East West Bancorp(EWBC) - 2020 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for East West Bancorp, Inc. as of September 30, 2020, including balance sheet, income statement, and detailed notes Consolidated Balance Sheet As of September 30, 2020, total assets increased to $50.37 billion, up 14% from $44.20 billion at year-end 2019, driven by loans and cash, with liabilities growing to $45.25 billion due to a 12% increase in deposits to $41.68 billion and higher long-term debt, while equity rose slightly to $5.13 billion Consolidated Balance Sheet Highlights (Unaudited, $ in millions) | Financial Metric | September 30, 2020 | December 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | 50,371.5 | 44,196.1 | 14.0% | | Cash and cash equivalents | 4,506.9 | 3,261.1 | 38.2% | | Loans held-for-investment, net | 36,818.9 | 34,420.3 | 7.0% | | Total Liabilities | 45,245.4 | 39,178.5 | 15.5% | | Total deposits | 41,680.6 | 37,324.3 | 11.7% | | Long-term debt and finance lease liabilities | 1,579.3 | 152.3 | 937.2% | | Total Stockholders' Equity | 5,126.1 | 5,017.6 | 2.2% | Consolidated Statement of Income Net income for Q3 2020 was $159.5 million, a 7% decrease year-over-year, and $403.7 million for the nine months, down 17% due to a significant increase in provision for credit losses Statement of Income Summary (Unaudited, $ in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | 324.1 | 369.8 | 1,030.6 | 1,099.6 | | Provision for credit losses | 10.0 | 38.3 | 186.3 | 80.1 | | Noninterest income | 49.6 | 51.5 | 162.3 | 146.4 | | Noninterest expense | 167.7 | 176.6 | 534.2 | 541.2 | | Net Income | 159.5 | 171.4 | 403.7 | 485.8 | | Diluted EPS | $1.12 | $1.17 | $2.82 | $3.33 | Notes to Consolidated Financial Statements These notes detail financial statements, including accounting policies, fair value measurements, and specifics on securities, derivatives, loans, and the adoption of the CECL standard in 2020 - The Company adopted ASU 2016-13 (CECL) on January 1, 2020, resulting in a $125.2 million increase to the allowance for loan losses, a $10.5 million increase to the allowance for unfunded credit commitments, and a corresponding after-tax decrease to opening retained earnings of $98.0 million[32] - Under the Paycheck Protection Program (PPP), the Company originated over 7,400 loans with an outstanding balance of $1.77 billion as of September 30, 2020, with no allowance for loan losses recorded due to SBA guarantee[53] - The Company elected not to apply Troubled Debt Restructuring (TDR) classification to COVID-19 related loan modifications for borrowers current as of December 31, 2019, in accordance with the CARES Act[52] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, balance sheet changes, and risk management, highlighting the impact of COVID-19 and maintaining strong capital and liquidity despite economic headwinds - The COVID-19 pandemic caused significant economic disruption, leading to a 133% increase in the provision for credit losses to $186.3 million for the first nine months of 2020[314] - As part of its pandemic response, the company funded over 7,400 PPP loans totaling $1.77 billion and drew $1.43 billion from the Federal Reserve's PPPLF as of September 30, 2020[299] - The company applied the CECL Capital Transition rule, temporarily delaying the accounting standard's effects on regulatory capital for two years, followed by a three-year transition period[302] Results of Operations Q3 2020 net interest income decreased 12% to $324.1 million with net interest margin compressing 87 bps to 2.72% due to lower rates, while noninterest income and expense saw modest declines, and the effective tax rate decreased to 14.5% Net Interest Income and Margin Comparison | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $324.1M | $369.8M | (12%) | | Net Interest Margin | 2.72% | 3.59% | (87 bps) | - The decrease in net interest income and margin was primarily driven by a cumulative 175 basis point reduction in the federal funds rate since September 30, 2019, which lowered yields on interest-earning assets[317][330] Balance Sheet Analysis Total assets grew 14% to $50.37 billion from year-end 2019, driven by an 8% increase in loans to $37.44 billion and a 37% increase in AFS debt securities, while total deposits rose 12% to $41.68 billion, fueled by a 35% surge in noninterest-bearing demand deposits, with capital ratios remaining strong - Total loans increased by $2.66 billion (8%) since year-end 2019, with growth driven by PPP loan funding in the C&I portfolio, as well as growth in commercial real estate and single-family residential loans[322] - Total deposits grew by $4.36 billion (12%) since year-end 2019, primarily from a $3.84 billion increase in noninterest-bearing demand deposits, which grew to comprise 36% of total deposits[323][464] Regulatory Capital Ratios | Ratio | September 30, 2020 | Well-Capitalized Requirement | | :--- | :--- | :--- | | CET1 capital | 12.8% | 6.5% | | Tier 1 capital | 12.8% | 8.0% | | Total capital | 14.5% | 10.0% | | Tier 1 leverage | 9.8% | 5.0% | Risk Management The company's risk management focuses on credit, liquidity, and market risks, with nonperforming assets rising to 0.52% and allowance for loan losses increasing to 1.65% due to the pandemic, while liquidity remained strong and the company maintained an asset-sensitive position - Nonperforming assets increased to $259.9 million (0.52% of total assets) as of September 30, 2020, up from $121.5 million (0.27% of total assets) at year-end 2019, primarily driven by inflows of C&I oil & gas loans and CRE loans to nonaccrual status[495] - The allowance for loan losses to loans held-for-investment ratio increased to 1.65% at September 30, 2020, from 1.03% at December 31, 2019, due to CECL adoption and COVID-19's adverse economic impact[324] - The company's net interest income simulation shows an asset-sensitive position, projecting a 6.9% increase in net interest income over 12 months with a +100 basis point instantaneous rate shock[560][561] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the detailed discussion of market risk, including interest rate risk, provided in the Management's Discussion and Analysis section of this report Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2020[606] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[608] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is party to various legal actions arising in the normal course of business, with further details provided in Note 10 of the Consolidated Financial Statements - The company is involved in various legal actions in the ordinary course of business, with further details provided in Note 10 of the financial statements[611] Item 1A. Risk Factors This section updates the company's risk factors, primarily focusing on the uncertain and ongoing impacts of the COVID-19 pandemic on business, financial condition, credit risk, market volatility, and operational challenges - The COVID-19 pandemic is identified as a primary risk factor, with potential continued adverse impacts on business operations, financial condition, liquidity, and results of operations, the extent of which remains uncertain[612] - The pandemic could continue to negatively affect borrowers' ability to meet their obligations, potentially leading to increased charge-offs and provisions for credit losses, especially given the concentration of loans secured by real estate[617] - Increased remote work has heightened cybersecurity risks, as it may create more opportunities for cybercriminals to exploit vulnerabilities and employees may be more susceptible to phishing and social engineering attempts[615] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company had no unregistered equity sales in Q3 2020 but repurchased 4,471,682 shares for $146.0 million in March 2020, with $354.0 million remaining available under the repurchase program as of September 30, 2020 - The company repurchased 4,471,682 shares of common stock during the first nine months of 2020 at an average price of $32.64 per share, with all repurchases occurring in March 2020[622] - As of September 30, 2020, approximately $354.0 million remained available for future repurchases under the company's publicly announced stock repurchase program[622] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including employment agreement amendments, CEO and CFO certifications, and Interactive Data Files (XBRL)