East West Bancorp(EWBC) - 2024 Q2 - Quarterly Report

PART I Item 1. Consolidated Financial Statements The consolidated financial statements present East West Bancorp's financial position as of June 30, 2024, and its performance for the three and six months then ended Consolidated Balance Sheets The Consolidated Balance Sheets show a 4.1% increase in total assets to $72.5 billion and a 7.0% increase in total deposits to $60.0 billion from year-end 2023 | Financial Metric | June 30, 2024 | December 31, 2023 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $72,468,272 | $69,612,884 | +4.1% | | Loans held-for-investment, net | $52,084,115 | $51,542,039 | +1.1% | | Total Deposits | $59,999,785 | $56,092,438 | +7.0% | | Total Liabilities | $65,253,158 | $62,662,050 | +4.1% | | Total Stockholders' Equity | $7,215,114 | $6,950,834 | +3.8% | - The company replaced $4.5 billion in Bank Term Funding Program (BTFP) borrowings with $3.5 billion in Federal Home Loan Bank (FHLB) advances between December 31, 2023, and June 30, 2024[7] Consolidated Statement of Income The Consolidated Statement of Income reflects a 7.6% year-over-year decrease in Q2 2024 net income to $288.2 million, primarily due to higher credit loss provisions and lower net interest income | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $553,229 | $566,746 | -2.4% | | Provision for Credit Losses | $37,000 | $26,000 | +42.3% | | Net Income | $288,230 | $312,031 | -7.6% | | Diluted EPS | $2.06 | $2.20 | -6.4% | | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $1,118,368 | $1,166,607 | -4.1% | | Provision for Credit Losses | $62,000 | $46,000 | +34.8% | | Net Income | $573,305 | $634,470 | -9.6% | | Diluted EPS | $4.09 | $4.47 | -8.5% | Consolidated Statement of Comprehensive Income The Consolidated Statement of Comprehensive Income indicates a significant increase in comprehensive income for Q2 2024, driven by improved Other Comprehensive Income related to AFS debt securities - Comprehensive income for Q2 2024 was $296.8 million, an increase from $210.1 million in Q2 2023, driven by a positive change in Other Comprehensive Income (OCI) of $8.6 million in Q2 2024, compared to a loss of $101.9 million in Q2 2023, primarily due to smaller unrealized losses on AFS debt securities and cash flow hedges[10] Consolidated Statement of Changes in Stockholders' Equity The Consolidated Statement of Changes in Stockholders' Equity details a rise in equity to $7.22 billion in H1 2024, influenced by net income, dividends, and share repurchases - During the first six months of 2024, stockholders' equity increased from $6.95 billion to $7.22 billion, with key activities including net income of $573.3 million, offset by cash dividends of $155.4 million ($1.10 per share) and common stock repurchases of $123.2 million[13] Consolidated Statement of Cash Flows The Consolidated Statement of Cash Flows highlights a net decrease in cash for H1 2024, primarily due to substantial investing activities funded by deposits and FHLB advances | Cash Flow Activity (Six Months Ended June 30) | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $525,411 | $479,805 | | Net Cash Used in Investing Activities | ($3,284,294) | ($1,340,247) | | Net Cash Provided by Financing Activities | $2,513,010 | $3,773,058 | | Net (Decrease) Increase in Cash | ($249,293) | $2,896,103 | - The significant cash used in investing activities in H1 2024 was primarily due to $4.85 billion in purchases of AFS debt securities, largely funded by a $3.92 billion net increase in deposits and $3.5 billion in proceeds from FHLB advances, while also repaying $4.5 billion in short-term BTFP borrowings[16][18] Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed disclosures on accounting policies, loan portfolio changes, and an increase in criticized loans - The company adopted ASU 2023-02 on January 1, 2024, expanding the use of the proportional amortization method (PAM) for tax credit investments, which resulted in a $9 million decrease to opening retained earnings[23] - Total loans held-for-investment increased to $52.8 billion from $52.2 billion at year-end 2023, with the allowance for loan losses standing at $683.8 million, or 1.30% of loans held-for-investment, up from 1.28% at year-end[111] - Criticized loans increased by 10% to $1.1 billion (2.05% of total loans) as of June 30, 2024, from $978 million (1.87% of total loans) at year-end 2023[328][329] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 8% year-over-year decline in Q2 2024 net income to lower net interest income and a higher provision for credit losses Financial Review The Financial Review presents key performance metrics for Q2 and H1 2024, showing declines in net income, EPS, ROA, and ROE, alongside net interest margin compression | Performance Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Income ($ thousands) | $288,230 | $312,031 | $573,305 | $634,470 | | Diluted EPS | $2.06 | $2.20 | $4.09 | $4.47 | | ROA | 1.63% | 1.85% | 1.61% | 1.93% | | ROE | 16.36% | 19.43% | 16.38% | 20.27% | | Net Interest Margin | 3.27% | 3.55% | 3.30% | 3.75% | | Efficiency Ratio | 37.06% | 40.56% | 37.70% | 36.79% | Results of Operations The Results of Operations section details the drivers of net interest income compression, growth in noninterest income, and a reduction in noninterest expense due to an accounting policy change - Q2 2024 net interest income decreased 2% year-over-year to $553 million, with net interest margin compressing 28 bps to 3.27%, driven by higher deposit funding costs and a mix shift to higher-cost deposits, partially offset by higher loan yields[227][233] - Q2 2024 noninterest income increased 8% year-over-year to $85 million, primarily due to higher lending, wealth management, and deposit account fees[248] - Q2 2024 noninterest expense decreased 10% year-over-year to $236 million, mainly because of a $40 million reduction in amortization of tax credit investments following an accounting policy change (adoption of ASU 2023-02)[253][257] Operating Segment Results The Operating Segment Results show a decline in net income for both Consumer and Business Banking and Commercial Banking segments, with Commercial Banking impacted by higher credit loss provisions | Segment Net Income (Q2 2024) | Amount ($ thousands) | YoY Change | | :--- | :--- | :--- | | Consumer and Business Banking | $151,578 | -3% | | Commercial Banking | $126,441 | -9% | | Other | $10,211 | -37% | - The decline in Commercial Banking net income was primarily driven by a 97% increase in the provision for credit losses, reflecting higher net charge-offs in C&I and CRE portfolios[266] Balance Sheet Analysis The Balance Sheet Analysis discusses the growth in AFS debt securities and the stable, conservatively managed Commercial Real Estate loan portfolio - The AFS debt securities portfolio increased by 44% to $8.9 billion since year-end 2023, mainly due to purchases of GNMA securities funded by deposit growth[278][279] - The total Commercial Real Estate (CRE) loan portfolio was stable at $20.3 billion, representing 39% of total loans, with the portfolio's weighted-average LTV ratio remaining conservative at 50%[289][291] Capital The Capital section highlights share repurchases and the increase in book value and tangible book value per share during the first half of 2024 - The company repurchased 1.7 million shares for $123 million in the first half of 2024, with $49 million remaining under its current authorization[309] - Book value per share increased 5% to $52.06 and tangible book value per share increased 5% to $48.65 since December 31, 2023[230][310] Regulatory Capital and Ratios The Regulatory Capital and Ratios section confirms the company maintains capital levels significantly above well-capitalized requirements across all key ratios | Capital Ratio | June 30, 2024 | Well-Capitalized Requirement | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 13.7% | 6.5% (Bank) | | Tier 1 Capital | 13.7% | 8.0% (Bank) | | Total Capital | 15.1% | 10.0% (Bank) | | Tier 1 Leverage | 10.4% | 5.0% (Bank) | Risk Management The Risk Management section addresses increases in nonperforming assets, the company's strong liquidity position, and its asset-sensitive net interest income profile - Nonperforming assets increased 72% to $196 million (0.27% of total assets) at June 30, 2024, from $114 million (0.16% of total assets) at year-end 2023[330] - The company's liquidity position remains strong, with total liquidity sources (cash and borrowing capacity) of $30.6 billion, covering 125% of uninsured deposits (excluding collateralized and affiliate deposits)[346][315] - The company's net interest income is asset sensitive, with a gradual 100 bps increase in rates projected to increase NII by 1.0%, while a gradual 100 bps decrease would lower NII by 1.5%[366] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the Market Risk Management discussion within the MD&A, primarily focusing on interest rate risk and its impact on net interest income - The company's market risk disclosures are detailed in the MD&A section, focusing on interest rate risk management through simulation models and derivatives[386][353] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2024 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[387] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[389] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is party to various legal actions arising in the ordinary course of business, none of which are expected to have a material adverse effect on its financial condition - The company states that it is not a party to any pending legal proceedings that would be reasonably expected to have a material adverse effect on its financial condition[190][391] Item 1A. Risk Factors There have been no material changes to the company's risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 - The company reports no material changes to its risk factors from those presented in its 2023 Form 10-K[392] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2024, the company repurchased 560,645 shares of its common stock for approximately $41 million, with $49 million remaining for future repurchases | Period | Total Shares Purchased | Average Price Paid | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | Q2 2024 | 560,645 | $72.74 | $40.8 million | - As of June 30, 2024, approximately $49 million remained available for repurchase under the company's stock repurchase program[394]