East West Bancorp, Inc. — Q1 2024 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 and commercial banking services through 120 locations in the U.S. and Asia. The company focuses on customers operating across the U.S. and Asia and reports Consumer and Business Banking, Commercial Banking, and Other segments. The filing covers the unaudited quarter ended March 31, 2024, with comparisons primarily to the quarter ended March 31, 2023 and December 31, 2023 balance sheet data.
Financial performance and key metrics
| Metric | Q1 2024 | Comparable / prior period |
|---|---|---|
| Total revenue | $644.1 million | $659.8 million in Q1 2023 |
| Net interest income before provision | $565.1 million | $599.9 million in Q1 2023 |
| Provision for credit losses | $25.0 million | $20.0 million in Q1 2023 |
| Net income | $285.1 million | $322.4 million in Q1 2023 |
| Diluted EPS | $2.03 | $2.27 in Q1 2023 |
| Net interest margin | 3.34% | 3.96% in Q1 2023 |
| Efficiency ratio | 38.33% | 33.11% in Q1 2023 |
| ROA / ROE | 1.60% / 16.40% | 2.01% / 21.15% in Q1 2023 |
| Cash flow from operating activities | $266.2 million | $222.9 million in Q1 2023 |
| Cash flow used in investing activities | $1.87 billion | $632.8 million in Q1 2023 |
| Cash flow from financing activities | $1.20 billion | $2.86 billion in Q1 2023 |
Average interest-earning assets increased 11% year over year to $68.1 billion, while the yield on those assets increased to 6.04%. These benefits were more than offset by higher funding costs. Average deposits increased 5% to $57.4 billion, but average noninterest-bearing deposits declined 24% to $15.0 billion, representing 26% of average deposits versus 36% a year earlier. The average cost of deposits rose to 2.84% from 1.60%.
Noninterest income increased 32% to $79.0 million, reflecting higher deposit account, lending, wealth management, customer derivative, and investment income. Noninterest expense increased 13% to $246.9 million, driven principally by compensation, regulatory assessments, deposit-related expenses, and tax credit investment amortization.
Balance sheet, debt, liquidity, and capital
- Total assets were $70.9 billion, up 2% from December 31, 2023.
- Total loans were $52.0 billion, down modestly from $52.2 billion at year-end. Commercial loans represented 70% of held-for-investment loans, including $20.3 billion of CRE exposure.
- Available-for-sale debt securities increased 36% to $8.4 billion, primarily due to purchases of GNMA securities funded by deposit growth. Total debt securities had $1.27 billion of gross unrealized losses, primarily related to interest-rate and spread movements; management reported no credit impairment allowance for these securities.
- Total deposits increased 4% to $58.6 billion, primarily due to a branch-based certificate of deposit campaign. Time deposits rose 15% to $20.8 billion, while noninterest-bearing demand deposits declined 5% to $14.8 billion.
- The $4.5 billion of BTFP borrowings outstanding at year-end matured and were repaid. This was partially offset by $3.5 billion of FHLB advances and $19 million of short-term borrowings at March 31, 2024. Approximately $117 million of junior subordinated debt was also redeemed.
- Cash and cash equivalents were $4.21 billion. Management reported cash, cash equivalents, and collateralized borrowing capacity of $30.1 billion, including $7.6 billion of FHLB capacity, $13.1 billion of FRBSF capacity, and $5.1 billion of unpledged securities.
- The loan-to-deposit ratio was 89%, down from 93% at year-end. Management stated that liquidity was adequate for ordinary-course operations and expected needs.
- Stockholders’ equity was $7.02 billion. Book value per share was $50.48 and tangible book value per share was $47.09. The company repurchased 1.18 million shares for $82 million and had approximately $89 million remaining under its repurchase authorization.
- The company and bank remained above applicable minimum and well-capitalized regulatory requirements. The company’s CET1, total capital, and Tier 1 leverage ratios were 13.5%, 14.8%, and 10.1%, respectively.
Material changes versus comparable periods
- Net income declined 12% year over year, primarily because net interest income fell 6% and noninterest expense rose 13%.
- Net interest margin contracted 62 basis points as deposit pricing increased, the deposit mix shifted toward time deposits, and borrowing costs remained elevated.
- Noninterest income increased 32%, partly because Q1 2023 included a $10 million impairment write-off on an AFS subordinated debt security; Q1 2024 recorded a small net gain on AFS securities.
- Credit costs increased to $25 million from $20 million. Net charge-offs rose to $23 million, or 0.17% annualized of average loans, from $1 million, or 0.01%, in Q1 2023.
- Criticized loans increased 22% from year-end to $1.20 billion, driven primarily by CRE and C&I loans. Nonaccrual loans increased 44% to $148 million, and total nonperforming assets increased 45% to $165 million.
- The allowance for credit losses increased slightly to $709 million from $706 million. Management cited continued caution regarding inflation, high interest rates, CRE conditions, and economic forecasts.
- Stockholders’ equity increased 1% from year-end despite the share repurchase, dividend payments, and a $42 million after-tax loss in other comprehensive income.
Outlook, management commentary, risks, and unusual items
The filing does not provide formal earnings or balance-sheet guidance. Management expects the relationship-focused banking model to support organic customer, loan, deposit, and revenue growth while emphasizing expense, capital, liquidity, and risk management.
- Persistent inflation and a restrictive Federal Reserve policy may delay rate cuts, pressure securities valuations, and increase deposit and other funding costs.
- The CRE market remains under pressure. Approximately 69% of the company’s $20.3 billion CRE portfolio is concentrated in California, making portfolio performance sensitive to California economic conditions and real estate values.
- The company is asset sensitive in its modeled interest-rate profile; rising rates may increase net interest income, while falling rates may reduce it. Reported sensitivity analyses showed modeled 12-month net interest income changes of positive 2.0% for a 100-basis-point rise and negative 3.2% for a 100-basis-point decline.
- AFS securities had $736 million of gross unrealized losses at March 31, 2024. Management expected full recovery of amortized cost and stated that it was more likely than not that the securities would not need to be sold before recovery.
- The company recognized an additional approximately $10 million FDIC special assessment charge in Q1 2024. It had recognized an approximately $70 million estimate of the broader special assessment in Q4 2023; future FDIC estimates could change.
- The company adopted ASU 2023-02 on January 1, 2024, reducing opening retained earnings by approximately $9 million and changing the accounting for qualifying tax credit investments.
- The company’s disclosure controls and procedures were effective as of March 31, 2024, and no material changes to internal control over financial reporting were reported.
- Management reported no pending legal proceedings expected to have a material adverse effect, while noting that litigation outcomes could exceed reserves. The filing states that there were no material changes to the risk factors in the 2023 Form 10-K.
Important facts for investors to verify
- Whether deposit repricing and migration toward higher-cost time deposits continue to compress net interest margin.
- Trends in criticized loans, nonaccrual loans, CRE delinquencies, charge-offs, and the allowance for credit losses, particularly in California.
- Whether unrealized securities losses remain non-credit-related and whether the company maintains the ability and intent to hold affected securities to recovery.
- The sustainability of deposit growth following the Lunar New Year CD campaign and the effect of uninsured domestic deposits, which were 42% of adjusted domestic deposits.
- Future FDIC special assessment adjustments and other regulatory or capital requirements.
- The impact of the BTFP repayment, FHLB advances, interest rates, and funding mix on liquidity and net interest income.
- Actual results relative to modeled interest-rate sensitivities, which depend on deposit behavior, loan growth, prepayments, and other management assumptions.