East West Bancorp(EWBC) - 2020 Q4 - Annual Report

PART I Business East West Bancorp, Inc. is a bank holding company focused on U.S. and Greater China financial needs, operating through three segments with $52.16 billion in assets as of December 31, 2020, and subject to extensive regulation Key Financial Metrics as of December 31, 2020 | Metric | Value (USD Billions) | | :--- | :--- | | Total Assets | $52.16 | | Total Loans (net) | $37.77 | | Total Deposits | $44.86 | | Total Stockholders' Equity | $5.27 | - The company's core strategy is to grow its cross-border client base between the U.S. and Greater China, leveraging its physical presence in both regions to facilitate business opportunities for its clients[18][19] - EWBC operates through three segments: Consumer and Business Banking (services via domestic branches), Commercial Banking (commercial loans and deposits), and Other (centralized functions like corporate treasury)[24] - As of December 31, 2020, the company had approximately 3,200 full-time equivalent employees. The workforce is notably diverse, with 74% of employees and 75% of managers being Asian or Asian-American[28][30] - The company and its bank are subject to comprehensive regulation under the Basel III Capital Rules, which mandate minimum capital ratios (CET1, Tier 1, Total Capital) and a capital conservation buffer to ensure financial stability[48][49] - In response to the COVID-19 pandemic, various regulatory relief measures were implemented, including allowing banks to temporarily suspend Troubled Debt Restructuring (TDR) accounting for certain loan modifications and providing a five-year transition period for the regulatory capital impact of adopting the CECL accounting standard[56][57] Risk Factors The company faces diverse risks including pandemic-related credit losses, geopolitical uncertainties, real estate loan concentration, interest rate sensitivity, CECL model impact, cybersecurity threats, and extensive regulatory compliance challenges - The COVID-19 pandemic poses significant risks, potentially leading to increased credit losses if borrowers' ability to repay deteriorates. It has also heightened cybersecurity risks due to a majority of corporate functions shifting to remote work[88][92][93] - Participation in government relief programs like the Paycheck Protection Program (PPP) could subject the company to increased regulatory scrutiny, negative publicity, and litigation risk[98] - Geopolitical risks, including unfavorable economic conditions and changes in U.S.-China trade policies, could adversely affect the company's business, which is concentrated in California and has a significant international presence in Greater China[103][104][106] - A significant portion of the loan portfolio is secured by real estate, primarily in California, creating a higher degree of risk from a downturn in real estate markets[108] - The company faces substantial interest rate risk, and the transition from LIBOR to an alternative reference rate like SOFR introduces uncertainty and could adversely affect financial condition and results of operations[110][111] - The adoption of the Current Expected Credit Losses (CECL) model for the allowance for credit losses requires complex judgments and could result in significant changes to the timing and amount of credit loss expense[120][121] - The company operates in a highly regulated environment and faces risks of noncompliance with laws such as the Bank Secrecy Act (BSA) and sanctions administered by the Office of Foreign Assets Control (OFAC), which could result in significant penalties[135][139][140] Properties The company owns its Pasadena headquarters and operates from 116 U.S. and 8 Greater China locations, with most U.S. and all international properties leased - The company owns its corporate headquarters located at 135 North Los Robles Avenue, Pasadena, California[155] - As of December 31, 2020, the company operates in 116 U.S. locations and 8 locations in Greater China. It owns 19 U.S. properties and leases the remainder, with all Greater China locations being leased[155][156] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 12 of the Consolidated Financial Statements - Details on legal proceedings are available in Note 12 — Commitments, Contingencies and Related Party Transactions — Litigation to the Consolidated Financial Statements[158] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities EWBC common stock trades on Nasdaq, with the company maintaining quarterly cash dividends and having repurchased $146.0 million in shares under a $500.0 million program in 2020 Five-Year Stock Performance Comparison (Reinvested Dividends) | Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | East West Bancorp, Inc. | $100.00 | $124.90 | $151.60 | $110.20 | $126.10 | $135.50 | | KRX (Regional Banking Index) | $100.00 | $139.00 | $141.50 | $116.70 | $144.50 | $131.90 | | S&P 500 Index | $100.00 | $112.00 | $136.40 | $130.40 | $171.50 | $203.00 | - On March 3, 2020, the Board authorized a stock repurchase program of up to $500.0 million. During March 2020, the company repurchased 4,471,682 shares for a total cost of $146.0 million. The remaining authorization as of year-end 2020 was $354.0 million[169] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes EWBC's 2020 financial performance, highlighting a 16% decrease in net income to $567.8 million due to increased credit loss provisions, a 6% decline in net interest income, but strong 18% asset growth to $52.16 billion and robust capital levels Overview This overview details the company's business model, COVID-19 pandemic response including PPP participation and loan modifications, and the impact of adopting the CECL accounting standard - The company participated in the Paycheck Protection Program (PPP), originating approximately 6,200 loans totaling $1.57 billion as of December 31, 2020[180] - In response to COVID-19, the company granted loan modifications under the relief provisions of the CARES Act, which allowed for temporary suspension of TDR accounting for eligible modifications[182] - The adoption of ASU 2016-13 (CECL) on January 1, 2020, resulted in a $125.2 million increase to the allowance for loan losses and a $98.0 million after-tax decrease to retained earnings[189] Financial Review The 2020 financial review shows a 16% net income decrease to $567.8 million due to higher credit loss provisions, a 6% net interest income decline, but strong 10% loan growth to $38.39 billion and 20% deposit growth to $44.86 billion, while maintaining robust capital 2020 vs. 2019 Financial Performance | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Income | $567.8M | $674.0M | -16% | | Diluted EPS | $3.97 | $4.61 | -14% | | Net Interest Income | $1.38B | $1.47B | -6% | | Net Interest Margin | 2.98% | 3.64% | -66 bps | | Provision for Credit Losses | $210.7M | $98.7M | +113% | | Total Loans | $38.39B | $34.78B | +10% | | Total Deposits | $44.86B | $37.32B | +20% | Results of Operations In 2020, net interest income decreased 6% to $1.38 billion due to lower rates, while noninterest income grew 6% to $235.5 million, and noninterest expense decreased 4% to $716.3 million, resulting in an effective tax rate of 17.2% - Net interest income decreased by $90.6 million (6%) in 2020 due to lower yields on interest-earning assets, reflecting the low interest rate environment. The net interest margin compressed to 2.98% from 3.64% in 2019[199] - Noninterest income increased by $13.3 million (6%) in 2020, primarily due to higher lending fees, deposit account fees, and a $8.4 million increase in gains on sales of AFS debt securities[212] - Noninterest expense decreased by $31.2 million (4%) in 2020, largely driven by a $28.3 million decrease in the amortization of tax credit and other investments[219] - The effective tax rate was 17.2% in 2020, compared to 20.1% in 2019. The 2019 rate was higher primarily due to a $30.1 million reversal of previously claimed tax credits related to the DC Solar investment[225] Operating Segment Results Segment analysis shows Consumer and Business Banking net income fell 34% to $187.9 million, Commercial Banking net income decreased 15% to $266.3 million due to higher credit loss provisions, while the Other segment's net income rose 49% to $113.5 million Segment Net Income (2020 vs. 2019) | Segment | 2020 Net Income (USD M) | 2019 Net Income (USD M) | Change | | :--- | :--- | :--- | :--- | | Consumer and Business Banking | $187.9 | $284.2 | -34% | | Commercial Banking | $266.3 | $313.8 | -15% | | Other | $113.5 | $76.0 | +49% | - The Commercial Banking segment's provision for credit losses increased by $122.3 million (145%) to $206.8 million in 2020, reflecting deteriorating macroeconomic conditions due to the COVID-19 pandemic[245][247] Balance Sheet Analysis As of December 31, 2020, total assets grew 18% to $52.16 billion, driven by 10% loan growth to $38.39 billion and 20% deposit growth to $44.86 billion, while stockholders' equity increased 5% to $5.27 billion, maintaining strong capital ratios Selected Balance Sheet Data (Year-End) | ($ in billions) | Dec 31, 2020 | Dec 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $52.16 | $44.20 | 18% | | Total Loans (net) | $37.77 | $34.42 | 10% | | AFS Debt Securities | $5.54 | $3.32 | 67% | | Total Deposits | $44.86 | $37.32 | 20% | | Stockholders' Equity | $5.27 | $5.02 | 5% | - The loan portfolio's growth was driven by a $1.48 billion increase in C&I loans (including $1.57 billion in PPP loans), a $1.08 billion increase in single-family residential loans, and an $896.2 million increase in CRE loans[274] - Deposit growth was primarily driven by a $5.22 billion (47%) increase in noninterest-bearing demand deposits, which grew to 36% of total deposits from 30% in the prior year[325] Regulatory Capital Ratios (Company) | Ratio | Dec 31, 2020 | Well-Capitalized Requirement | | :--- | :--- | :--- | | CET1 Capital | 12.7% | 6.5% | | Tier 1 Capital | 12.7% | 8.0% | | Total Capital | 14.3% | 10.0% | | Tier 1 Leverage | 9.4% | N/A | Risk Management The company manages risk via an ERM framework, with nonperforming assets increasing to 0.45%, the allowance for loan losses rising to 1.61% due to CECL and COVID-19, strong liquidity with $10.68 billion in liquid assets, and an asset-sensitive balance sheet - Nonperforming assets increased to $234.9 million (0.45% of total assets) at year-end 2020, up from $121.5 million (0.27% of total assets) at year-end 2019, primarily driven by inflows of C&I oil & gas and CRE loans to nonaccrual status[356][358] - As of December 31, 2020, $965.8 million of loans remained under COVID-19 related payment deferral and forbearance programs, down from a peak of $2.82 billion as of June 30, 2020[371][373] - The allowance for loan losses increased to $620.0 million (1.61% of loans) from $358.3 million (1.03% of loans) at year-end 2019. The increase reflects a $125.2 million impact from adopting CECL and provisions for deteriorating macroeconomic conditions[196][383] - The company's liquidity position is strong, with unencumbered liquid assets totaling $10.68 billion and a loan-to-deposit ratio of 86% as of December 31, 2020[400][402] - The company's net interest income is asset sensitive. A simulation as of December 31, 2020, showed that an instantaneous 100 basis point increase in rates would increase net interest income by an estimated 5.6% over 12 months[427][428][429] Critical Accounting Policies and Estimates This section details critical accounting policies requiring significant management judgment, including fair value of financial instruments, allowance for loan losses under CECL, goodwill impairment testing, and income taxes - Key critical accounting policies involve significant management judgment and estimation, including Fair Value of Financial Instruments, Allowance for Loan Losses, Goodwill Impairment, and Income Taxes[455] - The allowance for loan losses under the CECL model is inherently subjective, requiring management to make estimates of lifetime expected credit losses using macroeconomic forecasts, historical experience, and qualitative adjustments[458][459] - Goodwill is tested for impairment annually or more frequently if needed. An interim test was conducted as of March 31, 2020, due to COVID-19 market volatility, and no impairment was found in either the interim or annual tests for 2020[468] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the three-year period ended December 31, 2020, along with supplementary data and KPMG LLP's report, including detailed notes on accounting policies and financial instruments Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on both the consolidated financial statements and the effectiveness of internal control over financial reporting, highlighting the CECL adoption and allowance for loan losses as a critical audit matter - KPMG LLP provided an unqualified audit opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[486][866] - The audit report identifies the allowance for loan losses for loans evaluated on a collective pool basis as a critical audit matter, citing the high degree of audit effort and subjective judgment required, particularly following the adoption of the CECL standard[491][494] Consolidated Financial Statements The consolidated financial statements show total assets of $52.16 billion and net income of $567.8 million for 2020, with a net increase in cash and cash equivalents of $756.8 million from operating, investing, and financing activities Consolidated Balance Sheet Highlights (As of Dec 31, 2020) | Account | Value (USD Thousands) | | :--- | :--- | | Total Assets | $52,156,913 | | Loans held-for-investment, net | $37,770,972 | | Total Deposits | $44,862,752 | | Total Liabilities | $46,887,738 | | Total Stockholders' Equity | $5,269,175 | Consolidated Statement of Income Highlights (Year Ended Dec 31, 2020) | Account | Value (USD Thousands) | | :--- | :--- | | Net Interest Income | $1,377,193 | | Provision for Credit Losses | $210,653 | | Noninterest Income | $235,547 | | Noninterest Expense | $716,322 | | Net Income | $567,797 | | Diluted EPS | $3.97 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial figures, covering CECL adoption, fair value measurements, the $5.54 billion AFS securities portfolio, derivative use, the $38.4 billion loan portfolio, DC Solar tax impact, and capital adequacy - The company adopted the CECL standard (ASU 2016-13) on January 1, 2020, which requires estimating lifetime expected credit losses. This resulted in a $125.2 million increase to the allowance for loan losses[545] - The company's AFS debt securities portfolio increased to $5.54 billion at fair value as of year-end 2020, up from $3.32 billion in 2019. The portfolio is primarily composed of U.S. government agency and sponsored enterprise securities[643] - The company uses a variety of derivative instruments, with a total notional amount of over $21 billion for non-hedging derivatives (primarily for customer transactions), to manage interest rate, foreign exchange, and commodity risks[661] - The allowance for loan losses stood at $620.0 million at year-end 2020, with the increase driven by CECL adoption and the economic impact of COVID-19. The allowance for unfunded credit commitments was $33.6 million[742][744] - The company's investment in DC Solar tax credit funds, which were part of a fraudulent scheme, led to a reversal of $33.6 million in previously claimed tax credits in 2019 and the recording of a $5.1 million uncertain tax position in 2020[768][796] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, a conclusion supported by KPMG LLP's unqualified audit opinion - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[858] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, a conclusion supported by an unqualified audit report from KPMG LLP[862][864] PART III Directors, Executive Officers and Corporate Governance This section provides executive officer information, with further details on directors, corporate governance, and the code of conduct incorporated by reference from the 2021 Proxy Statement - Information regarding directors, corporate governance guidelines, and board committees is incorporated by reference from the definitive proxy statement for the 2021 Annual Meeting of Shareholders[879] Executive Compensation Details on executive compensation are incorporated by reference from the 2021 Proxy Statement - Details on executive compensation are incorporated by reference from the 2021 Proxy Statement[880] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized for issuance under equity compensation plans, with approximately 2.8 million securities remaining available, and incorporates further ownership details by reference from the 2021 Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | — | $ — | 2,767,391 | | Not approved by security holders | — | $ — | — | | Total | — | $ — | 2,767,391 | Certain Relationships and Related Transactions and Director Independence Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2021 Proxy Statement - Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2021 Proxy Statement[883] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[883] PART IV Exhibits and Financial Statement Schedules This section lists financial statements filed under Item 8 and provides a comprehensive index of all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications - This section lists the financial statements included in Item 8 and provides an index of all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications[887][889]