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| EWBC > SEC Filings for EWBC > Form 10-Q on 8-Aug-2012 | All Recent SEC Filings |
8-Aug-2012
Quarterly Report
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West Bancorp, Inc. and its subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, and the condensed consolidated financial statements and accompanying notes presented elsewhere in this report.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. The financial information contained within these statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and other subjective assessments. In addition, certain accounting policies require significant judgment in applying complex accounting principles to individual transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements.
The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact the results of operations.
† fair valuation of financial instruments; † investment securities; † acquired loans; † covered loans; † covered other real estate owned; † FDIC indemnification asset; † allowance for loan losses; † other real estate owned; † loan, OREO, and note sales; † goodwill impairment; and † share-based compensation. |
Our significant accounting policies are described in greater detail in our 2011 Annual Report on Form 10-K in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the Consolidated Financial Statements, "Significant Accounting Policies," which are essential to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
For the second quarter of 2012, net income was $70.6 million or $0.47 per dilutive share. Net income grew 4% or $2.5 million from the first quarter of 2012 and 17% or $10.0 million from the second quarter of 2011. Earnings per dilutive share grew 4% or $0.02 from the first quarter of 2012 and 21% or $0.08 from the second quarter of 2011.
At June 30, 2012, total assets equaled $21.5 billion compared to $21.7 billion at March 31, 2012. Average earning assets decreased slightly during the second quarter of 2012, down $14.1 million compared to the prior quarter. The small decrease in total assets and average earning assets during the second quarter was primarily attributable to a decrease in investment securities of $833.0 million, due to sales, calls and maturities, offset by purchases. As of June 30, 2012, excess cash from these activities had not yet been reinvested, resulting in an increase in cash and cash equivalents of $793.8 million.
Total gross loans receivable at June 30, 2012 equaled $14.3 billion, compared to $14.5 billion as of March 31, 2012. During the second quarter non-covered loan balances excluding loans held for sale, grew $296.8 million or 3%. This growth was largely due to increases in commercial and trade finance loans, and single family loans, which grew $180.0 million or 6% and $64.8 million or 3%, respectively.
Covered loans totaled $3.4 billion as of June 30, 2012, a decrease of $267.1 million or 7% from March 31, 2012. The decrease in the covered loan portfolio was primarily due to payoffs and paydown activity, as well as charge-offs.
At June 30, 2012, total deposits equaled $17.3 billion, unchanged from March 31, 2012. In the second quarter of 2012, we continued to execute our strategy to grow low-cost, commercial deposits while reducing our reliance on higher cost time deposits. Core deposits increased to a record $11.0 billion at June 30, 2012, or an increase of $476.9 million or 5% from March 31, 2012. Time deposits decreased by $473.6 million or 7% from March 31, 2012 to $6.3 billion at June 30, 2012.
Credit Quality
During the second quarter of 2012, the provision for loan losses and nonperforming assets were lower than the previous quarter and the prior year as a result of continued credit quality improvement. The provision for loan losses was $15.5 million for the second quarter of 2012, a decrease of 14% or $2.6 million from the prior quarter, and a decrease of 42% or $11.0 million as compared to the second quarter of 2011. Additionally, nonaccrual loans excluding covered loans, decreased to $112.4 million or 0.78% of total loans as of June 30, 2012.
East West maintained an allowance for non-covered loan losses at $219.5 million or 2.03% of non-covered loans receivable at June 30, 2012. This compares to an allowance for non-covered loan losses of $214.3 million or 2.04% of non-covered loans at March 31, 2012 and $213.8 million or 2.29% of non-covered loans at June 30, 2011.
Capital Strength
Our capital ratios remain very strong. As of June 30, 2012, our Tier 1 leverage capital ratio totaled 9.7%, our Tier 1 risk-based capital ratio totaled 15.7% and our total risk-based capital ratio totaled 17.3%. East West exceeds well capitalized requirements for all regulatory guidelines by more than $900 million.
On June 7, 2012, the three federal banking agencies proposed a broad and comprehensive revision of the regulatory capital rules applicable to all U.S. banks, savings associations, all bank holding companies, that would replace current capital rules to harmonize them with international capital standards, known as Basel III, as well as certain provisions of the Dodd-Frank Act. When fully implemented, the new rules will completely replace the agencies' existing Basel I-based capital requirements, generally requiring U.S. banking organizations to hold higher amounts of capital, especially common equity, against their risk-weighted assets. If our capital ratios were calculated based upon our interpretation of the latest Basel III capital proposals, including the notices of proposed rulemaking issued by the federal banking agencies, then as of June 30, 2012, we would be more than adequately capitalized.
During the second quarter of 2012, the Company repurchased 2.2 million shares of common stock at an average price of $21.95 per share, or $49.0 million in total cost. Under the repurchase program authorized by East West's Board of Directors earlier in the year, management has the authority to repurchase up to a total of $200.0 million of the Company's common stock. As of June 30, 2012, the Company had repurchased a total of 6.8 million shares of common stock under the repurchase program at a total cost of $149.9 million.
The Company's Board of Directors approved the payment of third quarter dividends of $20.00 per share on the Company's Series A preferred stock. The dividend is payable on or about August 1, 2012 to shareholders of record as of July 15, 2012. Additionally, the Board declared a quarterly dividend of $0.10 per share on the Company's common stock payable on or about August 24, 2012 to shareholders of record as of August 10, 2012.
Results of Operations
Net income for the second quarter of 2012 totaled $70.6 million, compared with $60.5 million for the second quarter of 2011. Diluted earnings per share was $0.47 and $0.39 for the second quarters of 2012 and 2011, respectively. Our annualized return on average total assets increased to 1.32% for the quarter ended June 30, 2012, from 1.12% for the same period in 2011. The annualized return on average common stockholders' equity increased to 12.46% for the second quarter of 2012, compared with 11.06% for the second quarter of 2011.
Components of Net Income
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
(In millions)
Net interest income $ 233.2 $ 227.3 $ 452.0 $ 436.2
Provision for loan losses (15.5 ) (26.5 ) (33.6 ) (53.0 )
Noninterest (loss) income (11.7 ) 12.5 10.1 23.5
Noninterest expense (101.6 ) (117.6 ) (216.4 ) (224.4 )
Provision for income taxes (33.8 ) (35.2 ) (73.5 ) (65.7 )
Net income $ 70.6 $ 60.5 $ 138.6 $ 116.6
Annualized return on average total assets 1.32 % 1.12 % 1.29 % 1.10 %
Annualized return on average common equity 12.46 % 11.06 % 12.23 % 10.80 %
Annualized return on average total equity 12.31 % 10.95 % 12.09 % 10.70 %
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Net Interest Income
Our primary source of revenue is net interest income which is the difference between interest earned on loans, investment securities, and other earning assets less the interest expense on deposits, borrowings, and other interest-bearing liabilities. Net interest income for the second quarter of 2012 totaled $233.2 million, a 3% increase over net interest income of $227.3 million for the same period in 2011.
Net interest margin, defined as net interest income divided by average earning assets, increased by 11 basis points to 4.81% during the second quarter of 2012, from 4.70% during the second quarter of 2011. For the six months ended June 30, 2012, net interest margin increased by 5 basis points to 4.66% from 4.61% for the same period ended 2011. During 2012 and 2011, our covered loan yield was positively impacted by the accretion from the covered loans under ASC 310-30. The increase in net interest margin during the three and six months ended June 30, 2012 resulted primarily from lower costs of deposits and other interest-bearing liabilities.
The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average rates by asset and liability component for the three months ended June 30, 2012 and 2011:
Three Months Ended June 30,
2012 2011
Average Average Average Average
Balance Interest Rate (1) Balance Interest Rate (1)
(Dollars in thousands)
ASSETS
Interest-earning assets:
Due from banks and
short-term investments $ 1,504,325 $ 5,774 1.54 % $ 1,006,402 $ 4,500 1.79 %
Securities purchased under
resale agreements 1,026,923 4,758 1.86 % 1,068,975 5,109 1.92 %
Investment securities
available-for-sale (3) 2,487,725 16,913 2.73 % 3,220,795 23,253 2.90 %
Loans receivable (2)(3) 10,742,672 125,526 4.70 % 9,418,750 119,739 5.10 %
Loans receivable -
covered(2) 3,572,300 112,510 12.67 % 4,487,610 121,034 10.82 %
FHLB and FRB stock 174,965 881 2.02 % 200,437 833 1.67 %
Total interest-earning
assets 19,508,910 266,362 5.49 % 19,402,969 274,468 5.67 %
Noninterest-earning assets:
Cash and cash equivalents 234,918 270,259
Allowance for loan losses (226,112 ) (228,587 )
Other assets 2,009,678 2,129,462
Total assets $ 21,527,394 $ 21,574,103
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Checking accounts $ 978,085 $ 725 0.30 % $ 793,349 $ 699 0.35 %
Money market accounts 4,831,665 4,243 0.35 % 4,374,404 5,848 0.54 %
Savings deposits 1,232,663 647 0.21 % 1,034,486 933 0.36 %
Time deposits 6,474,566 13,562 0.84 % 7,653,112 21,650 1.13 %
Federal funds purchased 9 - - - - -
FHLB advances 393,982 1,353 1.38 % 738,094 3,956 2.15 %
Securities sold under
repurchase agreements 995,000 11,591 4.69 % 1,064,096 12,116 4.57 %
Long-term debt 212,178 1,084 2.05 % 235,343 1,787 3.05 %
Other borrowings - - - 20,972 143 2.73 %
Total interest-bearing
liabilities 15,118,148 33,205 0.88 % 15,913,856 47,132 1.19 %
Noninterest-bearing
liabilities:
Demand deposits 3,724,399 2,935,704
Other liabilities 378,905 513,940
Stockholders' equity 2,305,942 2,210,603
Total liabilities and
stockholders' equity $ 21,527,394 $ 21,574,103
Interest rate spread 4.61 % 4.48 %
Net interest income and net
interest margin $ 233,157 4.81 % $ 227,336 4.70 %
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(2) Average balances include nonperforming loans.
(3) Includes (amortization) of premiums and accretion of discounts on investment securities and loans receivable totaling $(1.7) million and $5.4 million for the three months ended June 30, 2012 and 2011, respectively. Also includes the net (amortization) of deferred loans fees totaling ($4.3) million and ($2.9) million for the three months ended June 30, 2012 and 2011, respectively.
The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average rates by asset and liability component for the six months ended June 30, 2012 and 2011:
Six Months Ended June 30,
2012 2011
Average Average
Average Yield Average Yield
Balance Interest Rate (1) Balance Interest Rate (1)
(Dollars in thousands)
ASSETS
Interest-earning assets:
Due from banks and short-term
investments $ 1,276,498 $ 12,306 1.94 % $ 995,055 $ 7,240 1.47 %
Securities purchased under
resale agreements 910,857 9,072 2.00 % 984,020 9,379 1.92 %
Investment securities
available-for-sale(3) 2,725,123 38,145 2.81 % 3,020,860 42,110 2.81 %
Loans receivable(2)(3) 10,711,442 251,201 4.72 % 9,271,782 234,650 5.10 %
Loans receivable - covered(2) 3,712,894 207,874 11.26 % 4,591,211 233,649 10.26 %
FHLB and FRB stock 179,164 1,814 2.04 % 204,992 1,775 1.75 %
Total interest-earning assets 19,515,978 520,412 5.36 % 19,067,920 528,803 5.59 %
Noninterest-earning assets:
Cash and cash equivalents 252,896 277,214
Allowance for loan losses (224,646 ) (232,371 )
Other assets 2,064,695 2,120,150
Total assets $ 21,608,923 $ 21,232,913
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Checking accounts $ 970,526 $ 1,413 0.29 % $ 782,547 $ 1,347 0.35 % Money market accounts 4,748,698 8,244 0.35 % 4,374,322 11,823 0.55 % Savings deposits 1,207,994 1,229 0.20 % 1,003,074 1,665 0.33 % Time deposits 6,659,958 28,455 0.86 % 7,397,717 40,277 1.10 % Federal fund purchased 4,470 2 0.11 % - - FHLB advances 412,879 3,495 1.70 % 875,290 9,733 2.24 % Securities sold under repurchase agreements 1,000,908 23,313 4.68 % 1,072,124 24,133 4.54 % Long-term debt 212,178 2,186 2.07 % 235,456 3,359 2.88 % Other borrowings - - - 16,122 296 3.70 % Total interest-bearing liabilities 15,217,611 68,337 0.90 % 15,756,652 92,633 1.19 % Noninterest-bearing liabilities: Demand deposits 3,635,300 2,828,933 Other liabilities 450,183 468,704 Stockholders' equity 2,305,829 2,178,624 Total liabilities and stockholders' equity $ 21,608,923 $ 21,232,913 Interest rate spread 4.46 % 4.40 % Net interest income and net interest margin $ 452,075 4.66 % $ 436,170 4.61 % |
(2) Average balances include nonperforming loans.
(3) Includes (amortization) of premiums and accretion of discounts on investment securities and loans receivable totaling $(4.4) million and $7.8 million for the six months ended June 30, 2012 and 2011, respectively. Also includes the net (amortization) of deferred loans fees totaling ($7.7) million and ($5.5) million for the six months ended June 30, 2012 and 2011, respectively.
Analysis of Changes in Net Interest Income
Changes in our net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the periods indicated. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). Nonaccrual loans are included in average loans used to compute this table.
Three Months Ended June 30, Six Months Ended June 30,
2012 vs. 2011 2012 vs. 2011
Total Changes Due to Total Changes Due to
Change Volume (1) Rate (1) Change Volume (1) Rate (1)
(In thousands)
INTEREST-EARNING ASSETS:
Due from banks and
short-term investments $ 1,274 $ 1,981 $ (707 ) $ 5,066 $ 2,357 $ 2,709
Securities purchased under
resale agreements (351 ) (198 ) (153 ) (307 ) (717 ) 410
Investment securities
available-for-sale (6,340 ) (5,047 ) (1,293 ) (3,965 ) (4,139 ) 174
Loans receivable 5,787 15,967 (10,180 ) 16,551 34,620 (18,069 )
Loans receivable - covered (8,524 ) (26,959 ) 18,435 (25,775 ) (47,636 ) 21,861
FHLB and FRB stock 48 (113 ) 161 39 (240 ) 279
Total interest and
dividend income $ (8,106 ) $ (14,369 ) $ 6,263 $ (8,391 ) $ (15,755 ) $ 7,364
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INTEREST-BEARING LIABILITIES: Checking accounts $ 26 $ 147 $ (121 ) $ 66 $ 293 $ (227 ) Money market accounts (1,605 ) 562 (2,167 ) (3,579 ) 942 (4,521 ) Savings deposits (286 ) 155 (441 ) (436 ) 295 (731 ) Time deposits (8,088 ) (3,012 ) (5,076 ) (11,822 ) (3,743 ) (8,079 ) Federal funds purchased - - - 2 1 1 FHLB advances (2,603 ) (1,470 ) (1,133 ) (6,238 ) (4,296 ) (1,942 ) Securities sold under repurchase agreements (525 ) (800 ) 275 (820 ) (1,640 ) 820 Long-term debt (703 ) (163 ) (540 ) (1,173 ) (308 ) (865 ) Other borrowings (143 ) (71 ) (72 ) (296 ) (148 ) (148 ) Total interest expense $ (13,927 ) $ (4,652 ) $ (9,275 ) $ (24,296 ) $ (8,604 ) $ (15,692 ) CHANGE IN NET INTEREST INCOME $ 5,821 $ (9,717 ) $ 15,538 $ 15,905 $ (7,151 ) $ 23,056 |
Provision for Loan Losses
We recorded $15.5 million and $33.6 million in provision for loan losses during the second quarter and first half of 2012. In comparison we recorded $26.5 million and $53.0 million in provision for loan losses during the second quarter and first half of 2011, respectively. The Company recorded $11.7 million and $22.0 million in net charge-offs during the second quarter and first half of 2012, compared to $31.6 million and $65.8 million in net charge-offs recorded during the second quarter and first half of 2011. Provision for loan losses has declined for several quarters as a result of overall credit quality improvement.
Provisions for loan losses are charged to income to bring the allowance for credit losses as well as the allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions to a level deemed appropriate by the Company based on the factors discussed under the "Allowance for Loan Losses" section of this report.
Noninterest (Loss) Income
The following table sets forth the various components of noninterest (loss)
income for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
(In millions)
Impairment loss on investment
securities recognized in earnings $ - $ - $ (0.1 ) $ (0.4 )
Decrease in FDIC indemnification
asset and receivable (40.3 ) (18.8 ) (45.8 ) (36.2 )
Branch fees 8.6 9.1 16.9 16.8
Net gain on sales of investment
securities 0.1 1.1 0.6 3.6
Net gain on sale of fixed assets - 2.2 0.1 2.2
Letters of credit fees and
commissions 4.5 3.4 8.8 6.4
Foreign exchange income 0.6 2.8 2.4 4.8
Ancillary loan fees 2.2 2.0 4.2 4.0
Income from life insurance policies 1.0 1.1 1.9 2.1
Net gain on sales of loans 6.4 5.9 11.6 13.3
Other operating income 5.2 3.7 9.5 6.9
Total $ (11.7 ) $ 12.5 $ 10.1 $ 23.5
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Noninterest (loss) income includes revenues earned from sources other than interest income. These sources include service charges and fees on deposit accounts, fees and commissions generated from trade finance activities, foreign exchange activities and the issuance of letters of credit, ancillary fees on loans, net gains on sales of loans, investment securities available-for-sale and other assets, impairment losses on investment securities, (decrease)/increase in the FDIC indemnification asset and receivable, income from life insurance policies, and other noninterest-related revenues.
We recorded a noninterest loss of ($11.7) million for the three months ended . . .
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