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EWBC > SEC Filings for EWBC > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for EAST WEST BANCORP INC

Form 10-Q for EAST WEST BANCORP INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 third quarter of 2012, net income was $71.1 million or $0.48 per dilutive share. Net income increased by $553 thousand from the second quarter of 2012 and $8.7 million or 14% from the third quarter of 2011. Earnings per dilutive share grew $0.01 or 2% from the second quarter of 2012 and $0.07 or 17% from the third quarter of 2011.

At September 30, 2012, total assets increased to $21.8 billion compared to $21.5 billion at June 30, 2012. The increase in total assets during the third quarter was primarily attributable to an increase in non-covered loans, securities purchased under resale agreements and investment securities with a partial offsetting decrease in cash and cash equivalents.

Total loans receivable at September 30, 2012 equaled $14.5 billion, compared to $14.3 billion as of June 30, 2012. During the third quarter non-covered loan balances, excluding loans held for sale, grew $360.3 million or 3%. This growth was largely due to increases in commercial and trade finance loans, commercial real estate loans and single family loans, which grew $314.1 million or 9%, $74.6 million or 2% and $47.7 million or 2%, respectively.

Covered loans totaled $3.2 billion as of September 30, 2012, a decrease of $238.0 million or 7% from June 30, 2012. The decrease in the covered loan portfolio was primarily due to payoffs and paydown activity, as well as charge-offs.

At September 30, 2012, total deposits increased to $17.7 billion, up $324.6 million or 2% from $17.3 billion as of June 30, 2012. Total core deposits increased 3% quarter over quarter to $11.4 billion at September 30, 2012, largely due to a $290.4 million or 8% increase in noninterest-bearing demand deposits which grew to $4.1 billion as of September 30, 2012.

Credit Quality

Non-covered Loans

The provision for loan losses for non-covered loans declined to $13.3 million for the third quarter of 2012, a decrease of $3.3 million or 20% from the prior quarter, and a decrease of $9.0 million or 40% as compared to the third quarter of 2011. Additionally, nonaccrual loans, excluding covered loans, decreased to $104.1 million or 0.72% of total loans as of September 30, 2012.

Total net charge-offs on the non-covered loans decreased to $10.6 million for the third quarter of 2012, down from $11.7 million in the second quarter of 2012. East West maintained an allowance for non-covered loan losses at $223.6 million or 2.00% of non-covered loans receivable at September 30, 2012. This compares to an allowance for non-covered loan losses of $219.5 million or 2.03% of non-covered loans at June 30, 2012 and $211.7 million or 2.16% of non-covered loans at September 30, 2011. The total nonperforming assets, excluding covered assets, to total assets ratio was 0.66% with nonperforming assets of $144.1 million at September 30, 2012.

Covered Loans

During the third quarter of 2012, the Company recorded provision for loan losses on covered loans of $5.2 million, resulting from charge-offs of $6.5 million on three covered loans outside of the scope of ASC 310-30. As these loans are covered under loss-sharing agreements with the FDIC, the Company recorded income of $5.2 million or 80% of the charge-off amount of $6.5 million in noninterest income as a net increase in the FDIC receivable, resulting in a net impact to earnings for the third quarter of ($1.3) million.


Capital Strength

Our capital ratios remain very strong. As of September 30, 2012, our Tier 1 leverage capital ratio totaled 9.7%, our Tier 1 risk-based capital ratio totaled 15.3% and our total risk-based capital ratio totaled 16.6%.

During the third quarter of 2012, the Company repurchased 2.3 million shares of common stock at an average price of $21.86 per share, or $50.0 million in total cost. Under the repurchase program authorized by East West's Board of Directors earlier in the year, management had the authority to repurchase up to a total of $200.0 million of the Company's common stock. As of September 30, 2012, the Company had completed the authorized repurchase program, purchasing a total of 9.1 million shares of common stock at a total cost of $199.9 million during the year.

The Company's Board of Directors approved the payment of fourth quarter dividends on the common stock and Series A Preferred Stock. The common stock cash dividend of $0.10 is payable on or about November 23, 2012 to shareholders of record on November 9, 2012. The dividend on the Series A Preferred Stock of $20.00 per share is payable on November 1, 2012 to shareholders of record on October 15, 2012.

Results of Operations

Net income for the third quarter of 2012 totaled $71.1 million, compared with $62.4 million for the third quarter of 2011. Diluted earnings per share was $0.48 and $0.41 for the third quarters of 2012 and 2011, respectively. Our annualized return on average total assets increased to 1.30% for the quarter ended September 30, 2012, from 1.13% for the same period in 2011. The annualized return on average common stockholders' equity increased to 12.43% for the third quarter of 2012, compared with 10.99% for the third quarter of 2011.

Components of Net Income



                                        Three Months Ended          Nine Months Ended
                                           September 30,              September 30,
                                         2012         2011          2012         2011
                                                        (In millions)
Net interest income                    $   221.9     $  237.8     $   674.0     $  674.0
Provision for loan losses,
excluding covered loans                    (13.3 )      (22.3 )       (46.4 )      (72.8 )
(Provision) reversal for loan
losses on covered loans                     (5.2 )        0.3          (5.7 )       (2.2 )
Noninterest income (loss)                    2.8        (13.5 )        12.8         10.0
Noninterest expense                       (101.0 )     (104.6 )      (317.3 )     (328.9 )
Provision for income taxes                 (34.1 )      (35.3 )      (107.6 )     (101.0 )
Net income                             $    71.1     $   62.4     $   209.8     $  179.0

Annualized return on average total
assets                                      1.30 %       1.13 %        1.30 %       1.11 %

Annualized return on average
common equity                              12.43 %      10.99 %       12.30 %      10.92 %

Annualized return on average total
equity                                     12.27 %      10.88 %       12.15 %      10.82 %

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 third quarter of 2012 totaled $221.9 million, a 7% decrease over net interest income of $237.8 million for the same period in 2011.

Net interest margin, defined as net interest income divided by average earning assets, decreased by 30 basis points to 4.46% during the third quarter of 2012, from 4.76% during the third quarter of 2011. For the nine months ended September 30, 2012, net interest margin decreased by 7 basis points to 4.59% from 4.66% for the same period ended 2011. During 2012 and 2011, our covered loan yield was positively impacted by the accretion from the covered loans accounted for under ASC 310-30. The decrease in net interest margin during the three and nine months ended September 30, 2012 resulted primarily from lower yields on interest earning asset partially offset by 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 September 30, 2012 and 2011:

                                                              Three Months Ended September 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                         $   1,586,995    $     5,211       1.31 %  $      1,164,302    $     7,866       2.68 %
Securities purchased under
resale agreements                       1,515,761          5,530       1.45 %         1,117,493          5,064       1.80 %
Investment securities
available-for-sale (3)                  2,084,165         10,380       1.98 %         3,255,701         24,503       2.99 %
Loans receivable (2)(3)                11,119,319        128,896       4.61 %         9,825,559        120,596       4.87 %
Loans receivable - covered(2)           3,299,459        103,299      12.46 %         4,253,687        123,927      11.56 %
FHLB and FRB stock                        168,768            846       2.00 %           193,891            785       1.61 %
Total interest-earning assets          19,774,467        254,162       5.11 %        19,810,633        282,741       5.66 %
Noninterest-earning assets:
Cash and cash equivalents                 233,111                                       254,918
Allowance for loan losses                (229,474 )                                    (225,395 )
Other assets                            1,908,116                                     2,137,967
Total assets                        $  21,686,220                              $     21,978,123

LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Checking accounts                   $   1,090,227    $       838       0.31 %  $        895,223    $       936       0.41 %
Money market accounts                   4,957,938          4,437       0.36 %         4,453,224          4,798       0.43 %
Savings deposits                        1,290,159            764       0.24 %         1,048,004            756       0.29 %
Time deposits                           6,226,133         12,163       0.78 %         7,665,429         21,726       1.12 %
Federal funds purchased                         9              -          -                 462              -          -
FHLB advances                             362,966          1,468       1.61 %           508,913          3,013       2.35 %
Securities sold under repurchase
agreements                                995,000         11,664       4.66 %         1,035,466         12,218       4.68 %
Long-term debt                            172,232            920       2.13 %           222,490          1,424       2.54 %
Other borrowings                                -              -          -              13,541             88       2.58 %
Total interest-bearing
liabilities                            15,094,664         32,254       0.85 %        15,842,752         44,959       1.13 %
Noninterest-bearing liabilities:
Demand deposits                         3,949,807                                     3,236,683
Other liabilities                         336,945                                       622,885
Stockholders' equity                    2,304,804                                     2,275,803
Total liabilities and
stockholders' equity                $  21,686,220                              $     21,978,123
Interest rate spread                                                   4.26 %                                        4.53 %

Net interest income and net
interest margin                                      $   221,908       4.46 %                      $   237,782       4.76 %



(1) Annualized.
(2) Average balances include nonperforming loans.
(3) Includes (amortization) of premiums and accretion of discounts on investment securities and loans receivable totaling $(3.3) million and $529 thousand for the three months ended September 30, 2012 and 2011, respectively. Also includes the net (amortization) of deferred loans fees totaling ($4.4) million and ($3.7) million for the three months ended September 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 nine months ended September 30, 2012 and 2011:

                                                                Nine Months Ended September 30,
                                                       2012                                          2011
                                       Average                    Average Yield      Average                   Average Yield
                                       Balance        Interest      Rate (1)         Balance       Interest      Rate  (1)
                                                                     (Dollars in thousands)
ASSETS
Interest-earning assets:
Due from banks and short-term
investments                          $   1,380,753    $  17,517            1.69 %  $  1,052,091    $  15,106            1.92 %
Securities purchased under resale
agreements                               1,113,963       14,602            1.75 %     1,029,000       14,443            1.88 %
Investment securities
available-for-sale(3)                    2,509,911       48,525            2.58 %     3,100,000       66,613            2.87 %
Loans receivable(2)(3)                  10,848,394      380,097            4.68 %     9,458,403      355,246            5.02 %
Loans receivable - covered(2)            3,574,076      311,173           11.63 %     4,477,467      357,576           10.68 %
FHLB and FRB stock                         175,673        2,660            2.02 %       201,251        2,560            1.70 %
Total interest-earning assets           19,602,770      774,574            5.28 %    19,318,212      811,544            5.62 %
Noninterest-earning assets:
Cash and cash equivalents                  246,253                                      269,700
Allowance for loan losses                 (226,267 )                                   (230,020 )
Other assets                             2,012,121                                    2,126,154
Total assets                         $  21,634,877                                 $ 21,484,046

LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Checking accounts                    $   1,010,718    $   2,251            0.30 %  $    820,518    $   2,283            0.37 %
Money market accounts                    4,818,954       12,681            0.35 %     4,400,912       16,621            0.50 %
Savings deposits                         1,235,582        1,993            0.22 %     1,018,215        2,421            0.32 %
Time deposits                            6,514,294       40,618            0.83 %     7,487,935       62,003            1.11 %
Federal funds purchased                      2,972            2            0.11 %           113            -               -
FHLB advances                              396,120        4,963            1.67 %       751,822       12,746            2.27 %
Securities sold under repurchase
agreements                                 998,924       34,977            4.68 %     1,059,770       36,351            4.59 %
Long-term debt                             198,766        3,106            2.09 %       231,087        4,783            2.77 %
Other borrowings                                 -            -            0.00 %        15,295          384            3.36 %
Total interest-bearing
liabilities                             15,176,330      100,591            0.89 %    15,785,667      137,592            1.17 %
Noninterest-bearing liabilities:
Demand deposits                          3,740,901                                    2,966,343
Other liabilities                          412,161                                      520,663
Stockholders' equity                     2,305,485                                    2,211,373
Total liabilities and
stockholders' equity                 $  21,634,877                                 $ 21,484,046
Interest rate spread                                                       4.39 %                                       4.45 %

Net interest income and net
interest margin                                       $ 673,983            4.59 %                  $ 673,952            4.66 %



(1) Annualized.
(2) Average balances include nonperforming loans.
(3) Includes (amortization) of premiums and accretion of discounts on investment securities and loans receivable totaling $(7.7) million and $8.3 million for the nine months ended September 30, 2012 and 2011, respectively. Also includes the net (amortization) of deferred loans fees totaling ($12.1) million and ($9.2) million for the nine months ended September 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 September 30,           Nine Months Ended September 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          $    (2,655 )   $    2,248    $  (4,903 )  $     2,411    $    4,319    $  (1,908 )
Securities purchased under
resale agreements                       466          1,577       (1,111 )          159         1,149         (990 )
Investment securities
available-for-sale                  (14,123 )       (7,280 )     (6,843 )      (18,088 )     (11,847 )     (6,241 )
Loans receivable                      8,300         15,259       (6,959 )       24,851        49,800      (24,949 )
Loans receivable - covered          (20,628 )      (29,357 )      8,729        (46,403 )     (76,643 )     30,240
FHLB and FRB stock                       61           (110 )        171            100          (350 )        450
Total interest and dividend
income                          $   (28,579 )   $  (17,663 )  $ (10,916 )  $   (36,970 )  $  (33,572 )  $  (3,398 )

INTEREST-BEARING
LIABILITIES:
Checking accounts               $       (98 )   $      180    $    (278 )  $       (32 )  $      472    $    (504 )
Money market accounts                  (361 )          507         (868 )       (3,940 )       1,465       (5,405 )
Savings deposits                          8            157         (149 )         (428 )         451         (879 )
Time deposits                        (9,563 )       (3,602 )     (5,961 )      (21,385 )      (7,375 )    (14,010 )
Federal funds purchased                   -              -            -              2             -            2
FHLB advances                        (1,545 )         (734 )       (811 )       (7,783 )      (5,016 )     (2,767 )
Securities sold under
repurchase agreements                  (554 )         (475 )        (79 )       (1,374 )      (2,119 )        745
Long-term debt                         (504 )         (291 )       (213 )       (1,677 )        (609 )     (1,068 )
Other borrowings                        (88 )          (44 )        (44 )         (384 )        (192 )       (192 )
Total interest expense          $   (12,705 )   $   (4,302 )  $  (8,403 )  $   (37,001 )  $  (12,923 )  $ (24,078 )
CHANGE IN NET INTEREST
INCOME                          $   (15,874 )   $  (13,361 )  $  (2,513 )  $        31    $  (20,649 )  $  20,680



(1) Changes in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume.

Provision for Loan Losses

The Company recorded $13.3 million and $46.4 million in provision for loan losses on non-covered loans, and $5.2 million and $5.7 million on covered loans during the third quarter and first nine months of 2012, respectively. In comparison, the Company recorded $22.3 million and $72.8 million in provision for loan losses on non-covered loans during the third quarter and first nine months of 2011, respectively. The Company also recorded a $297 thousand reversal of provision for loan losses and $2.2 million in provision on covered loans during the third quarter and first nine months of 2011, respectively. $10.6 million and $32.6 million in net charge-offs were recorded on non-covered loans during the third quarter and first nine months of 2012, compared with $24.4 million and $90.2 million in net charge-offs recorded during the third quarter and first nine months of 2011, respectively. $6.5 million of net charge-offs were recorded on covered loans during the third quarter and first nine months of 2012. No net charge-offs on covered loans were recorded in 2011.

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 Income (Loss)



The following table sets forth the various components of noninterest income
(loss) for the periods indicated:



                                          Three Months Ended        Nine Months Ended
                                            September 30,             September 30,
                                          2012         2011          2012         2011
                                                         (In millions)
Impairment loss on investment
securities recognized in earnings        $      -     $      -     $    (0.1 )   $  (0.5 )
Decrease in FDIC indemnification
asset and receivable                        (26.7 )      (43.5 )       (72.5 )     (79.7 )
Branch fees                                   8.3          8.9          25.3        25.7
Net gain on sales of investment
securities                                    0.1          3.2           0.7         6.8
Net gain on sale of fixed assets                -            -           0.1         2.2
Letters of credit fees and
commissions                                   5.0          3.6          13.8        10.0
Foreign exchange income                       2.2          2.9           4.5         7.6
Ancillary loan fees                           1.8          2.1           6.0         6.1
Income from life insurance policies           1.0          1.0           2.9         3.1
Net gain on sales of loans                    5.4          5.5          16.9        18.8
Other operating income                        5.7          2.8          15.2         9.9
Total                                    $    2.8     $  (13.5 )   $    12.8     $  10.0

. . .

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