded well-capitalized requirements.
- Six-month cash flow: $403.8 million provided by operating activities, $5.60 billion used in investing activities, and $7.17 billion provided by financing activities. Cash increased by $1.98 billion.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 126% from $99.4 million to $224.7 million; first-half net income increased 76% from $244.2 million to $429.7 million. The improvement primarily reflected the credit-loss reversal, sharply lower funding costs and higher noninterest income.
- Net interest income increased 10% in the second quarter and 3% for the first half, but net interest margin declined from 3.04% to 2.75% and from 3.24% to 2.73%, respectively. Lower loan yields and broader asset yield compression offset balance-sheet growth and lower deposit costs.
- Noninterest income increased 23% in the second quarter and 27% in the first half, driven by deposit fees, foreign exchange income, wealth management fees and other investment income. Gains on AFS securities fell 93% in both comparison periods.
- Noninterest expense increased 3% in the quarter and 4% in the first half. Compensation and tax-credit investment amortization rose, while the $8.7 million 2020 repurchase-agreement extinguishment cost did not recur.
- The allowance for loan losses declined to $585.7 million, or 1.46% of loans, from $620.0 million, or 1.61%, at year-end. Total allowance for credit losses, including unfunded commitments, declined to $612.0 million from $653.6 million.
- Criticized loans declined 15% to $1.03 billion, or 2.58% of loans. Nonperforming assets declined 4% to $225.7 million, or 0.38% of assets.
- AFS debt securities increased 51% to $8.40 billion. The portfolio had $88.8 million of gross unrealized losses at quarter-end, primarily attributed to interest-rate and liquidity-spread movements; management reported no credit impairment and no intent or requirement to sell affected securities.
- The common dividend increased to $0.33 per share from $0.275 in the prior-year quarter. No share repurchases occurred during the first half of 2021, leaving $354.0 million available under the authorization.
Guidance, Outlook, Commentary and Risks
- No formal quantitative earnings or revenue guidance is provided in the filing. Management expects its relationship-focused strategy, loan and deposit growth, customer engagement and technology investments to support long-term growth, while emphasizing risk and expense management.
- Management cited an improving macroeconomic outlook, reopening activity and vaccination progress as key reasons for the credit-loss reversal and improved asset quality. However, COVID-19 variants, renewed restrictions and delayed recognition of delinquencies or charge-offs remain risks.
- PPP loans outstanding totaled approximately $1.43 billion at June 30, 2021, down from $1.57 billion at year-end. Approximately $1.00 billion of PPP loans had received SBA forgiveness approval during the first half.
- COVID-19-related payment deferrals and forbearance totaled $863.5 million, down 12% from year-end. Such programs may delay recognition of delinquency, nonaccrual status and credit losses.
- The loan portfolio is concentrated in commercial lending and California real estate: commercial loans represented 73% of loans, and 77% of CRE loans were concentrated in California. Changes in California economic conditions or property values could materially affect credit losses.
- The company is asset-sensitive to interest rates. Modeled 12-month net interest income sensitivity was positive 7.4% under an instantaneous 100-basis-point increase and positive 15.6% under a 200-basis-point increase. Actual results may differ because of deposit behavior, prepayments and other modeling assumptions.
- A significant volume of products references USD LIBOR settings scheduled to cease, primarily after June 30, 2023. The transition creates financial, operational, legal, compliance and reputational risks.
- Off-balance-sheet exposure included $8.14 billion of loan commitments and letters of credit, $24.6 million of maximum potential recourse payments on loans sold or securitized, and $332.2 million of commitments to invest in affordable housing, tax-credit and other investments.
- Management stated that liquidity sources were sufficient for reasonably foreseeable needs, but noted risks from economic stress, capital-market disruption, funding-cost increases, credit deterioration, cyber or technology events, regulatory changes, litigation, geopolitical developments and natural disasters.
Important Facts for Investors to Verify
- Whether the credit-loss reversal and lower allowance remain appropriate as pandemic-related support programs expire and modified loans season.
- Trends in net interest margin, loan yields, deposit pricing and the sustainability of the unusually strong deposit growth.
- Exposure to California CRE, hospitality, retail, office, oil and gas, and other criticized or nonaccrual loan categories.
- Progress and costs associated with transitioning LIBOR-linked contracts to alternative reference rates.
- Changes in AFS portfolio duration, unrealized losses and sensitivity to higher interest rates or widening credit spreads.
- Whether PPP forgiveness, loan growth and fee recognition materially affect future reported revenue and margins.
- Future capital distributions, including dividends and any resumption of share repurchases, relative to capital, liquidity and regulatory requirements.