East West Bancorp Reports Net Income for Second Quarter 2019 of $150 Million and Diluted Earnings Per Share of $1.03; Record Operating Revenue of $420 Million

Business Wire 18-Jul-2019 8:00 AM

East West Bancorp, Inc. ("East West" or the "Company") (NASDAQ:EWBC), parent company of East West Bank, the financial bridge between the United States and Greater China, today reported its financial results for the second quarter of 2019. For the second quarter of 2019, net income was $150.4 million or $1.03 per diluted share. Second quarter 2019 return on average assets was 1.45% and return on average equity was 12.9%.

"Total loans grew $871 million, or 11% annualized, to a record $33.7 billion as of June 30, 2019 from $32.9 billion as of March 31, 2019. Loan growth was well-diversified across our major lending portfolios," stated Dominic Ng, Chairman and Chief Executive Officer of East West. "Total deposits grew $204 million, or 2% annualized, to a record $36.5 billion from $36.3 billion as of March 31, 2019. A highlight was robust growth in noninterest-bearing demand deposits."

"East West achieved record total operating¹ revenue of $420 million in the second quarter of 2019, an increase of 4% from $405 million in the first quarter of 2019, and an increase of 8% from $390 million in the second quarter of 2018. Quarter-over-quarter, net interest income grew by 1% and we also saw substantial noninterest income growth of 25%. Year-over-year, net interest income grew by 8% and noninterest income grew by 9%," continued Ng.

"The growth in revenue combined with strong operating expense control drove improvement in our operating efficiency and an expansion of our pre-tax, pre-provision profitability. Our pre-tax, pre-provision profitability ratio² was 2.51% in the second quarter of 2019, expanding by 8 basis points linked quarter. Additionally, nonperforming assets, net charge-offs and the provision for credit losses all decreased."

"Despite macro-economic and geopolitical volatility, East West continues to execute, delivering attractive growth and profitability, demonstrating the strength of our differentiated strategy and the value proposition that we provide for our customers. We are pleased with the solid results of the second quarter and look forward to continued strong performance in the second half of 2019," concluded Ng.

HIGHLIGHTS OF RESULTS

• Second Quarter Earnings – Second quarter 2019 net income was $150.4 million and diluted earnings per share ("EPS") were $1.03, compared to first quarter 2019 net income of $164.0 million and diluted EPS of $1.12. During the second quarter, the Company recorded $30.1 million of additional income tax expense to reverse previously claimed tax credits, equivalent to $0.21 per share. Adjusted³ second quarter net income was $180.5 million and adjusted³ diluted EPS were $1.24, both up by 7% from adjusted³ first quarter net income of $168.9 million and adjusted³ first quarter diluted EPS of $1.16.

• Net Interest Income and Net Interest Margin – Second quarter 2019 net interest income ("NII") was $367.3 million, a quarterly increase of $4.9 million or 1%, and a year-over-year increase of $25.6 million or 8%. Second quarter 2019 net interest margin ("NIM") was 3.73%, compared to 3.79% in the previous quarter. Net interest income growth in the second quarter primarily reflects loan growth, partially offset by the change in the NIM.

• Record Loans – Total loans of $33.7 billion as of June 30, 2019 were up $871.0 million, or 11% linked quarter annualized, from $32.9 billion as of March 31, 2019. Growth was well-diversified across commercial and industrial loans, commercial real estate and single family residential mortgage portfolios. Total loans grew by $3.5 billion, or 12% year-over-year.

• Record Deposits – Total deposits of $36.5 billion as of June 30, 2019 were up $203.6 million, or 2% linked quarter annualized, from $36.3 billion as of March 31, 2019. Growth in time, noninterest-bearing demand and savings deposits was partially offset by declines in interest-bearing checking and money market balances. Total deposits grew by $3.7 billion, or 11% year-over-year.

• Asset Quality Metrics – The allowance for loan losses was $330.6 million, or 0.98% of loans held-for-investment ("HFI"), as of June 30, 2019, compared to 0.97% of loans HFI as of March 31, 2019, and 1.00% of loans HFI as of June 30, 2018. For the second quarter of 2019, net charge-offs were $7.6 million, or annualized 0.09% of average loans HFI, a decrease from annualized net charge-offs of 0.18% of average loans HFI for the first quarter of 2019 and 0.14% for the year-ago quarter. Non-purchased credit impaired ("Non-PCI") nonperforming assets were $119.3 million, or 0.28% of total assets, as of June 30, 2019, compared to 0.33% of total assets as of March 31, 2019, and 0.27% of total assets as of June 30, 2018.

• Capital Levels – Capital levels for East West continue to be strong. As of June 30, 2019, stockholders' equity was $4.7 billion, or $32.53 per share. Tangible equity⁴ per common share was $29.20 as of June 30, 2019, an increase of 3% linked quarter and 17% year-over-year. As of June 30, 2019, the tangible equity to tangible assets ratio⁴ was 10.0%, the common equity tier 1 ("CET1") capital ratio was 12.5%, and the total risk-based capital ratio was 13.9%.

MANAGEMENT OUTLOOK FOR 2019

The Company has updated its outlook for the expected full year 2019 results, compared to our full year 2018 results. The components are as follows:

• End of Period Loans: increase by approximately 10%.
• Net Interest Income (excluding ASC 310-30 discount accretion income): increase at a percentage rate in the high single-digits.
• Net Interest Margin (excluding the impact of ASC 310-30 discount accretion): between 3.60% and 3.70%.
• Noninterest Expense (excluding amortization of tax credit investments & core deposit intangibles): increase at a percentage rate in the mid-single-digits.
• Provision for Credit Losses: in the range of $80 million to $90 million.
• Tax Items: projecting full year effective tax rate of approximately 20%, including the impact of the $30.1 million reversal of previously claimed tax credits in the second quarter of 2019, or approximately 15% excluding the tax credit reversal.
• Interest Rates: Two 25-basis point cuts to the fed funds rate, in July and October of 2019.

OPERATING RESULTS SUMMARY

Second Quarter 2019 Compared to First Quarter 2019

Net Interest Income and Net Interest Margin Net interest income totaled $367.3 million, a 1% increase from $362.5 million. Net interest margin of 3.73% contracted by six basis points from 3.79%.

• Excluding the impact of ASC 310-30 discount accretion, adjusted⁵ NII of $365.6 million also increased by 1%, and adjusted⁵ NIM of 3.71% also decreased by six basis points. ASC 310-30 discount accretion income was $1.7 million, a decrease from $2.2 million last quarter.
• Average loans of $33.0 billion grew by $566.6 million, or 7% linked quarter annualized. Growth was well-diversified across all our major commercial and consumer loan portfolios.
• Average deposits of $35.3 billion grew by $403.0 million, or 5% linked quarter annualized. Growth was primarily in time and noninterest-bearing demand deposits, partially offset by a decline in money market balances.
• The yield on loans contracted by two basis points to 5.28% from 5.30%. Excluding the impact of ASC 310-30 discount accretion, the adjusted⁵ yield on loans contracted by one basis point to 5.26% from 5.27%, reflecting an unchanged fed funds rate and the decline in Libor rates.
• The cost of deposits increased by four basis points to 1.11% from 1.07% linked quarter. This is a deceleration from the linked quarter cost of deposits increases in the first quarter of 2019 and in the second quarter of 2018, which were 17 basis points and 15 basis points, respectively.

Noninterest Income Noninterest income totaled $52.8 million, a 25% increase from $42.1 million.

• The linked quarter increase in noninterest income was primarily attributable to interest rate contracts and other derivative income, which increased by $7.2 million, reflecting strong customer demand for interest rate swaps in response to the inverted yield curve.
• Additionally, foreign exchange income increased by $2.3 million, reflecting revaluations of foreign currency-denominated balance sheet items, and lending fees increased by $1.4 million.

Noninterest Expense Noninterest expense totaled $177.7 million, a 5% decrease from $186.9 million. Second quarter noninterest expense consisted of $159.8 million of adjusted⁶ noninterest expense, $16.7 million in amortization of tax credit and other investments, and $1.2 million in amortization of core deposit intangibles.

• Adjusted noninterest expense of $159.8 million decreased by $1.1 million, or 1%, from $160.8 million. The linked quarter change primarily reflected a decrease in compensation and employee benefits expense.
• The adjusted⁶ efficiency ratio was 38.0% in the second quarter, compared to 39.8% in the previous quarter.

TAX RELATED ITEMS

Second quarter 2019 income tax expense was $72.8 million and the effective tax rate was 33%. Included in the second quarter 2019 income tax expense was a $30.1 million reversal of certain previously claimed tax credits related to DC Solar. Adjusted, tax expense was $42.7 million⁷ and the effective tax rate was 19%⁷ in the second quarter of 2019. This compares to a tax expense of $31.1 million and an effective tax rate of 16% in the first quarter of 2019.

• For the full year 2019, the Company projects that its effective tax rate will be approximately 20%, including the impact of the $30.1 million tax credit reversal in the second quarter of 2019, or approximately 15% excluding the tax credit reversal.

CREDIT QUALITY

The allowance for loan losses totaled $330.6 million, or 0.98% of loans HFI, as of June 30, 2019, compared to $317.9 million, or 0.97% of loans HFI, as of March 31, 2019, and $301.6 million, or 1.00% of loans HFI, as of June 30, 2018.

• The provision for credit losses recorded for the second quarter of 2019 was $19.2 million, compared to $22.6 million for the first quarter of 2019, and $15.5 million for the year-ago quarter.
• Net charge-offs for the current quarter were $7.6 million, or annualized 0.09% of average loans HFI. This is a decrease from net charge-offs of $14.4 million, or annualized 0.18% of average loans HFI, for the first quarter of 2019, and net charge-offs of $10.6 million, or annualized 0.14% of average loans HFI, for the second quarter of 2018.
• Non-PCI nonperforming assets were $119.3 million, or 0.28% of total assets, as of June 30, 2019, compared to $138.0 million, or 0.33% of total assets, as of March 31, 2019, and $103.5 million, or 0.27% of total assets, as of June 30, 2018.

CAPITAL STRENGTH

Capital levels for East West continue to be strong. The following table presents the regulatory capital ratios for the quarters ended June 30, 2019, March 31, 2019, and June 30, 2018.

DIVIDEND PAYOUT AND CAPITAL ACTIONS

East West's Board of Directors has declared third quarter 2019 dividends for the Company's common stock. The common stock cash dividend of $0.275 per share is payable on August 15, 2019 to shareholders of record on August 1, 2019.

Conference Call

East West will host a conference call to discuss second quarter 2019 earnings with the public on Thursday, July 18, 2019 at 8:30 a.m. PT/11:30 a.m. ET. The public and investment community are invited to listen as management discusses second quarter 2019 results and operating developments.

• The following dial-in information is provided for participation in the conference call: calls within the U.S. – (877) 506-6399; calls within Canada – (855) 669-9657; international calls – (412) 902-6699.
• A presentation to accompany the earnings call will be available on the Investor Relations page of the Company's website at www.eastwestbank.com/investors.
• A listen-only live broadcast of the call will also be available on the Investor Relations page of the Company's website at www.eastwestbank.com/investors.
• A replay of the conference call will be available on July 18, 2019 at 11:30 a.m. Pacific Time through August 18, 2019. The replay numbers are: within the U.S. – (877) 344-7529; within Canada – (855) 669-9658; International calls – (412) 317-0088; and the replay access code is: 10132709.

About East West

East West Bancorp, Inc. is a publicly owned company with total assets of $42.9 billion and is traded on the Nasdaq Global Select Market under the symbol "EWBC". The Company's wholly-owned subsidiary, East West Bank, is one of the largest independent banks headquartered in California. East West is a premier bank focused exclusively on the United States and Greater China markets and operates over 130 locations worldwide, including in the United States markets of California, Georgia, Massachusetts, Nevada, New York, Texas and Washington. In Greater China, East West's presence includes full service branches in Hong Kong, Shanghai, Shantou and Shenzhen, and representative offices in Beijing, Chongqing, Guangzhou, Taipei and Xiamen. For more information on East West, visit the Company's website at www.eastwestbank.com.

Forward-Looking Statements

Certain matters set forth herein (including any exhibits hereto) constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to our current business plans and expectations regarding future operating results. Forward-looking statements may include, but are not limited to, the use of forward-looking language, such as "likely result in," "expects," "anticipates," "estimates," "forecasts," "projects," "intends to," "assumes," or may include other similar words or phrases, such as "believes," "plans," "trend," "objective," "continues," "remains," or similar expressions, or future or conditional verbs, such as "will," "would," "should," "could," "may," "might," "can," or similar verbs, and the negative thereof. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from those projected. These risks and uncertainties, some of which are beyond our control, include, but are not limited to, the changes and effects thereof in trade, monetary and fiscal policies and laws, including the ongoing trade dispute between the U.S. and the People's Republic of China; our ability to compete effectively against other financial institutions in our banking markets; success and timing of our business strategies; our ability to retain key officers and employees; impact on our funding costs, net interest income and net interest margin due to changes in key variable market interest rates, competition, regulatory requirements and our product mix; changes in our costs of operation, compliance and expansion; our ability to adopt and successfully integrate new technologies into our business in a strategic manner; impact of failure in, or breach of, our operational or security systems or infrastructure, or those of third parties with whom we do business, including as a result of cyber attacks; and other similar matters which could result in, among other things, confidential and/or proprietary information being disclosed or misused; adequacy of our risk management framework, disclosure controls and procedures and internal control over financial reporting; future credit quality and performance, including our expectations regarding future credit losses and allowance levels; impact of adverse changes to our credit ratings from major credit rating agencies; impact of adverse judgments or settlements in litigation; changes in the commercial and consumer real estate markets; changes in consumer spending and savings habits; changes in the United States ("U.S.") economy, including inflation, deflation, employment levels, rate of growth and general business conditions; government intervention in the financial system, including changes in government interest rate policies; impact of benchmark interest rate reform in the U.S. that resulted in the Secured Overnight Financing Rate selected as the preferred alternative reference rate to the London Interbank Offered Rate; impact of political developments, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions; changes in laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission, the Consumer Financial Protection Bureau and the California Department of Business Oversight — Division of Financial Institutions; impact of the Dodd-Frank Act on our business, business practices, cost of operations and executive compensation; heightened regulatory and governmental oversight and scrutiny of our business practices, including dealings with consumers; impact of reputational risk from negative publicity, fines and penalties and other negative consequences from regulatory violations and legal actions and from our interactions with business partners, counterparties, service providers and other third parties; impact of regulatory enforcement actions; changes in accounting standards as may be required by the Financial Accounting Standards Board or other regulatory agencies and their impact on critical accounting policies and assumptions; changes in income tax laws and regulations and the impact of the Tax Cuts and Jobs Act of 2017; impact of other potential federal tax changes and spending cuts; our capital requirements and our ability to generate capital internally or raise capital on favorable terms; changes in our ability to receive dividends from our subsidiaries; any future strategic acquisitions or divestitures; continuing consolidation in the financial services industry; changes in the equity and debt securities markets; fluctuations in our stock price; fluctuations in foreign currency exchange rates; a recurrence of significant turbulence or disruption in the capital or financial markets, which could result in, among other things, a reduction in the availability of funding or increases in funding costs, a reduction in investor demand for mortgage loans and declines in asset values and/or recognition of other-than-temporary impairment on securities held in our available-for-sale investment securities portfolio; impact of natural or man-made disasters or calamities or conflicts or other events that may directly or indirectly result in a negative impact on our financial performance; and other factors set forth in our public reports including its Annual Report on Form 10-K for the year ended December 31, 2018, and particularly the discussion of risk factors within that document. If any of these risks or uncertainties materializes or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by such forward-looking statements. We assume no obligation to update or revise such forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.