East West Bancorp(EWBC) - 2023 Q1 - Quarterly Report

Forward-Looking Statements This section contains forward-looking statements intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, based on current assumptions and subject to risks and uncertainties - This section contains forward-looking statements intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, based on current assumptions and subject to risks and uncertainties[10] - Key factors that could cause future results to differ materially include changes in global economy, bank failures, regulatory changes, interest rates, and geopolitical events[11][13] PART I — FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents unaudited consolidated financial statements for Q1 2023, reflecting increased cash from borrowings and higher net income due to net interest income growth Consolidated Balance Sheet Total assets increased to $67.2 billion by March 31, 2023, driven by a $2.45 billion rise in cash from $4.5 billion in new short-term borrowings, while deposits slightly decreased Consolidated Balance Sheet Highlights (Unaudited) | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :--- | :--- | :--- | | Total Assets | $67,244,898 | $64,112,150 | | Cash and cash equivalents | $5,934,194 | $3,481,784 | | Loans held-for-investment, net | $48,298,155 | $47,606,785 | | Total Liabilities | $60,935,567 | $58,127,538 | | Total deposits | $54,737,402 | $55,967,849 | | Short-term borrowings | $4,500,000 | $0 | | Total Stockholders' Equity | $6,309,331 | $5,984,612 | Consolidated Statement of Income Net income for Q1 2023 increased 36% to $322.4 million, driven by a 44% rise in net interest income to $599.9 million, with diluted EPS at $2.27 Consolidated Statement of Income Highlights (Unaudited) | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | | :--- | :--- | :--- | | Net interest income | $599,861 | $415,613 | | Provision for credit losses | $20,000 | $8,000 | | Noninterest income | $59,978 | $79,743 | | Noninterest expense | $218,447 | $189,450 | | Net Income | $322,439 | $237,652 | | Diluted EPS | $2.27 | $1.66 | Notes to Consolidated Financial Statements Notes detail accounting policies, financial instruments, and segments, highlighting ASU 2022-02 adoption, unrealized securities losses, loan portfolio growth, and $4.5 billion in new BTFP borrowings - The company adopted ASU 2022-02 on January 1, 2023, eliminating accounting guidance for Troubled Debt Restructurings (TDRs), resulting in a $6.0 million increase to the allowance for loan losses and a corresponding $4.3 million after-tax decrease to opening retained earnings[35] - As of March 31, 2023, the Available-for-Sale (AFS) debt securities portfolio had gross unrealized losses of $771.9 million, primarily attributed to interest rate movements rather than credit impairment, with no allowance for credit losses recorded[75][82][83] - Total loans held-for-investment grew to $48.9 billion as of March 31, 2023, with the allowance for loan losses at $619.9 million, up from $595.6 million at year-end 2022, driven by loan growth and changes in economic outlook[120][159] - In March 2023, the company borrowed $4.5 billion from the Federal Reserve's Bank Term Funding Program (BTFP) with a maturity date of March 19, 2024, and an interest rate of 4.37%, enhancing liquidity[174][176] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial performance, noting a 36% net income increase to $322.4 million driven by net interest income growth and a $4.5 billion BTFP borrowing to enhance liquidity Results of Operations Q1 2023 net income rose 36% to $322.4 million, driven by a 44% surge in net interest income to $599.9 million, despite a $10.0 million AFS debt security write-off Key Performance Metrics | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income | $322.4M | $237.7M | | Diluted EPS | $2.27 | $1.66 | | ROA | 2.01% | 1.56% | | ROE | 21.15% | 16.50% | | Net Interest Margin | 3.96% | 2.87% | | Efficiency Ratio | 33.11% | 38.25% | - The increase in net interest income was primarily driven by a 252 basis point increase in the yield on average interest-earning assets, which outpaced the 150 basis point increase in the average cost of deposits[221][223][227] Balance Sheet Analysis Total assets grew to $67.2 billion due to BTFP borrowings, loans increased to $48.9 billion, and deposits decreased to $54.7 billion, improving the uninsured deposit ratio to 44% - Total loans held-for-investment reached $48.9 billion, a 1% increase from year-end 2022, driven by growth in residential mortgage and CRE loans[269] - Total deposits decreased by $1.2 billion (2%) from year-end 2022, with noninterest-bearing demand deposits falling by $2.7 billion and money market deposits falling by $3.0 billion, partially offset by a $2.8 billion increase in time deposits[298][299] - The company's domestic uninsured deposit ratio improved to 44% as of March 31, 2023, compared to 50% as of December 31, 2022[300] Regulatory Capital and Ratios The company and Bank maintained strong capital positions, exceeding all 'well-capitalized' requirements, with a CET1 ratio of 13.1% and Total capital ratio of 14.5% Company Capital Ratios | Ratio | March 31, 2023 | Minimum for Well-Capitalized* | | :--- | :--- | :--- | | Common Equity Tier 1 | 13.1% | 6.5% (Bank) | | Tier 1 Capital | 13.1% | 8.0% (Bank) | | Total Capital | 14.5% | 10.0% (Bank) | | Tier 1 Leverage | 10.0% | 5.0% (Bank) | *Well-capitalized requirements shown are for the Bank subsidiary Risk Management The company's ERM framework maintains strong credit quality with nonperforming assets at 0.14%, increased liquidity to $30.7 billion via BTFP, and remains asset sensitive to interest rates - Nonperforming assets decreased by 6% to $93.4 million, representing 0.14% of total assets as of March 31, 2023[319] - Total available liquidity sources, including cash and borrowing capacity, increased to $30.7 billion as of March 31, 2023, from $26.5 billion at year-end 2022, bolstered by borrowings from the BTFP[336] - The company's net interest income is asset sensitive, with a simulation showing a 4.8% increase over 12 months in a +100 bps instantaneous rate shock scenario[349][350] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section cross-references detailed market risk disclosures found in Item 2 (MD&A – Risk Management) and Note 6 (Derivatives) of the financial statements Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[375] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[377] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal actions in the ordinary course of business, none of which are expected to have a material adverse effect on its financial condition - The company is a party to various legal actions arising in the ordinary course of business but does not expect them to have a material adverse effect on its financial condition[185][186][380] Item 1A. Risk Factors This section updates risk factors from the 2022 Form 10-K, focusing on risks from recent bank failures, including increased FDIC premiums, regulatory changes, and heightened liquidity risk, leading to $4.5 billion in BTFP borrowings - The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank have created industry disruption and could lead to increased FDIC premiums or special assessments[381][382] - The company faces enhanced liquidity risk due to the proportion of its deposits that exceed FDIC insurance limits, which could lead to significant withdrawals in a short period[383] - To manage liquidity risk in the current environment, the company borrowed $4.5 billion from the Federal Reserve's Bank Term Funding Program (BTFP) during the first quarter of 2023[383] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or share repurchase activities during Q1 2023 - There were no unregistered sales of equity securities or share repurchases during Q1 2023[385]