East West Bancorp, Inc. — 2022 Form 10-K Summary
Business context and reporting period
East West Bancorp, Inc. is a Delaware bank holding company operating primarily through East West Bank, a commercial bank serving customers in the U.S. and Asia. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021. The Company operated more than 120 locations, reported $64.11 billion of assets, and had 3,155 full-time equivalent employees at year-end. Its reportable segments were Consumer and Business Banking, Commercial Banking, and Other.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $2.345 billion | $1.817 billion | +29% |
| Net interest income before provision | $2.046 billion | $1.532 billion | +34% |
| Provision for credit losses | $73.5 million | ($35.0) million reversal | Higher expense |
| Noninterest income | $298.7 million | $285.9 million | +4% |
| Noninterest expense | $859.4 million | $796.1 million | +8% |
| Net income | $1.128 billion | $873.0 million | +29% |
| Diluted EPS | $7.92 | $6.10 | +30% |
| Net interest margin | 3.45% | 2.72% | +73 bps |
| Efficiency ratio | 36.65% | 43.80% | Improved |
| ROA / ROE | 1.80% / 19.51% | 1.47% / 15.70% | Expanded |
| Total assets | $64.11 billion | $60.87 billion | +5% |
| Total loans | $48.23 billion | $41.69 billion | +16% |
| Total deposits | $55.97 billion | $53.35 billion | +5% |
| Stockholders’ equity | $5.985 billion | $5.837 billion | +3% |
Operating cash flow was $2.066 billion, compared with $1.168 billion in 2021. Investing activities used $4.583 billion, primarily reflecting net loan growth and investment activity, while financing activities provided $2.114 billion, principally from deposit growth. Cash and cash equivalents decreased to $3.482 billion from $3.913 billion.
Loan growth was broad-based: commercial real estate loans increased 18% to $19.07 billion, residential mortgage loans increased 19% to $13.35 billion, and commercial and industrial loans increased 11% to $15.71 billion. Commercial loans represented 72% of loans held for investment. The allowance for loan losses was $595.6 million, and total allowance for credit losses, including unfunded commitments, was $621.9 million.
Liquidity remained supported by deposits, unencumbered liquid assets of $9.43 billion, and available borrowing capacity of $22.90 billion. The loan-to-deposit ratio increased to 86% from 78%. Uninsured deposits totaled $37.33 billion, including $8.80 billion of uninsured time deposits. Debt consisted primarily of $148.0 million of long-term junior subordinated debt; there were no FHLB advances at year-end versus $249.3 million in 2021.
The Company and Bank remained well capitalized. At December 31, 2022, the Company reported CET1, total risk-based capital, and Tier 1 leverage ratios of 12.7%, 14.0%, and 9.8%, respectively; the Bank reported 12.5%, 13.5%, and 9.7%.
Material changes versus the prior comparable period
- Profitability improved substantially, driven primarily by higher loan balances, rising asset yields, and wider net interest margin in the higher-rate environment.
- Deposit funding shifted toward time deposits: time deposits increased 67% to $13.33 billion, while noninterest-bearing demand deposits declined 8% to $21.05 billion.
- Credit provisioning changed from a $35.0 million reversal in 2021 to a $73.5 million provision in 2022, reflecting loan growth and a less favorable economic outlook.
- Net charge-offs declined to $18.5 million, or 0.04% of average loans, from $50.0 million, or 0.13%, in 2021.
- Nonperforming assets decreased 4% to $99.8 million, or 0.16% of total assets. Criticized loans increased 8% to $896.0 million, with special mention loans rising 22%.
- The Company transferred approximately $3.01 billion of securities from available-for-sale to held-to-maturity. Rising rates produced significant unrealized losses: pre-tax unrealized losses on AFS securities were $844.2 million, and accumulated other comprehensive loss increased to $765.6 million.
- The Company repurchased $100.0 million of common stock during 2022 and paid $1.60 per share in dividends, compared with $1.32 in 2021. In January 2023, the Board declared a quarterly dividend of $0.48 per share.
- The Company ceased offering new LIBOR-based loans or renewals beginning January 1, 2022 and expected to complete remaining contract transitions before June 30, 2023.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management highlighted inflation, Federal Reserve rate increases, higher funding costs, supply-chain disruption, geopolitical tensions, and potential recessionary conditions. The Company’s baseline credit-loss forecast assumed slower GDP growth and modestly higher unemployment in 2023; a downside scenario contemplated a recession, GDP contraction, and unemployment of 6.8%.
- Interest-rate risk is significant. The Company was asset sensitive for near-term net interest income, but liability sensitive on economic value of equity. Modeled 12-month net interest income sensitivity was positive 5.9% for an immediate 100-basis-point increase and negative 5.3% for a 100-basis-point decrease.
- Real estate concentration is material: 39% of loans were CRE, and 71% of CRE loans were concentrated in California. A California real estate downturn could increase credit losses.
- Uninsured deposits, deposit migration toward higher-cost products, and the increased loan-to-deposit ratio may pressure liquidity and net interest margin.
- Credit-loss estimates depend on macroeconomic forecasts and management judgments. A hypothetical 100% downside-scenario weighting would have increased the modeled allowance by approximately $292.9 million before model overlays and qualitative adjustments.
- International operations expose the Company to U.S.-China geopolitical, regulatory, currency, economic, and sanctions-related risks. Overseas offices generated approximately 4% of consolidated revenue in 2022.
- Other key risks include cybersecurity and operational failures, regulatory and AML compliance, litigation, climate-related events, competition, technology investment, tax-credit investment performance, and the LIBOR transition.
- The annual goodwill impairment test identified no impairment. KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit pricing and the shift from noninterest-bearing deposits to time deposits continue to compress net interest margin.
- California CRE, multifamily, office, and residential real estate performance, including criticized loans, delinquencies, nonaccrual loans, and collateral values.
- Whether the $621.9 million credit-loss allowance adequately reflects potential recessionary losses and continued loan growth.
- The liquidity impact of $37.33 billion of uninsured deposits, $13.10 billion of time deposits maturing in 2023, and the 86% loan-to-deposit ratio.
- The effect of $1.39 billion of gross unrealized losses in the total debt securities portfolio and the Company’s ability and intent to hold securities through recovery.
- Progress and residual legal, operational, and financial exposure from the LIBOR-to-alternative-rate transition.
- Future regulatory capital requirements, CECL phase-in effects through 2024, dividend capacity, and share repurchase plans.