EAST WEST BANCORP INC quarterly report, Q2 FY2022

East West Bancorp, Inc. 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 more than 120 locations in the U.S. and China. The filing covers the quarter and six months ended June 30, 2022. The company reported $62.39 billion of assets and approximately 3,200 full-time equivalent employees at quarter-end.

Key Financial Metrics

Metric	Three Months Ended June 30, 2022	Six Months Ended June 30, 2022
Total revenue	$551.4 million	$1.047 billion
Net interest income before credit provision	$473.0 million	$888.6 million
Provision for credit losses	$13.5 million	$21.5 million
Noninterest income	$78.4 million	$158.2 million
Noninterest expense	$196.9 million	$386.3 million
Net income	$258.3 million	$496.0 million
Diluted EPS	$1.81	$3.47
Net interest margin	3.23%	3.05%
ROA / ROE	1.66% / 18.23%	1.61% / 17.36%
Efficiency ratio	35.70%	36.91%

Loans held for investment totaled $46.50 billion, up 12% from December 31, 2021; loans net of allowance and loans held for sale totaled $45.97 billion.
Total deposits were $54.34 billion, up 2% year-to-date. Noninterest-bearing deposits represented 42% of total deposits.
Allowance for loan losses was $563.3 million, or 1.21% of loans held for investment. Total allowance for credit losses, including unfunded commitments, was $587.6 million.
Nonaccrual loans were $89.9 million, or 0.19% of loans held for investment. Total nonperforming assets were $89.9 million, or 0.14% of total assets.
Stockholders’ equity was $5.61 billion. Book value per share was $39.81 and tangible equity per share was $36.44.
Cash and cash equivalents were $1.90 billion, compared with $3.91 billion at year-end. Unencumbered liquid assets were $9.08 billion, and available borrowing capacity was $22.62 billion.
FHLB advances totaled $174.8 million, repurchase agreements totaled $611.8 million, and long-term debt totaled $147.8 million. The loan-to-deposit ratio was 86%.
Six-month operating cash flow was $929.1 million; investing activities used $4.0 billion and financing activities provided $1.05 billion. Cash and cash equivalents declined by $2.01 billion during the first half.
At June 30, 2022, the company and bank remained above well-capitalized regulatory thresholds. Company common equity Tier 1, total capital, and Tier 1 leverage ratios were 12.0%, 13.2%, and 9.3%, respectively; bank ratios were 11.8%, 12.8%, and 9.2%.

Material Changes Versus Prior Comparable Period

Second-quarter net income increased 15% from $224.7 million to $258.3 million; first-half net income increased 15% from $429.7 million to $496.0 million.
Second-quarter net interest income increased 26%, and first-half net interest income increased 22%, primarily due to loan growth, higher loan yields, higher securities yields and rising interest rates.
Net interest margin expanded 48 basis points in the quarter and 32 basis points for the first half, while the efficiency ratio improved from 42.60% to 35.70% in the quarter and from 43.67% to 36.91% for the first half.
Credit provision changed from a $15.0 million reversal in the 2021 quarter and first half to provisions of $13.5 million and $21.5 million, respectively. Management attributed the 2022 provisions primarily to loan growth and a weakening economic outlook.
Noninterest income increased 15% in the quarter and 12% for the first half, driven primarily by deposit account fees and derivative income. Wealth management fees and other investment income declined.
Noninterest expense increased 4% in the quarter and 2% for the first half. Compensation and other operating expenses rose, partly offset by lower amortization of tax credit and other investments.
Accumulated other comprehensive loss increased from $90.4 million at year-end to $600.6 million, primarily because of unrealized losses on debt securities and cash-flow hedges. Comprehensive income was a loss of $14.3 million for the first half despite net income of $496.0 million.
The company transferred $3.01 billion of debt securities from available-for-sale to held-to-maturity during the first quarter. AFS securities declined to $6.26 billion from $9.97 billion at year-end, while HTM securities totaled $3.03 billion at amortized cost.
The company repurchased $100.0 million of common stock during the quarter and declared a $0.40 per-share quarterly dividend. The remaining repurchase authorization was approximately $254.0 million at June 30.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued organic growth in loans, deposits and revenue through its relationship-focused banking model and believes liquidity is sufficient for foreseeable needs.

Management’s credit-loss forecast incorporated inflation, supply-chain constraints, the Russia-Ukraine war, slower GDP growth and rising interest rates. The baseline scenario assumed 2022 GDP growth of 2.7% and a 3.3% year-end unemployment rate.
Management identified California real estate concentration as a material credit consideration: 72% of total CRE loans were in California, and the weighted-average CRE loan-to-value ratio was 52%.
The company reported $1.02 billion of criticized loans, equal to 2.20% of loans held for investment, up 23% from year-end. Special mention loans increased 53%, while classified loans declined 4%.
The company remains asset-sensitive to interest rates. Its model estimated that a sustained instantaneous 100- or 200-basis-point increase could increase 12-month net interest income by 7.0% or 13.8%, respectively, although actual results may differ materially.
Unfunded loan commitments, commercial letters of credit and standby letters of credit totaled $9.89 billion. These amounts do not necessarily represent future funding requirements, but expose the company to contingent credit risk.
LIBOR transition activity is expected to continue through June 30, 2023. The company has ceased new LIBOR loan originations and is transitioning affected contracts to alternative reference rates, including SOFR.
Key stated risks include economic slowdown, inflation, interest-rate volatility, credit deterioration, California real estate conditions, COVID-19 effects, China-U.S. geopolitical and economic developments, cybersecurity and operational disruptions, regulatory changes, litigation, funding costs and liquidity-market stress.
The company expects to adopt ASU 2022-02 on January 1, 2023 and does not expect a material financial statement impact.

Important Facts for Investors to Verify

Whether rapid loan growth and the 86% loan-to-deposit ratio remain sustainable as deposits reprice and liquidity declines.
Whether the $587.6 million credit-loss allowance adequately covers risks from commercial real estate concentration, criticized loans and changing economic forecasts.
The effect of rising interest rates on deposit betas, funding costs, net interest margin and the value of the securities portfolio.
Whether unrealized securities losses in AOCI could affect tangible book value, regulatory capital or liquidity if securities must be sold.
Progress and remaining exposure in the LIBOR transition, including loans, derivatives, debt and repurchase agreements maturing after June 30, 2023.
The nature and potential magnitude of the miscellaneous operational losses and other foreclosed-asset write-downs reflected in other operating expense.
Future changes in deposit insurance assessment rates, CRA requirements, capital rules and other regulatory proposals.
Details of pending litigation and other contingencies, for which the filing states ultimate losses could exceed accrued amounts.