East West Bancorp(US:EWBC)2024-05-09 19:17Forward-Looking Statements This report contains forward-looking statements subject to risks and uncertainties, where actual results may differ materially - This report contains forward-looking statements based on current assumptions and are subject to risks and uncertainties. These statements are not guarantees of future performance and actual results could differ materially10 - Key factors that could cause results to differ from forward-looking statements include, but are not limited to1113 - Changes in the global economy, inflation, and interest rate environment - The soundness of other financial institutions and impacts from bank failures - Changes in laws or the regulatory environment - Shifts in trade, monetary, and fiscal policies, particularly between the U.S. and China - Fluctuations in commercial and consumer real estate markets - Cyber-attacks and technology disruptions - Future credit quality and performance PART I — FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Unaudited consolidated financial statements for Q1 2024 show total assets increased to $70.9 billion, driven by available-for-sale securities and deposits, while net income decreased to $285.1 million due to lower net interest income and higher expenses Consolidated Balance Sheet Total assets increased to $70.9 billion as of March 31, 2024, driven by available-for-sale debt securities, with deposits growing to $58.6 billion and a shift from BTFP to FHLB borrowings Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $70,875,670 | $69,612,884 | | Cash and cash equivalents | $4,210,801 | $4,614,984 | | Available-for-sale debt securities, at fair value | $8,400,468 | $6,188,337 | | Loans held-for-investment, net | $51,322,224 | $51,542,039 | | Total Liabilities | $63,852,438 | $62,662,050 | | Total deposits | $58,560,624 | $56,092,438 | | BTFP borrowings | $0 | $4,500,000 | | FHLB advances | $3,500,000 | $0 | | Total Stockholders' Equity | $7,023,232 | $6,950,834 | Consolidated Statement of Income Net income for Q1 2024 decreased to $285.1 million from $322.4 million YoY, primarily due to a 6% drop in net interest income and a 13% rise in noninterest expense Income Statement Summary (in thousands, except per share data) | Income Statement Item | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Total interest and dividend income | $1,023,617 | $835,506 | | Total interest expense | $458,478 | $235,645 | | Net interest income before provision | $565,139 | $599,861 | | Provision for credit losses | $25,000 | $20,000 | | Total noninterest income | $78,988 | $59,978 | | Total noninterest expense | $246,875 | $218,447 | | Net Income | $285,075 | $322,439 | | Diluted EPS | $2.03 | $2.27 | Notes to Consolidated Financial Statements Key accounting updates, including ASU 2023-02 adoption, impacted retained earnings by $9 million, while total loans remained stable at $52.0 billion and criticized loans increased to $1.2 billion - The company adopted ASU 2023-02 on January 1, 2024, which expanded the scope of the proportional amortization method (PAM) for tax credit investments, resulting in a $9 million decrease to opening retained earnings35 - As of March 31, 2024, the company had $8.4 billion in Available-for-Sale (AFS) debt securities and $2.9 billion in Held-to-Maturity (HTM) debt securities at amortized cost, with the AFS portfolio having gross unrealized losses of $736.5 million primarily due to interest rate movements78 - The company uses various derivative instruments to manage interest rate and foreign currency risks, with derivatives designated as hedging instruments having a notional amount of $5.3 billion and non-hedging derivatives $21.9 billion as of March 31, 2024100 - Total loans held-for-investment were stable at $52.0 billion as of March 31, 2024, with commercial loans representing 70% of the portfolio and consumer loans making up the remaining 30%120 - During Q1 2024, the company repurchased 1,181,851 shares of common stock for $82 million under its authorized stock repurchase program, with approximately $89 million remaining available for future repurchases as of March 31, 2024195 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2024 net income decreased 12% to $285 million due to lower net interest income and margin compression, while total assets grew to $70.9 billion with increased deposits and strong capital ratios Financial Review Q1 2024 net income declined 12% to $285 million, with diluted EPS at $2.03, driven by lower net interest income and higher noninterest expense, though total assets reached $70.9 billion Q1 2024 vs Q1 2023 Performance Summary (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Income | $285,075 | $322,439 | | Diluted EPS | $2.03 | $2.27 | | Net Interest Income | $565,139 | $599,861 | | Noninterest Expense | $246,875 | $218,447 | | ROA | 1.60% | 2.01% | | ROE | 16.40% | 21.15% | | Net Interest Margin | 3.34% | 3.96% | - Asset Growth: Total assets increased by $1.3 billion (2%) from year-end 2023 to $70.9 billion220 - Deposit Growth: Total deposits grew by $2.5 billion (4%) from year-end 2023 to $58.6 billion220 - Borrowings Shift: Total borrowings decreased by $1.1 billion, with a $4.5 billion payoff of BTFP borrowings offset by a $3.5 billion increase in FHLB advances220 - Strong Capital: Book value per share increased to $50.48 from $49.64 at year-end 2023220 Results of Operations Q1 2024 operating results show a 6% decline in net interest income to $565.1 million due to higher funding costs, while noninterest income rose 32% and noninterest expense increased 13% - Net interest margin compressed by 62 bps year-over-year to 3.34%, as the average cost of funds rose 128 bps to 2.97%, while the yield on average interest-earning assets increased by only 53 bps to 6.04%221223228 - Noninterest income increased by $19 million (32%) YoY, primarily due to a $10 million impairment write-off on an AFS debt security in Q1 2023 not recurring in Q1 2024, along with higher lending and wealth management fees237241 - Noninterest expense increased by $28 million (13%) YoY, mainly due to a $12 million increase in compensation and a $12 million increase in deposit insurance premiums, which included a $10 million additional FDIC special assessment charge243244245 Balance Sheet Analysis The balance sheet expanded to $70.9 billion as of March 31, 2024, with AFS securities growing to $8.4 billion and the loan portfolio stable at $52.0 billion, maintaining a conservative CRE LTV - The AFS debt securities portfolio increased by 36% to $8.4 billion from year-end 2023, mainly due to purchases of GNMA securities, with 99% of the AFS portfolio rated investment grade263265 - Total loans held-for-investment were stable at $52.0 billion, with the portfolio composed of 70% commercial loans ($36.6 billion) and 30% consumer loans ($15.3 billion)268269 - The total CRE loan portfolio of $20.3 billion is well-diversified by property type and has a weighted-average LTV of 50%, with office properties constituting 11% of the CRE portfolio276277 Capital The company maintained strong capital ratios, with CET1 at 13.5%, exceeding 'well-capitalized' requirements, while stockholders' equity increased to $7.0 billion and $82 million in stock was repurchased Regulatory Capital Ratios | Ratio | March 31, 2024 (Company) | Well-Capitalized Requirement | | :--- | :--- | :--- | | Common Equity Tier 1 | 13.5% | 6.5% (Bank) | | Tier 1 Capital | 13.5% | 8.0% (Bank) | | Total Capital | 14.8% | 10.0% (Bank) | | Tier 1 Leverage | 10.1% | 5.0% (Bank) | - During Q1 2024, the company repurchased 1,181,851 shares for $82 million, with $89 million remaining available under the stock repurchase program as of March 31, 2024292 - A quarterly cash dividend of $0.55 per share was paid in Q1 2024, and another $0.55 per share dividend was declared for Q2 2024295 Deposits and Other Sources of Funding Total deposits increased by $2.5 billion to $58.6 billion, with a shift towards higher-cost time deposits, while BTFP borrowings were repaid and replaced by FHLB advances Deposit Composition (in thousands) | Deposit Type | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Noninterest-bearing demand | $14,798,927 | $15,539,872 | | Interest-bearing checking | $7,570,427 | $7,558,908 | | Money market | $13,585,597 | $13,108,727 | | Time deposits | $20,771,280 | $18,043,464 | | Total Deposits | $58,560,624 | $56,092,438 | - Uninsured domestic deposits, after adjusting for collateralized and affiliate deposits, were $23.4 billion, or 42% of total domestic deposits, a stable ratio compared to year-end 2023301 Risk Management Risk management includes an ERM framework, with criticized loans increasing to $1.2 billion and nonperforming assets to $165 million, while liquidity remains strong at $30.1 billion - Criticized loans increased by 22% from year-end 2023 to $1.2 billion, representing 2.30% of loans held-for-investment317319 - Nonperforming assets rose 45% to $165 million, or 0.23% of total assets, up from 0.16% at year-end 2023320 - Total liquidity sources, including cash and borrowing capacity, stood at $30.1 billion as of March 31, 2024334 Net Interest Income Sensitivity (Instantaneous Shift) | Change in Interest Rates (bps) | % Change in NII (Mar 31, 2024) | | :--- | :--- | | +200 | 2.7% | | +100 | 2.0% | | -100 | (3.2)% | | -200 | (6.6)% | Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk disclosures are referenced in the MD&A and Note 6, with interest rate risk identified as the primary exposure - The company's disclosures regarding market risk are detailed in Item 2 (MD&A - Risk Management) and Note 6 (Derivatives) of this Form 10-Q377 Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2024, 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 covered by this report378 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls380 PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal actions, but management does not anticipate a material adverse effect on its financial condition - The company is involved in various legal actions in the ordinary course of business, but management does not expect them to have a material adverse effect on its financial condition188383 Item 1A. Risk Factors No material changes to the company's risk factors have occurred since the 2023 Annual Report on Form 10-K - No material changes to the risk factors disclosed in the company's 2023 Form 10-K have occurred384 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2024, the company repurchased 1,181,851 common shares for $82 million, with $89 million remaining available under the repurchase program Q1 2024 Stock Repurchase Activity | Calendar Month | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining (in millions) | | :--- | :--- | :--- | :--- | | January | 0 | $0.00 | $172 | | February | 1,181,851 | $69.76 | $89 | | March | 0 | $0.00 | $89 |