East West Bancorp, Inc. — 2023 Q3 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2023. East West Bancorp is a bank holding company whose principal subsidiary, East West Bank, provides consumer, business, commercial, wealth management and related banking services through more than 120 locations in the U.S. and Asia. The filing was dated November 8, 2023.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $647.6 million | $627.4 million | $1.95 billion | $1.67 billion |
| Net interest income before provision | $570.8 million | $551.8 million | $1.74 billion | $1.44 billion |
| Provision for credit losses | $42.0 million | $27.0 million | $88.0 million | $48.5 million |
| Net income | $287.7 million | $295.3 million | $922.2 million | $791.3 million |
| Diluted EPS | $2.02 | $2.08 | $6.49 | $5.55 |
| Net interest margin | 3.48% | 3.68% | 3.66% | 3.27% |
| ROA | 1.66% | 1.86% | 1.83% | 1.70% |
| ROE | 17.28% | 20.30% | 19.23% | 18.35% |
| Efficiency ratio | 38.92% | 34.43% | 37.50% | 35.98% |
Balance Sheet, Credit and Capital
- Total assets were $68.29 billion at September 30, 2023, up 7% from December 31, 2022.
- Loans held for investment were $50.91 billion, up 6%, primarily due to growth in commercial real estate and single-family residential loans.
- Total deposits were $55.09 billion, down 2% from year-end 2022. Noninterest-bearing deposits declined to 29% of total deposits from 38% at year-end.
- The allowance for credit losses was $689.1 million, including a $655.5 million allowance for loan losses, compared with $621.9 million at December 31, 2022. The allowance for loan losses was 1.29% of loans held for investment.
- Nonaccrual loans were $103.7 million, or 0.20% of loans held for investment. Criticized loans increased 14% to $1.02 billion, or 2.01% of loans held for investment.
- Annualized net charge-offs were 0.14% of average loans in Q3 and 0.07% for the first nine months, compared with 0.06% and 0.02%, respectively, in the prior-year periods.
- Stockholders’ equity was $6.60 billion; book value per share was $46.62 and tangible book value per share was $43.29.
- At September 30, 2023, the Company’s common equity tier 1, total capital and tier 1 leverage ratios were 13.3%, 14.7% and 10.2%, respectively. The Bank’s corresponding ratios were 12.9%, 14.1% and 9.8%. The Company and Bank exceeded applicable well-capitalized requirements.
Cash Flow, Debt and Liquidity
- For the first nine months, operating activities provided $863.2 million of cash, investing activities used $2.90 billion, and financing activities provided $3.13 billion. Cash and cash equivalents increased $1.08 billion to $4.56 billion.
- Short-term borrowings were $4.50 billion under the Federal Reserve’s Bank Term Funding Program, maturing March 19, 2024, and secured by $4.34 billion of pledged securities. Remaining BTFP borrowing capacity was $238.3 million.
- Long-term debt was $148.2 million. Repurchase agreements declined from $300.0 million at year-end 2022 to zero after repayment and a $3.9 million extinguishment charge.
- Total cash, cash equivalents and stated borrowing capacity were $29.53 billion, compared with $26.52 billion at December 31, 2022. Management stated that liquidity was adequate for ordinary-course needs.
- The loan-to-deposit ratio increased to 92% from 86%. Domestic uninsured deposits, excluding collateralized and affiliate deposits, were $22.32 billion, or 42% of domestic deposits, compared with 51% at year-end.
Material Changes Versus Comparable Periods
- Quarterly earnings: Net income declined 3% year over year, as higher net interest income and lower taxes were more than offset by increased credit-loss provision and noninterest expense.
- Year-to-date earnings: Net income increased 17%, driven primarily by a $297.0 million increase in net interest income before provision for credit losses.
- Margin pressure: Q3 net interest margin contracted 20 basis points year over year as deposit costs rose faster than asset yields. Average interest-bearing deposit costs increased to 3.45% from 0.86%.
- Expense growth: Q3 noninterest expense increased 17%, and nine-month expense increased 22%. The largest drivers included amortization of tax credit and other investments, deposit account expense, regulatory assessments and staffing-related costs.
- Credit provisioning: The Q3 provision increased 56% year over year, while the nine-month provision increased 81%, reflecting loan growth and more cautious economic assumptions, particularly for commercial real estate.
- Loan mix: CRE loans increased 7% to $20.37 billion and represented 41% of loans held for investment. Single-family residential loans increased 14% to $12.84 billion. Approximately 69% of CRE loans were concentrated in California.
- Securities: Gross unrealized losses on AFS debt securities increased to $936.6 million from $844.7 million, primarily from interest-rate and spread movements. No AFS or HTM credit-loss allowance was recorded.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or financial guidance is provided in the filing. Management expects economic and interest-rate conditions, deposit competition and credit quality to remain important drivers of results.
- Management remained cautious regarding high inflation, elevated interest rates, financial-system volatility, global conflicts, oil prices and the CRE outlook. The filing’s baseline forecast assumed 2024 U.S. GDP growth of 1.4% and 2023 unemployment of 3.7%; a downside scenario assumed a recession in Q4 2023.
- Management identified risks from deposit withdrawals, uninsured deposits, higher funding costs, bank-industry disruption, potential FDIC assessments, regulatory reforms, CRE weakness, securities valuation declines, cybersecurity and technology disruptions, geopolitical conditions, litigation and model uncertainty.
- The Company acquired a 49.99% equity interest in Rayliant Global Advisors Limited for $94.7 million in cash and performance-based restricted stock units. The investment had a $110.9 million carrying value at September 30, 2023, including $100.7 million of equity-method goodwill.
- The Company adopted ASU 2022-02 on January 1, 2023. The adoption increased the allowance for loan losses by $6.0 million and reduced opening retained earnings by $4.3 million after tax.
- In October 2023, the Board declared a $0.48 per-share fourth-quarter dividend and announced resumption of repurchases under the existing $500 million authorization, with $254 million available at September 30, 2023.
- The Company reported no pending litigation expected to have a material adverse effect on financial condition, although it cautioned that ultimate legal losses could exceed established reserves.
- Management concluded that disclosure controls were effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of net interest income as deposit costs continue to rise and noninterest-bearing deposits migrate to interest-bearing products.
- Monitor CRE concentrations, especially California exposure, criticized loans, nonaccrual loans, charge-offs and future allowance changes.
- Assess the maturity and refinancing plan for the $4.50 billion BTFP borrowing and the effect of wholesale funding costs on liquidity and margin.
- Review the $936.6 million of AFS unrealized losses and the $1.59 billion of total debt-security unrealized losses for potential capital or liquidity implications if securities must be sold.
- Evaluate the impact of uninsured deposits, deposit competition and potential FDIC special assessments.
- Track the financial performance, valuation and contingent PRSU obligations associated with the Rayliant investment.
- Distinguish GAAP results from management’s non-GAAP measures, including adjusted efficiency ratio, tangible book value per share and return on average tangible common equity.