East West Bancorp(EWBC) - 2023 Q4 - Annual Report

PART I Business East West Bancorp, Inc. is a bank holding company for East West Bank, a leading commercial bank serving U.S. and Asian markets, with $69.6 billion in assets Company Overview (as of December 31, 2023) | Metric | Value | | :--- | :--- | | Total Assets | $69.6 billion | | Total Net Loans | $51.5 billion | | Total Deposits | $56.1 billion | | Total Stockholders' Equity | $7.0 billion | - The company's core strategy involves growing loans, deposits, and revenue by deepening client relationships, particularly those with cross-border business needs between the U.S. and Asia[20][21] - East West Bank operates under a commercial business license in China, a unique feature among U.S. regional banks, allowing it to open branches, make loans, and collect deposits in the country[21] - The company operates through three segments: Consumer and Business Banking, Commercial Banking, and an Other segment for centralized functions like corporate treasury[26] Human Capital The company employed 3,206 full-time equivalents as of December 31, 2023, with a diverse workforce emphasizing internal promotion and equitable compensation Workforce Composition (as of December 31, 2023) | Category | % of Total Workforce | % of Total Managers | | :--- | :--- | :--- | | Gender | | | | Female | 62% | 58% | | Male | 38% | 42% | | Race/Ethnicity | | | | Asian minorities | 74% | 74% | | Non-Asian minorities | 15% | 12% | | White | 11% | 14% | - In 2023, the company hired over 500 external candidates and promoted over 550 internal employees, representing 18% of the workforce[35][36] - The company offers a "Spirit of Ownership" program that awards stock grants to all employees, regardless of title or status, to align employee and stockholder interests. In 2023, over 600,000 restricted stock units were granted through various stock compensation programs[39] Supervision and Regulation The company is extensively regulated by U.S. and Asian authorities, adhering to Basel III capital rules and preparing for new climate-related disclosures - The company and the Bank are subject to Basel III Capital Rules and exceeded all "well capitalized" requirements as of December 31, 2023[51] - The company is not required to conduct company-run or supervisory stress tests under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), but continues to conduct its own annual capital and quarterly liquidity stress tests[59] - In November 2023, the FDIC implemented a special deposit insurance assessment to recover losses from the 2023 bank failures. The company recognized the entire assessment expense of approximately $70 million in the fourth quarter of 2023[70] - New California laws, the Climate Corporate Data Accountability Act (CCDAA) and the Climate-Related Financial Risk Act (CRFRA), will require the company to begin publicly disclosing greenhouse gas emissions and climate-related financial risks starting in 2026[80] Risk Factors The company faces diverse risks including economic downturns, U.S.-China tensions, interest rate fluctuations, credit exposure, cybersecurity threats, and regulatory changes - A significant portion of the loan portfolio is secured by real estate, primarily in California, making the company susceptible to downturns in regional real estate markets[88][96] - The business is subject to interest rate risk, as changes in rates affect net interest income, and inflation can increase funding costs and negatively impact borrowers' ability to repay loans[97][98] - The proportion of deposit balances exceeding FDIC insurance limits exposes the company to enhanced liquidity risk, particularly during periods of financial industry instability[107] - Cybersecurity threats, including ransomware and phishing attacks, pose a significant operational risk. A failure in security systems could disrupt business, result in the misuse of confidential information, and cause reputational harm[115][116] - The company operates in a highly regulated environment, and changes to statutes, regulations, or policies could increase costs, limit business activities, and result in penalties for non-compliance[129][130] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[144] Cybersecurity The company manages cybersecurity risk through a NIST-based program with Board oversight and a three-lines-of-defense model, reporting no material incidents - The Board's Risk Oversight Committee has primary oversight responsibility for cybersecurity risk and receives quarterly reports on the matter[146] - The company employs a three-lines-of-defense model for cybersecurity: 1) The Information Security Team for daily operations, 2) The Enterprise Risk Management (ERM) Team for independent monitoring, and 3) Internal Audit for independent assurance[148] - The company has not experienced any cybersecurity incidents that have materially affected its business strategy, results of operations, or financial condition to date[149] Properties The company operates from 21 owned and 90 leased U.S. locations, plus 11 leased locations in Asia, including full-service branches - The company operates from 21 owned and 90 leased locations in the U.S. and 11 leased locations in Asia[150] Legal Proceedings The company is party to various legal actions arising in the ordinary course of business, with details in Note 12 of the financial statements - Refer to Note 12 — Commitments and Contingencies — Litigation to the Consolidated Financial Statements for details on legal proceedings[152] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with a five-year cumulative return of 86.84% and $82 million in Q4 2023 share repurchases Five-Year Cumulative Total Return | Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | East West Bancorp, Inc. | $100.00 | $114.36 | $122.62 | $193.73 | $165.75 | $186.84 | | KBW Nasdaq Bank Index (BKX) | $100.00 | $136.13 | $122.08 | $168.88 | $132.75 | $131.56 | | S&P 500 Index | $100.00 | $131.49 | $155.68 | $200.37 | $164.08 | $207.21 | Q4 2023 Common Stock Repurchases | Calendar Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October | 590,696 | $52.63 | | November | 768,649 | $54.44 | | December | 146,746 | $63.00 | | Fourth quarter | 1,506,091 | $54.56 | - As of the end of 2023, approximately $172 million remained available for share repurchases under the company's $500 million stock repurchase program authorized in March 2020[163][164] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, the company achieved $1.2 billion net income, driven by 13% net interest income growth and 9% asset growth to $69.6 billion Financial Highlights 2023 vs. 2022 | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $1,161.2 M | $1,128.1 M | | Diluted EPS | $8.18 | $7.92 | | Net Interest Income | $2,312.3 M | $2,045.9 M | | Net Interest Margin | 3.61% | 3.45% | | Total Assets | $69.6 B | $64.1 B | | Total Loans | $52.2 B | $48.2 B | | Total Deposits | $56.1 B | $56.0 B | | Book Value per Share | $49.64 | $42.46 | - The company's financial performance in 2023 was marked by strong net interest income growth and net interest margin expansion, driven by a higher interest rate environment[173] - Total assets grew by $5.5 billion (9%) year-over-year, primarily due to loan growth of $4.0 billion (8%)[176] Results of Operations Results were driven by a 13% increase in net interest income to $2.3 billion, offset by a 19% rise in noninterest expense, including a $70 million FDIC special assessment - Net interest income grew by $266 million (13%) year-over-year, while noninterest income saw a slight decrease of $3 million (1%)[173][190] - Noninterest expense increased by $163 million (19%), largely due to a $70 million FDIC special assessment charge and a $31 million increase in compensation and benefits[198][199][200] Balance Sheet Analysis Total assets reached $69.6 billion, with 8% loan growth to $52.2 billion and a deposit shift from noninterest-bearing to time deposits - Total loans held-for-investment increased by $4.0 billion (8%) to $52.2 billion, driven by growth in residential mortgage (+$1.8B), CRE (+$1.4B), and C&I (+$0.9B) loans[225] - Total deposits remained stable at $56.1 billion. However, the composition shifted, with noninterest-bearing deposits decreasing by $5.5 billion and time deposits increasing by $4.7 billion as customers moved to higher-yielding products[252][255] - Stockholders' equity grew by $966 million (16%) to $7.0 billion, primarily due to $1.2 billion in net income, partially offset by $274 million in dividends[249] Risk Management The company manages credit, liquidity, and market risks, maintaining strong credit quality, robust liquidity of $29.8 billion, and an asset-sensitive balance sheet Credit Quality Metrics (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Criticized Loans to Total Loans | 1.87% | | Nonperforming Assets to Total Assets | 0.16% | | Allowance for Loan Losses to Total Loans | 1.28% | | Net Charge-offs to Average Loans (2023) | 0.09% | - Total liquidity sources, including cash and borrowing capacity, increased to $29.8 billion at year-end 2023 from $26.5 billion at year-end 2022[293] - Interest rate sensitivity analysis shows that a +100 bps instantaneous rate shock would increase net interest income by an estimated 1.2% over 12 months, indicating a modestly asset-sensitive balance sheet[314][317] Financial Statements This section presents the audited consolidated financial statements for 2023, including balance sheets, income statements, and cash flows, with an unqualified auditor opinion - The financial statements present the company's financial position as of December 31, 2023 and 2022, and its results of operations and cash flows for the three years ended December 31, 2023[357] - KPMG LLP, the independent registered public accounting firm, provided an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting[357][358] Note 1 — Summary of Significant Accounting Policies This note details the company's significant accounting policies, including the adoption of ASU 2022-02 and the Current Expected Credit Losses (CECL) methodology - The company adopted ASU 2022-02 on January 1, 2023, which eliminated the accounting guidance for Troubled Debt Restructurings (TDRs) and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty[400][438] - The allowance for loan losses is based on the Current Expected Credit Losses (CECL) methodology, representing management's estimate of expected losses over the contractual life of the loans, adjusted for prepayments[403] Note 6 — Loans Receivable and Allowance for Credit Losses Total loans held-for-investment reached $52.2 billion, with commercial loans comprising 71% and the allowance for loan losses increasing to $669 million Loan Portfolio Composition (in billions) | Loan Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Commercial & Industrial (C&I) | $16.6 | $15.7 | | Total Commercial Real Estate (CRE) | $20.5 | $19.1 | | Total Residential Mortgage | $15.1 | $13.3 | | Other Consumer | $0.1 | $0.1 | | Total Loans Held-for-Investment | $52.2 | $48.2 | Allowance for Loan Losses Activity (Year Ended Dec 31, 2023) | ($ in millions) | Amount | | :--- | :--- | | Beginning Balance (Dec 31, 2022) | $595.6 | | Provision for Credit Losses | $113.6 | | Net Charge-offs | ($46.3) | | Ending Balance (Dec 31, 2023) | $668.7 | - The allowance for credit losses increased in 2023 due to net loan growth and economic forecasts reflecting caution regarding inflation, high interest rates, and the CRE market outlook[568] Note 9 — Deposits Total deposits remained stable at $56.1 billion, but composition shifted significantly from noninterest-bearing to higher-yielding time deposits Deposit Composition (in billions) | Deposit Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Noninterest-bearing demand | $15.5 | $21.1 | | Interest-bearing checking | $7.6 | $6.7 | | Money market | $13.1 | $12.3 | | Savings | $1.8 | $2.6 | | Time deposits | $18.0 | $13.3 | | Total Deposits | $56.1 | $56.0 | Note 16 — Regulatory Requirements and Matters The company and East West Bank are "well capitalized" under Basel III, with a CET1 capital ratio of 13.3% as of December 31, 2023 Company Capital Ratios (as of Dec 31, 2023) | Ratio | Company | Minimum Requirement (with buffer) | | :--- | :--- | :--- | | CET1 Capital Ratio | 13.3% | 7.0% | | Tier 1 Capital Ratio | 13.3% | 8.5% | | Total Capital Ratio | 14.8% | 10.5% | | Tier 1 Leverage Ratio | 10.2% | 4.0% | - Both the company and the Bank were categorized as well capitalized as of December 31, 2023 and 2022[622] Controls and Procedures The CEO and CFO concluded disclosure controls were effective, and management's internal control over financial reporting was also effective, with an unqualified audit report - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[639] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[643] - KPMG LLP issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting[645][646] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Related Matters This section incorporates information on directors, executive officers, corporate governance, and compensation by reference from the 2024 proxy statement - Information required for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2024 Proxy Statement, to be filed within 120 days of the fiscal year-end[657][658][661][662] - As of December 31, 2023, approximately 4.3 million securities were available for future issuance under equity compensation plans approved by security holders[660] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and all exhibits filed as part of the Form 10-K report - This section contains the list of financial statements filed under Item 8 and a list of all exhibits filed with the Form 10-K[664][666]