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EWBC > SEC Filings for EWBC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for EAST WEST BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for EAST WEST BANCORP INC


12-Nov-2013

Quarterly Report


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

The following discussion provides information about the consolidated 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, 2012, 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 2012 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.


Table of Contents

Overview

For the third quarter of 2013, net income was $73.2 million or $0.53 per dilutive share. Net income decreased by $858 thousand or 1% from the second quarter of 2013 and increased $2.0 million or 3% from the third quarter of 2012. Earnings per dilutive share grew $0.01 or 2% from the second quarter of 2013 and $0.05 or 10% from the third quarter of 2012.

At September 30, 2013, total assets increased to $24.50 billion compared to $23.31 billion at June 30, 2013. Average earning assets increased during the third quarter of 2013, up $923.1 million or 4% compared to the prior quarter. The increase in total assets and average earning assets during the third quarter was primarily attributable to increases in average balances for non-covered loans.

Total loans receivable (including both covered and non-covered loans) at September 30, 2013 was $17.20 billion, compared to $16.28 billion as of June 30, 2013. During the third quarter total loans grew 6% or $914.8 million to a record $17.20 billion as of September 30, 2013. This growth was largely due to increases in non-covered single-family real estate loans, non-covered commercial real estate loans and consumer loans, which grew 16% or $424.9 million, 5% or $211.4 million and 19% or $217.4 million, respectively. This growth in non-covered loans was partially offset by a decrease in loans covered under loss-sharing agreements.

Covered loans, net of discount totaled $2.37 billion as of September 30, 2013, a decrease of 6% or $145.8 million from June 30, 2013. The decrease in the covered loan portfolio was primarily due to payoffs and paydown activity, as well as charge-offs.

At September 30, 2013, total deposits grew to a record $20.36 billion, an increase of 6% or $1.08 billion from $19.28 billion at June 30, 2013. In the third quarter of 2013, the Company continued to execute its strategy to grow low-cost, commercial deposits while reducing its reliance on time deposits. Core deposits increased to a record $14.45 billion at September 30, 2013, or an increase of 8% or $1.12 billion from June 30, 2013. The strong increase in core deposits during the third quarter of 2013 was largely driven by an increase in noninterest-bearing demand deposits which increased by 12% or $628.4 million to a record $5.76 billion.

Additionally, during the third quarter of 2013, the Company signed a definitive agreement to acquire MetroCorp Bancshares, Inc. ("MCBI"), headquartered in Houston, Texas. MCBI has $1.6 billion in total assets and operates 18 branches under its two subsidiary banks, MetroBank and Metro United Bank. The Company expects the acquisition of MCBI to close in the first quarter of 2014.

Credit Quality

Non-covered Loans

For the third quarter of 2013, the Company recorded a provision for loan losses for non-covered loans of $4.5 million. This compares to a provision for loan losses of $8.3 million for the second quarter of 2013 and a provision for loan losses of $13.3 million for the third quarter of 2012. Total net charge-offs on non-covered loans decreased to $334 thousand for the third quarter of 2013, down from $4.0 million in the second quarter of 2013. The allowance for non-covered loan losses was $234.2 million or 1.60% of non-covered loans receivable at September 30, 2013. This compares to an allowance for non-covered loan losses of $233.5 million or 1.73% of non-covered loans at June 30, 2013 and $233.6 million or 2.00% of non-covered loans at September 30, 2012.


Table of Contents

Covered Loans

During the third quarter of 2013, the Company recorded a reversal of provision for loan losses of ($772) thousand on covered loans outside of the scope of ASC 310-30 and ($192) thousand on covered loans within the scope of ASC 310-30. As these loans are covered under loss-sharing agreements with the FDIC, for any charge-offs, the Company records income of 80% of the charge-off amount in noninterest income as a net increase in the FDIC receivable, resulting in a net impact to earnings of 20% of the charge-off amount.

Capital Strength

The capital ratios remain strong. As of September 30, 2013, the Company's Tier 1 leverage capital ratio totaled 8.7%, Tier 1 risk-based capital ratio totaled 12.4% and total risk-based capital ratio totaled 14.0%.

The Company is focused on active capital management and is committed to maintaining strong capital levels that exceed regulatory requirements while also supporting balance sheet growth and providing a strong return to our shareholders

The Company's Board of Directors approved the payment of fourth quarter dividends on the common stock. The common stock cash dividend of $0.15 is payable on or about November 15, 2013 to shareholders of record on October 31, 2013.

Results of Operations

Net income for the third quarter of 2013 totaled $73.2 million, compared with $71.1 million for the third quarter of 2012. Diluted earnings per share was $0.53 and $0.48 for the third quarters of 2013 and 2012, respectively. Our annualized return on average total assets decreased to 1.22% for the quarter ended September 30, 2013, from 1.30% for the same period in 2012. The annualized return on average common stockholders' equity increased to 12.65% for the third quarter of 2013, compared with 12.43% for the third quarter of 2012.

Components of Net Income



                                           Three Months Ended          Nine Months Ended
                                             September 30,               September 30,
                                           2013          2012          2013         2012
                                                           (In millions)
Net interest income                     $    254.3    $    221.9    $    691.2    $   674.0
Provision for loan losses, excluding
covered loans                                 (4.6 )       (13.3 )       (12.1 )      (46.4 )
Reversal of (provision for) loan
losses on covered loans                        1.0          (5.2 )        (4.8 )       (5.7 )
Noninterest (loss) income                    (41.4 )         2.8         (55.9 )       12.8
Noninterest expense                         (100.4 )      (101.0 )      (291.1 )     (317.3 )
Provision for income taxes                   (35.7 )       (34.1 )      (108.0 )     (107.6 )
Net income                              $     73.2    $     71.1    $    219.3    $   209.8
Annualized return on average total
assets                                        1.22 %        1.30 %        1.27 %       1.30 %
Annualized return on average common
equity                                       12.65 %       12.43 %       12.56 %      12.30 %
Annualized return on average total
equity                                       12.65 %       12.27 %       12.56 %      12.15 %

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 2013 totaled $254.3 million, a 15% increase over net interest income of $221.9 million for the same period in 2012.


Table of Contents

Net interest margin, defined as net interest income divided by average earning assets, increased by 8 basis points to 4.54% during the third quarter of 2013, from 4.46% during the third quarter of 2012. During the three and nine months ended September 30, 2013 and 2012, our net interest margin and yield on interest-earning assets was positively impacted by the interest income from the covered loans accounted for under ASC 310-30. The interest income on covered loan was $108.9 million and $287.5 million with a resulting yield of 17.8% and 14.6% for the three and nine months ended September 30, 2013, respectively. In comparison interest income on covered loans was $103.3 million and $311.2 million with a resulting yield of 12.5% and 11.6% for the three and nine months ended September 30, 2012. The additional accretion from the covered loans accounted for under ASC 310-30 is the reason for the significant difference between the yields on the covered and the non-covered loans. Over time, as the covered loans payoff, the average covered loan balance will continue to decrease. As such, as the covered loan balances decrease, the interest income from the covered loans accounted for under ASC 310-30 will have less of an impact on our overall net interest margin. Net interest margin decreased to 4.32% for the nine months ended September 30, 2013, compared to 4.59% during the same period in 2012. This decrease resulted primarily from the low interest rate environment, and the related lower average yield on non-covered loans.

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 and nine months ended September 30, 2013 and 2012:

                                               Three Months Ended September 30,
                                        2013                                     2012
                           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             $   1,199,507   $    4,276       1.41 %  $   1,586,995   $    5,211       1.31 %
Securities purchased
under resale
agreements                  1,408,152        5,168       1.46 %      1,515,761        5,530       1.45 %
Investment securities
available-for-sale
(3)                         2,759,586       11,039       1.59 %      2,084,165       10,380       1.98 %
Loans receivable
(2)(3)                     14,292,218      150,174       4.17 %     11,119,319      128,896       4.61 %
Loans receivable -
covered(2)                  2,424,111      108,931      17.83 %      3,299,459      103,299      12.46 %
FHLB and FRB stock            128,947        2,118       6.52 %        168,768          846       2.00 %
Total
interest-earning
assets                     22,212,521      281,706       5.03 %     19,774,467      254,162       5.11 %
Noninterest-earning
assets:
Cash and cash
equivalents                   272,459                                  233,111
Allowance for loan
losses                       (242,560 )                               (229,474 )
Other assets                1,638,688                                1,908,116
Total assets            $  23,881,108                            $  21,686,220

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Checking accounts       $   1,564,649   $      831       0.21 %  $   1,090,227   $      838       0.31 %
Money market accounts       5,242,517        3,604       0.27 %      4,957,938        4,437       0.36 %
Savings deposits            1,607,983          685       0.17 %      1,290,159          764       0.24 %
Time deposits               5,925,928        9,979       0.67 %      6,226,133       12,163       0.78 %
Federal funds
purchased and other
borrowings                        389            -          -                9            -          -
FHLB advances                 314,207        1,049       1.32 %        362,966        1,468       1.61 %
Securities sold under
repurchase agreements         995,000       10,323       4.12 %        995,000       11,664       4.66 %
Long-term debt                187,179          985       2.09 %        172,232          920       2.13 %
Total
interest-bearing
liabilities                15,837,852       27,456       0.69 %     15,094,664       32,254       0.85 %
Noninterest-bearing
liabilities:
Demand deposits             5,414,856                                3,949,807
Other liabilities             334,196                                  336,945
Stockholders' equity        2,294,204                                2,304,804
Total liabilities and
stockholders' equity    $  23,881,108                            $  21,686,220
Interest rate spread                                     4.34 %                                   4.26 %
Net interest income
and net interest
margin                                  $  254,250       4.54 %                  $  221,908       4.46 %



(1) Annualized.

(2) Average balances include nonperforming loans.

(3) Includes (amortization) of premiums and accretion of discounts on investment securities and loans receivable totaling ($7.3) million and ($3.3) million for the three months ended September 30, 2013 and 2012, respectively. Also includes the net (amortization) of deferred loans fees totaling ($3.8) million and ($4.4) million for the three months ended September 30, 2013 and 2012, respectively.


Table of Contents

                                              Nine Months Ended September 30,
                                        2013                                  2012
                           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   $  1,217,909   $  12,844       1.41 % $  1,380,753   $  17,517       1.69 %
Securities purchased
under resale
agreements                  1,537,729      16,132       1.40 %    1,113,963      14,602       1.75 %
Investment securities
available-for-sale(3)       2,658,900      30,843       1.55 %    2,509,911      48,525       2.58 %
Loans receivable(2)(3)     13,214,039     423,046       4.28 %   10,848,394     380,097       4.68 %
Loans receivable -
covered(2)                  2,635,267     287,508      14.59 %    3,574,076     311,173      11.63 %
FHLB and FRB stock            140,956       5,109       4.85 %      175,673       2,660       2.02 %
Total interest-earning
assets                     21,404,800     775,482       4.84 %   19,602,770     774,574       5.28 %
Noninterest-earning
assets:
Cash and cash
equivalents                   296,503                               246,253
Allowance for loan
losses                       (239,206 )                            (226,267 )
Other assets                1,693,485                             2,012,121
Total assets             $ 23,155,582                          $ 21,634,877

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Checking accounts        $  1,431,176   $   2,596       0.24 % $  1,010,718   $   2,251       0.30 %
Money market accounts       5,150,479      11,315       0.29 %    4,818,954      12,681       0.35 %
Savings deposits            1,510,844       2,241       0.20 %    1,235,582       1,993       0.22 %
Time deposits               5,995,527      31,539       0.70 %    6,514,294      40,618       0.83 %
Federal funds
purchased and other
borrowings                        233           -          -          2,972           2       0.11 %
FHLB advances                 313,683       3,135       1.34 %      396,120       4,963       1.67 %
Securities sold under
repurchase agreements         995,000      31,069       4.17 %      998,924      34,977       4.68 %
Long-term debt                154,028       2,402       2.08 %      198,766       3,106       2.09 %
Total interest-bearing
liabilities                15,550,970      84,297       0.72 %   15,176,330     100,591       0.89 %
Noninterest-bearing
liabilities:
Demand deposits             4,929,233                             3,740,901
Other liabilities             341,756                               412,161
Stockholders' equity        2,333,623                             2,305,485
Total liabilities and
stockholders' equity     $ 23,155,582                          $ 21,634,877
Interest rate spread                                    4.12 %                                4.39 %
Net interest income
and net interest
margin                                  $ 691,185       4.32 %                $ 673,983       4.59 %



(1) Annualized.

(2) Average balances include nonperforming loans.

(3) Includes (amortization) of premiums and accretion of discounts on investment securities and loans receivable totaling ($20.3) million and ($7.7) million for the nine months ended September 30, 2013 and 2012, respectively. Also includes the net (amortization) of deferred loans fees totaling ($12.2) million and ($12.1) million for the nine months ended September 30, 2013 and 2012, respectively.


Table of Contents

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,
                                        2013 vs. 2012                              2013 vs. 2012
                             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    $       (935 )  $     (1,353 ) $      418   $     (4,673 )  $    (1,923 ) $  (2,750 )
Securities purchased
under resale agreements           (362 )          (395 )         33          1,530          4,827      (3,297 )
Investment securities
available-for-sale                 659           2,952       (2,293 )      (17,682 )        2,732     (20,414 )
Loans receivable                21,278          34,189      (12,911 )       42,949         77,762     (34,813 )
Loans receivable -
covered                          5,632         (31,923 )     37,555        (23,665 )      (92,272 )    68,607
FHLB and FRB stock               1,272            (242 )      1,514          2,449           (617 )     3,066
Total interest and
dividend income           $     27,544    $      3,228   $   24,316   $        908    $    (9,491 ) $  10,399

INTEREST-BEARING
LIABILITIES:
Checking accounts         $         (7 )  $        299   $     (306 ) $        345    $       816   $    (471 )
Money market accounts             (833 )           243       (1,076 )       (1,366 )          830      (2,196 )
Savings deposits                   (79 )           164         (243 )          248            418        (170 )
Time deposits                   (2,184 )          (566 )     (1,618 )       (9,079 )       (3,064 )    (6,015 )
Federal funds purchased
and other borrowings                 -               -            -             (2 )           (1 )        (1 )
FHLB advances                     (419 )          (182 )       (237 )       (1,828 )         (927 )      (901 )
Securities sold under
repurchase agreements           (1,341 )             -       (1,341 )       (3,908 )         (137 )    (3,771 )
Long-term debt                      65              79          (14 )         (704 )         (698 )        (6 )
Total interest expense    $     (4,798 )  $         37   $   (4,835 ) $    (16,294 )  $    (2,763 ) $ (13,531 )
CHANGE IN NET INTEREST
INCOME                    $     32,342    $      3,191   $   29,151   $     17,202    $    (6,728 ) $  23,930



(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 a provision for loan losses on non-covered loans of $4.5 million during the third quarter and a net provision for loan losses on non-covered loans of $12.1 million for the first nine months of 2013. In comparison, the Company recorded $13.3 million and $46.4 million in provision for loan losses on non-covered loans during the third quarter and first nine months of 2012, respectively. The Company recorded $334 thousand and $4.9 million of net charge-offs on non-covered loans during the third quarter and first nine months of 2013, compared with $10.6 million and $32.6 million in net charge-offs recorded during the third quarter and first nine months of 2012, respectively.

During the third quarter and first nine months of 2013, the Company also recorded a reversal of provision for loan losses of ($772) thousand and a net provision for loan losses of $2.5 million on covered loans outside of the scope of ASC 310-30. In comparison, the Company recorded a provision for loan losses of $5.2 million during the third quarter and a net provision for loan losses of $5.7 million for the first nine months of 2012 on covered loans outside of the scope of ASC 310-30. No net charge-offs was recorded on covered loans outside of the scope of ASC 310-30 during the third quarter of 2013. $1.3 million of net charge-offs were recorded on covered loans outside of the scope of ASC 310-30 during the first nine months of 2013. In comparison, the Company recorded net charge-offs of $6.5 million during the third quarter and first nine months of 2012 on covered loans outside of the scope of ASC 310-30.

The Company recorded a reversal of provision for loan losses of ($192) thousand and a net provision for loan losses of $2.3 million on covered loans within the scope of ASC 310-30 during the third quarter and first nine months of 2013. In comparison, no provision for loan losses on covered loans within the scope of ASC 310-30 was recorded during the third quarter and first nine months of 2012. Net charge-offs on covered loans within the scope of ASC 310-30 also were not recorded during the third quarter and first nine months of 2013 and 2012.


Table of Contents

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             Nine Months Ended
                                           September 30,                 September 30,
                                        2013           2012           2013           2012
                                                         (In millions)
Impairment loss on investment
securities recognized in
earnings                            $          -    $         -    $         -    $     (0.1 )
Decrease in FDIC indemnification
asset and receivable                       (74.5 )        (26.7 )       (154.3 )       (72.5 )
. . .
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