East West Bancorp, Inc. 10-Q Summary
Reporting period: Three months ended March 31, 2022. East West Bancorp is a bank holding company serving individuals and businesses through East West Bank, with operations in the United States and China. The company reported $62.24 billion of assets and approximately 3,100 full-time equivalent employees at quarter-end.
Financial performance and position
| Metric | Q1 2022 | Comparable period or change |
|---|---|---|
| Total revenue | $495.4 million | Up 16% from $426.6 million in Q1 2021 |
| Net interest income before provision | $415.6 million | Up 18% year over year |
| Net interest margin | 2.87% | Up from 2.71% |
| Noninterest income | $79.7 million | Up 9% year over year |
| Noninterest expense | $189.5 million | Down 1% year over year |
| Provision for credit losses | $8.0 million | None in Q1 2021 |
| Net income | $237.7 million | Up 16% from $205.0 million |
| Diluted EPS | $1.66 | Up from $1.44 |
| ROA / ROE | 1.56% / 16.50% | Up from 1.50% / 15.57% |
| Efficiency ratio | 38.25% | Improved from 44.79% |
Loan yields, loan growth, and lower deposit funding costs drove the increase in net interest income and margin. Average interest-earning assets rose 11% to $58.69 billion, while the average cost of deposits declined to 0.10% from 0.18%. Noninterest income benefited from higher deposit account fees, foreign exchange income, loan-sale gains, and securities-sale gains, partly offset by lower derivative income.
At March 31, 2022, total loans held for investment were $43.49 billion, up 4% from December 31, 2021, and net loans were $42.95 billion. Total deposits were $54.94 billion, up 3%, with noninterest-bearing demand deposits increasing 9% to $24.93 billion and representing 45% of total deposits. The loan-to-deposit ratio was 79%.
Cash and cash equivalents were $3.85 billion. Unencumbered liquid assets totaled $12.92 billion, down from $15.63 billion at year-end, primarily because $3.01 billion of securities were transferred from available-for-sale to held-to-maturity. Management reported $25.91 billion of available borrowing capacity, including $12.13 billion with the FHLB and $4.60 billion with the Federal Reserve Bank of San Francisco.
Debt and other funding included $74.6 million of FHLB advances, $300.0 million of repurchase agreements, and $147.7 million of long-term debt. Stockholders’ equity declined 2% to $5.70 billion, primarily because after-tax accumulated other comprehensive losses increased by $304.5 million from securities and hedging losses. Book value per share was $40.09 and tangible equity per share was $36.76.
Operating cash flow was $285.9 million. Investing activities used $1.68 billion, primarily reflecting net loan growth and investment activity, while financing activities provided $1.33 billion, mainly from increased deposits. Cash and cash equivalents declined by $64.2 million during the quarter.
Material changes versus prior comparable periods
- Net income increased 16%, supported by higher net interest income and revenue growth.
- Net interest margin expanded 16 basis points because of loan growth, higher loan yields, and lower deposit costs.
- Loans increased $1.80 billion from year-end, led by commercial real estate, commercial and industrial, and residential mortgage lending.
- Deposits increased $1.59 billion, driven primarily by noninterest-bearing demand deposits; money market deposits declined $1.02 billion.
- Noninterest expense decreased despite an 8% increase in compensation and employee benefits, principally because tax credit and other investment amortization declined 45%.
- The company recognized an $8.0 million credit-loss provision, while net charge-offs declined to $8.3 million, or 0.08% annualized of average loans, from $13.4 million, or 0.14%, in Q1 2021.
- During the quarter, $3.01 billion of debt securities were transferred from AFS to HTM. AFS securities declined 32% to $6.73 billion, while HTM securities were $3.00 billion at amortized cost.
- Other comprehensive loss was $304.5 million, compared with $134.4 million in Q1 2021, producing comprehensive loss of $66.9 million despite positive net income.
- First-quarter 2022 dividends declared were $0.40 per share, compared with $0.33 per share in Q1 2021. The board declared a second-quarter dividend of $0.40 per share in April 2022.
Asset quality, capital, outlook, and risks
Asset quality remained strong. Criticized loans were $833.3 million, or 1.92% of loans held for investment, essentially unchanged in dollars from year-end. Nonperforming assets declined 9% to $94.4 million, or 0.15% of total assets. Nonaccrual loans were $84.8 million, and the allowance for credit losses was $568.9 million, including $545.7 million for loan losses and $23.3 million for unfunded commitments.
Management increased the weighting of its downside economic scenario because of inflation, supply-chain constraints, and potential COVID-19 variants. The base forecast assumed 2022 GDP growth of 3.5%, a 3.5% year-end unemployment rate, and rising interest rates; the downside scenario assumed 0.9% GDP growth and unemployment increasing to 7.2%.
The company and bank continued to exceed regulatory minimums and were classified as well capitalized. At March 31, the company’s common equity Tier 1, total capital, and Tier 1 leverage ratios were 12.6%, 13.9%, and 9.3%, respectively; the bank’s corresponding ratios were 12.1%, 13.1%, and 9.0%.
No formal earnings or financial guidance is provided in the filing. Management expects its relationship-focused banking model to support organic loan, deposit, and revenue growth while continuing to manage expenses, capital, liquidity, and risk. The company is asset sensitive and reported that net interest income would generally benefit from higher interest rates, subject to deposit pricing, loan growth, and deposit mix.
Key risks include COVID-19 and its variants, inflation, supply-chain disruption, rising interest rates, changes in commercial and residential real estate markets, concentration of CRE lending in California, geopolitical and economic developments involving China and Hong Kong, credit losses, liquidity and funding costs, cybersecurity and operational disruptions, regulatory changes, litigation, and the transition from USD LIBOR to alternative reference rates. The company stated that no material change had occurred in the risk factors disclosed in its 2021 Form 10-K.
The company had $9.22 billion of off-balance-sheet credit commitments, including $7.01 billion of loan commitments and $2.21 billion of commercial and standby letters of credit. It also had $288.2 million of commitments to invest in affordable housing, tax credit, and other investments. Management stated that liquidity sources were sufficient for reasonably foreseeable needs.
Important facts for investors to verify
- Whether loan growth and the 2.87% net interest margin remain sustainable as deposit pricing and market rates rise.
- The effect of the $3.01 billion AFS-to-HTM transfer on liquidity, interest-rate risk, AOCI, and future earnings.
- Whether unrealized securities losses, which were primarily attributed to rate movements and spread widening, remain noncredit-related.
- Future credit performance of the commercial portfolio, particularly California-concentrated CRE and C&I exposures.
- Changes in noninterest-bearing deposit balances, deposit betas, and the 79% loan-to-deposit ratio.
- Whether the $568.9 million allowance for credit losses remains adequate under the company’s downside economic scenarios.
- Progress and costs associated with the transition from LIBOR, including the company’s significant volume of LIBOR-based loans and derivatives.
- Potential effects of COVID-19, inflation, supply-chain conditions, China-related geopolitical developments, and changing regulatory requirements.