East West Bancorp, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
East West Bancorp, Inc. is a bank holding company whose principal subsidiary, East West Bank, provides consumer, business, commercial and international banking services through more than 120 locations in the U.S. and Asia. The filing covers the unaudited three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022 and December 31, 2022 balance-sheet figures. The Company reported $67.24 billion of assets and approximately 3,200 full-time-equivalent employees at quarter-end.
Key financial metrics
| Metric | Q1 2023 | Comparable / change |
|---|---|---|
| Net interest income before provision | $599.9 million | Up 44% from $415.6 million |
| Total revenue | $659.8 million | Up 33% from $495.4 million |
| Provision for credit losses | $20.0 million | Up from $8.0 million |
| Net income | $322.4 million | Up 36% from $237.7 million |
| Diluted EPS | $2.27 | Up from $1.66 |
| Net interest margin | 3.96% | Up 109 basis points from 2.87% |
| Efficiency ratio | 33.11% | Improved from 38.25% |
| Return on average assets | 2.01% | Up from 1.56% |
| Return on average common equity | 21.15% | Up from 16.50% |
| Total assets | $67.24 billion | Up 5% from December 31, 2022 |
| Total loans | $48.92 billion | Up 1% from December 31, 2022 |
| Total deposits | $54.74 billion | Down 2% from December 31, 2022 |
| Stockholders’ equity | $6.31 billion | Up 5% from December 31, 2022 |
Net interest income benefited from higher asset yields, loan growth and rising benchmark rates. Average loan yield increased to 6.14% from 3.63%, while average deposit cost increased to 1.60% from 0.10%. Average noninterest-bearing deposits declined 16% year over year, comprising 36% of average deposits versus 43% in Q1 2022.
Noninterest income declined 25% to $60.0 million, primarily because of a $10.0 million write-off of an impaired subordinated debt security and lower interest-rate-contract and other derivative income. Noninterest expense increased 15% to $218.4 million, driven by compensation, deposit-related expenses, regulatory assessments, other operating costs and a $3.9 million repurchase-agreement extinguishment charge.
Operating cash flow was $222.9 million, compared with $285.9 million in Q1 2022. Investing activities used $632.8 million, while financing activities provided $2.86 billion, primarily reflecting a $4.50 billion increase in short-term borrowings and a $1.25 billion decline in deposits. Cash and cash equivalents increased $2.45 billion to $5.93 billion.
Debt included $4.50 billion of Bank Term Funding Program borrowings due March 19, 2024, secured by $4.84 billion of eligible securities, with reported remaining borrowing capacity of $339.0 million. Long-term debt was $148.0 million. Total cash, cash equivalents and reported borrowing capacity were $30.66 billion at quarter-end.
Material changes versus prior periods
- Net income, EPS, net interest income and profitability ratios increased substantially year over year, supported by rate-sensitive asset yields and loan growth.
- Loans grew $696.8 million from year-end, led by residential mortgage and CRE lending. Single-family residential loans increased 5%, while HELOC balances declined 6%.
- Deposits declined $1.23 billion. Noninterest-bearing demand and money-market deposits decreased, while time deposits and interest-bearing checking deposits increased.
- The Company added $4.50 billion of BTFP funding and increased cash and cash equivalents by 70% from year-end in response to banking-sector volatility and liquidity concerns.
- The allowance for credit losses increased to $647.6 million from $621.9 million, reflecting loan growth and a more cautious economic outlook. The allowance for loan losses was 1.27% of loans held for investment.
- Nonperforming assets decreased 6% to $93.4 million, and nonaccrual loans declined to $93.1 million. Criticized loans increased 2% to $914.1 million.
- Accumulated other comprehensive loss improved to $680.0 million from $765.6 million, principally due to favorable changes in AFS securities and cash-flow hedges.
- The Company adopted ASU 2022-02 on January 1, 2023. Adoption increased the allowance for loan losses by $6.0 million and reduced opening retained earnings by $4.3 million after tax.
Guidance, outlook, commentary and risks
The filing does not provide formal numerical earnings or revenue guidance. Management described the economic outlook as cautious because of persistent inflation, elevated interest rates, recent bank failures, financial-system strain, geopolitical uncertainty and potential recessionary conditions. The Company assigned greater weight to its downside economic scenario and no weight to its upside scenario in estimating credit losses.
Management stated that liquidity resources were adequate for ordinary-course needs. However, the Company highlighted risks from deposit withdrawals, particularly uninsured deposits; higher funding costs; unrealized losses in the securities portfolio; dependence on borrowing capacity; and possible negative perceptions of the banking industry. Domestic uninsured deposits represented approximately 44% of domestic deposits at March 31, 2023, although the ratio improved from 50% at year-end.
Credit concentrations warrant monitoring. Approximately 71% of CRE loans were concentrated in California, and the Company identified commercial real estate values, office exposure, economic conditions and borrower performance as relevant risks. The allowance estimate remains sensitive to macroeconomic assumptions and portfolio performance.
The Company remained above applicable well-capitalized requirements. At March 31, 2023, Company and Bank total capital ratios were 14.5% and 14.0%, respectively; Company and Bank Tier 1 leverage ratios were 10.0% and 9.9%.
The Company expected to continue its LIBOR transition through June 30, 2023. It stated that most LIBOR exposure had been remediated or had appropriate fallback provisions. Management also noted potential future FDIC assessments and regulatory reforms following bank failures, as well as the pending impact of new small-business lending data-collection requirements.
Most important facts for investors to verify
- Whether deposit outflows stabilize and whether deposit pricing materially increases funding costs or compresses net interest margin.
- The sustainability of earnings after the unusually favorable effect of rising rates and the use of $4.50 billion of BTFP funding.
- Changes in AFS securities’ unrealized losses, collateral availability and the potential need to sell securities under stressed liquidity conditions.
- Trends in CRE, especially California and office exposure, criticized loans, nonaccrual loans, charge-offs and the allowance for credit losses.
- The Company’s ability to repay or refinance the BTFP borrowings due in March 2024 and maintain sufficient liquidity if deposits decline further.
- The effect of possible FDIC special assessments, enhanced capital or liquidity requirements and other post-bank-failure regulatory reforms.
- Actual results of the LIBOR transition and any remaining contract, derivative or funding exposures tied to LIBOR.
- Any divergence between modeled interest-rate sensitivity and actual results, particularly given changing deposit behavior and the potential for rate cuts or recession.