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 United States and China. The company reported unaudited results for the quarter and nine months ended September 30, 2022. Assets totaled $62.58 billion at quarter-end, with approximately 3,200 full-time equivalent employees.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $627.4 million | $468.8 million | $1.674 billion | $1.340 billion |
| Net interest income before credit-loss provision | $551.8 million | $395.7 million | $1.440 billion | $1.126 billion |
| Net income | $295.3 million | $225.4 million | $791.3 million | $655.2 million |
| Diluted EPS | $2.08 | $1.57 | $5.55 | $4.58 |
| Net interest margin | 3.68% | 2.70% | 3.27% | 2.72% |
| ROA / ROE | 1.86% / 20.30% | 1.46% / 15.75% | 1.70% / 18.35% | 1.50% / 15.98% |
| Provision for credit losses | $27.0 million | $(10.0) million | $48.5 million | $(25.0) million |
- Net income increased 31% year over year in the third quarter and 21% for the first nine months, driven primarily by higher loan yields, loan growth and wider net interest margin.
- Noninterest income increased 3% to $75.6 million in the quarter and 9% to $233.7 million year to date. Deposit account fees, derivative income and wealth-management fees increased, while foreign-exchange income and other investment income declined.
- Noninterest expense increased 5% to $216.0 million in the quarter and 3% to $602.3 million year to date. Compensation and employee benefits were the principal source of growth; tax-credit investment amortization declined materially.
- The efficiency ratio improved to 34.43% in the quarter and 35.98% year to date, compared with 43.81% and 43.72%, respectively, in the prior-year periods.
- Total loans were $47.46 billion, up 14% from December 31, 2021, led by commercial real estate, residential mortgage and commercial-and-industrial loans. Total deposits were $53.86 billion, up 1%; time deposits increased while noninterest-bearing demand and money-market deposits declined.
- The allowance for credit losses was $606.6 million, including a $582.5 million loan-loss allowance. The allowance increased from $569.1 million at year-end, reflecting loan growth and management’s updated economic outlook.
- Net charge-offs were $6.6 million in the quarter and $8.3 million year to date, equivalent to annualized ratios of 0.06% and 0.02% of average loans, respectively.
Cash Flow, Capital, Debt and Liquidity
- For the first nine months, operating activities provided $1.616 billion of cash; investing activities used $4.250 billion, primarily from loan growth; and financing activities provided $919.6 million. Cash and cash equivalents declined to $2.163 billion from $3.913 billion at year-end.
- Funding consisted primarily of $53.86 billion of deposits. Other funding included $200.0 million of federal funds purchased, $324.9 million of FHLB advances, $611.8 million of repurchase agreements and $147.9 million of long-term debt.
- The loan-to-deposit ratio increased to 88% from 78% at year-end. Management reported $20.51 billion of available borrowing capacity, including $10.88 billion from the FHLB and $2.17 billion from the Federal Reserve Bank of San Francisco.
- Unencumbered liquid assets declined to $8.64 billion from $15.63 billion at year-end, reflecting loan funding, lower cash and resale agreements, the transfer of securities to held-to-maturity and lower securities fair values.
- The company and bank remained above applicable well-capitalized requirements. At September 30, 2022, company common equity Tier 1, total capital and Tier 1 leverage ratios were 12.3%, 13.6% and 9.6%, respectively.
- Stockholders’ equity decreased to $5.66 billion from $5.84 billion, primarily because of $709.7 million of after-tax accumulated other comprehensive loss from securities and hedges, dividends and share repurchases. The company repurchased $100.0 million of common stock during the first nine months and paid $1.20 per share in dividends.
Material Changes, Outlook and Risks
- In the first quarter, the company transferred $3.01 billion of debt securities from available-for-sale to held-to-maturity. At September 30, held-to-maturity securities had amortized cost of $3.01 billion and fair value of $2.46 billion.
- Rising interest rates materially increased loan yields and net interest margin but also increased deposit and other funding costs. The company reported an asset-sensitive interest-rate position; modeled 12-month net interest income sensitivity was positive 6.0% for an immediate 100-basis-point increase and positive 11.7% for a 200-basis-point increase.
- Unrealized losses on securities increased substantially as rates and spreads rose. AOCI declined to a loss of $800.0 million, including $712.97 million attributable to debt securities. Management stated that the securities were expected to recover and that no credit-loss allowance was required.
- Management cited inflation, supply-chain disruptions, higher oil prices, the Russia-Ukraine conflict, rising interest rates and recession concerns as important economic factors. No formal earnings or revenue guidance is provided in the filing.
- Credit quality remained strong overall: nonperforming assets were $97.0 million, or 0.16% of assets, and nonaccrual loans were $82.5 million. However, criticized loans increased 9% from year-end to $905.2 million, and the California concentration of the commercial real estate portfolio remains significant at 72%.
- The company has significant off-balance-sheet exposure, including $10.08 billion of loan commitments and letters of credit, $408.5 million of commitments to affordable-housing and tax-credit investments, and recourse obligations on sold or securitized loans.
- The transition from USD LIBOR remains a material operational and contractual issue. The company has significant LIBOR-linked loans, derivatives, securities and funding arrangements and expects the transition to continue through June 30, 2023.
- Other stated risks include economic deterioration, commercial and residential real-estate declines, deposit migration and funding costs, credit losses, regulatory and legal changes, cybersecurity and operational disruptions, China and Hong Kong exposure, foreign-exchange movements, and climate or natural disasters.
Important Facts for Investors to Verify
- Whether loan growth and the 3.68% quarterly net interest margin remain sustainable as deposit costs rise and the Federal Reserve tightens policy.
- The effect of the $800.0 million AOCI loss and the $1.42 billion of aggregate unrealized losses on AFS and HTM debt securities on tangible capital, liquidity and future earnings.
- Whether criticized loans, California commercial real estate exposure and the higher allowance for credit losses translate into increased provisions or charge-offs.
- The pace and cost of migration from LIBOR to alternative reference rates, including any effects on contracts, systems, derivatives and customer relationships.
- The decline in unencumbered liquid assets, the 88% loan-to-deposit ratio and continued reliance on wholesale funding capacity.
- The company’s future capital allocation, including dividends, the remaining authorization under the $500 million repurchase program and the impact on book and tangible equity per share.