East West Bancorp, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
East West Bancorp, Inc. is a bank holding company operating primarily through East West Bank, providing consumer, business and commercial banking services in the U.S. and Asia through more than 120 locations. Reported results are unaudited and cover the quarter and six months ended June 30, 2023, compared with the same periods in 2022. The Company reported approximately 3,200 full-time equivalent employees and $68.53 billion of assets at quarter-end.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income before provision | $566.7 million | $473.0 million | $1.17 billion | $888.6 million |
| Total revenue | $645.4 million | $551.4 million | $1.31 billion | $1.05 billion |
| Provision for credit losses | $26.0 million | $13.5 million | $46.0 million | $21.5 million |
| Noninterest expense | $261.8 million | $196.9 million | $480.2 million | $386.3 million |
| Net income | $312.0 million | $258.3 million | $634.5 million | $496.0 million |
| Diluted EPS | $2.20 | $1.81 | $4.47 | $3.47 |
| Net interest margin | 3.55% | 3.23% | 3.75% | 3.05% |
| ROA | 1.85% | 1.66% | 1.93% | 1.61% |
| ROE | 19.43% | 18.23% | 20.27% | 17.36% |
- Total assets were $68.53 billion at June 30, 2023, up 7% from December 31, 2022. Loans held for investment were $49.83 billion, up 3%, primarily from commercial real estate and residential mortgage growth.
- Total deposits were $55.66 billion, down 1% from year-end. Noninterest-bearing deposits declined 20% to $16.74 billion, while time deposits increased 27% to $16.98 billion.
- Cash and cash equivalents increased 83% to $6.38 billion. The Company had $4.50 billion of Bank Term Funding Program borrowings outstanding at 4.37%, maturing March 19, 2024.
- Total stockholders’ equity was $6.46 billion; book value per share was $45.67 and tangible book value per share was $42.33. The Company and Bank remained above well-capitalized regulatory thresholds; Company CET1 and total capital ratios were 13.2% and 14.6%, respectively.
- Operating cash flow was $481.4 million for the first six months, compared with $929.1 million in the prior-year period. Investing activities used $1.34 billion, while financing activities provided $3.77 billion.
Material changes versus comparable periods
- Q2 net income increased 21% and first-half net income increased 28%, driven primarily by higher loan yields, loan growth and higher interest income.
- Net interest margin expanded 32 basis points year over year in Q2 and 70 basis points for the first half. Average loan yield increased to 6.33% in Q2 from 3.95%, while average deposit cost rose to 2.12% from 0.17%, reflecting higher market rates and deposit competition.
- Noninterest income was essentially unchanged in Q2 but declined 12% for the first half, primarily due to lower derivative income and a $10.0 million write-off of an impaired available-for-sale subordinated debt security.
- Noninterest expense increased 33% in Q2 and 24% for the first half. Significant drivers included tax-credit investment amortization, compensation, deposit account expense and FDIC-related assessments.
- The allowance for credit losses increased to $665.1 million from $621.9 million at year-end, reflecting loan growth and a more cautious economic outlook. Net charge-offs were $7.5 million in Q2 and $8.1 million for the first half.
- Nonaccrual loans increased 16% to $115.5 million, although criticized loans declined 9% to $811.8 million. Commercial real estate loans represented 40% of loans held for investment, and 70% of total CRE loans were concentrated in California.
- The Company adopted ASU 2022-02 effective 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.
Guidance, outlook, commentary and risks
- No formal earnings or financial guidance is provided in the filing. Management expects to continue pursuing organic loan, deposit and revenue growth while managing expenses, capital and risk.
- Management described inflation, elevated interest rates, commercial real estate pressure, supply-chain disruption and potential economic slowdown as continuing concerns. The allowance methodology used a baseline and downside scenario, with no weighting assigned to the upside scenario.
- The Company believes liquidity is adequate. Cash and cash equivalents, interest-bearing bank deposits and stated borrowing capacity totaled $30.16 billion at June 30, 2023. The loan-to-deposit ratio increased to 90% from 86% at year-end.
- Uninsured deposits excluding collateralized and affiliate deposits were $21.47 billion, or 40% of domestic deposits, down from 51% at year-end. Management noted that deposit outflows, higher funding costs and reduced market access could pressure liquidity and net interest margin.
- The filing highlights risks from the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, potential FDIC special assessments, increased regulatory requirements and broader disruption in the banking sector.
- Interest-rate risk remains material. The Company reported an asset-sensitive profile; modeled 12-month net interest income would increase 2.3% under an instantaneous +100 basis-point scenario and decrease 3.0% under a -100 basis-point scenario. Economic value of equity would decline 3.5% under a +100 basis-point shock.
- LIBOR exposure was substantially remediated by June 30, 2023, and the remaining small portion had been amended to alternative reference rates by July 3, 2023.
- The Company reported no pending litigation expected to have a material adverse effect, although ultimate legal losses could exceed recorded reserves. Disclosure controls were deemed effective, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit mix continues shifting from noninterest-bearing balances into higher-cost interest-bearing and time deposits.
- Whether the 90% loan-to-deposit ratio and reliance on $4.50 billion of BTFP funding remain appropriate as the facility approaches its March 2024 maturity.
- Trends in nonaccrual loans, criticized CRE exposures, California real estate values and the $665.1 million allowance for credit losses.
- The effect of additional Federal Reserve rate changes on net interest margin, deposit betas, securities valuations and accumulated other comprehensive loss.
- The potential amount and timing of FDIC special assessments and any regulatory capital changes affecting banks with less than $100 billion of assets.
- The sustainability of reported profitability after excluding tax-credit investment effects, the $10.0 million securities write-off and other unusual items.