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EWBC > SEC Filings for EWBC > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for EAST WEST BANCORP INC

Form 10-Q for EAST WEST BANCORP INC


8-Aug-2014

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 2013 Annual Report, and the 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 2013 Annual Report 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

Recent Accounting Standards

In January 2014, the FASB issued ASU 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-10 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the amortization in the income statement as a component of income tax expense. ASU 2014-01 is effective for interim and annual periods beginning after December 15, 2014 and if elected, should be applied retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies when an in-substance repossession or foreclosure occurs that would require a transfer of mortgage loans collateralized by residential real estate properties to other real estate owned. The standard permits the use of either a modified retrospective or prospective transition method. ASU 2014-04 is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

Overview

For the second quarter of 2014, net income was $84.0 million or $0.58 per diluted share. Net income increased by $7.2 million or 9% from the first quarter of 2014, and increased $10.0 million or 13% from the second quarter of 2013. Earnings per diluted share increased $0.04 or 7% from the first quarter of 2014 and grew $0.06 or 12% from the second quarter of 2013.

At June 30, 2014, total assets increased to $27.56 billion compared to $27.40 billion at March 31, 2014. Average earning assets increased during the second quarter of 2014, up $785.1 million or 3% from the first quarter of 2014. The increase in total assets and average earning assets during the second quarter was largely attributable to a $918.1 million increase in average non-covered loans balances, partially offset by a decrease of $220.5 million in average covered loan balances.

Total loans receivable (including both covered and non-covered loans) as of June 30, 2014 was $20.54 billion, compared to $19.92 billion as of March 31, 2014. During the second quarter, total loans grew $615.5 million or 3%. This growth was primarily due to growth in non-covered commercial, commercial real estate and consumer loans, partially offset by the sale of $181.1 million of government guaranteed student loans and the decrease in covered loan balances.

Covered loans, net of discount totaled $1.81 billion as of June 30, 2014, a decrease of $227.4 million or 11% from March 31, 2014. The decrease in the covered loan portfolio was primarily due to payoffs and paydown activity.

At June 30, 2014, total deposits grew to a record $22.88 billion, an increase of $47.0 million from $22.83 billion at March 31, 2014. In the second quarter of 2014, 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 $16.64 billion at June 30, 2014 compared to $16.44 billion at March 31, 2014. The increase in core deposits was mainly due to overall increases in noninterest-bearing demand deposits, interest-bearing checking accounts, and savings accounts, partially offset by decreases in money market accounts and time deposits.


Table of Contents

Credit Quality

Non-covered Loans

For the second quarter of 2014, the Company recorded a provision for loan losses for non-covered loans of $8.9 million. This compares to a provision for loan losses of $8.0 million for the first quarter of 2014 and a provision for loan losses of $8.3 million for the second quarter of 2013. Total net charge-offs on non-covered loans increased to $7.3 million for the second quarter of 2014, up from net charge-offs on non-covered loans of $4.1 million in the first quarter of 2014. The allowance for non-covered loan losses was $246.5 million or 1.35% of non-covered loans receivable at June 30, 2014. This compares to an allowance for non-covered loan losses of $245.6 million or 1.42% of non-covered loans at March 31, 2014 and $233.5 million or 1.73% of non-covered loans at June 30, 2013.

Covered Loans

The Company's covered loan portfolio consists of (1) purchased credit-impaired ("PCI") loans and (2) covered advances drawn down on existing commitments lines acquired, subsequent to the UCB and WFIB acquisition dates (covered advances). PCI covered loans represent acquired loans, which the Company elected to account for in accordance with ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). As of the respective acquisition dates, the UCB and WFIB loan portfolios included unfunded commitments for commercial lines of credit, construction draws and other lending activity. These commitments are covered under the shared-loss agreements. However, the covered advances are not accounted for under ASC 310-30. The covered loan portfolio comprised of $1.74 billion of PCI loans and $252.2 million covered advances as of June 30, 2014. As of December 31, 2013, the covered loan portfolio comprised of $2.14 billion of PCI loans and $320.2 million covered advances.

During the second quarter of 2014, the Company recorded a provision for loan losses of $70 thousand on covered advances and a reversal of provision for loan losses of $1.0 million on PCI covered loans. As these loans are covered under shared-loss 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. For all recoveries the Company also shares 80% of the amounts recovered with the FDIC.

Capital Strength

The Company's capital ratios remain strong. As of June 30, 2014, the Company's Tier 1 leverage capital ratio totaled 8.5%, Tier 1 risk-based capital ratio totaled 11.0% and total risk-based capital ratio totaled 12.8%.

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 third quarter dividends on the common stock. The common stock cash dividend of $0.18 is payable on or about August 15, 2014 to shareholders of record on August 1, 2014.


Table of Contents

Results of Operations

Net income for the second quarter of 2014 totaled $84.0 million, compared with $74.0 million for the second quarter of 2013. Diluted earnings per share was $0.58 and $0.52 for the second quarters of 2014 and 2013, respectively. Our annualized return on average total assets was 1.24% for the quarter ended June 30, 2014, compared to 1.29% for the same period in 2013. The annualized return on average common stockholders' equity was 12.56% for the second quarter of 2014, compared with 12.59% for the second quarter of 2013.

Components of Net Income



                                      Three Months Ended              Six Months Ended
                                           June 30,                       June 30,
                                     2014            2013            2014           2013
                                                       ($ in millions)
Net interest income              $      266.4    $      227.6    $      524.4    $     437.0
(Provision for) reversal of
loan losses, excluding
covered loans                            (8.9 )          (8.3 )         (16.9 )         (7.5 )
Reversal of (provision for)
loan losses on covered loans              0.9            (0.7 )           2.0           (5.8 )
Noninterest loss                        (14.9 )         (12.4 )         (29.9 )        (14.5 )
Noninterest expense                    (127.9 )         (94.4 )        (252.3 )       (190.8 )
Provision for income taxes              (31.6 )         (37.8 )         (66.6 )        (72.3 )
Net income                       $       84.0    $       74.0    $      160.7    $     146.1
Annualized return on average
total assets                             1.24 %          1.29 %          1.21 %         1.29 %
Annualized return on average
common equity                           12.56 %         12.59 %         12.31 %        12.52 %
Annualized return on average
total equity                            12.56 %         12.73 %         12.31 %        12.52 %

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 2014 totaled $266.4 million, a 17% increase over net interest income of $227.6 million for the same period in 2013. For the six months ended June 30, 2014, net interest income totaled $524.4 million, a 20% increase over net interest income of $437.0 million for the same period in 2013.

Net interest margin, defined as net interest income divided by average earning assets, decreased by seven basis points to 4.22% during the second quarter of 2014, from 4.29% during the second quarter of 2013. During the three and six months ended June 30, 2014 and 2013, our net interest margin and yield on interest-earning assets was positively impacted by the interest income from the PCI covered loans. The interest income on covered loans was $78.7 million and $159.4 million with a resulting yield of 16.84% and 16.20% for the three and six months ended June 30, 2014. In comparison, interest income on covered loans was $92.4 million and $178.6 million with a resulting yield of 14.03% and 13.13% for the three and six months ended June 30, 2013. 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 PCI covered loans will have less of an impact on our overall net interest margin.


Table of Contents

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 six months ended June 30, 2014 and 2013:

                                                       Three Months Ended June 30,
                                               2014                                  2013
                                  Average                  Average      Average                  Average
                                  Balance      Interest    Rate (1)     Balance      Interest    Rate (1)
                                                            ($ in thousands)
ASSETS
Interest-earning assets:
Due from banks and short-term
investments                     $  1,481,361   $   6,354       1.72 % $  1,247,457   $   4,292       1.38 %
Securities purchased under
resale agreements                  1,230,769       4,559       1.49 %    1,578,846       5,435       1.38 %
Investment securities
available-for-sale (2)             2,486,303      12,490       2.01 %    2,582,899       9,594       1.49 %
Loans receivable, excluding
covered loans (3)(4)              18,155,876     190,763       4.21 %   13,099,286     141,904       4.35 %
Covered Loans(3)                   1,874,927      78,721      16.84 %    2,641,324      92,386      14.03 %
Federal Home Loan Bank and
Federal Reserve Bank stock            97,011       1,555       6.43 %      139,608       1,742       5.00 %
Total interest-earning assets     25,326,247     294,442       4.66 %   21,289,420     255,353       4.81 %
Noninterest-earning assets:
Cash and cash equivalents            305,151                               265,915
Allowance for loan losses           (254,282 )                            (238,702 )
Other assets                       1,754,296                             1,678,031
Total assets                    $ 27,131,412                          $ 22,994,664
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Checking accounts               $  2,139,537   $   1,216       0.23 % $  1,440,538   $     876       0.24 %
Money market accounts              6,035,120       3,982       0.26 %    5,332,345       3,875       0.29 %
Savings deposits                   1,495,295         635       0.17 %    1,256,146         512       0.16 %
Time deposits                      6,288,684       9,736       0.62 %    5,993,464      10,475       0.70 %
Federal funds purchased and
other borrowings                         315           -          -             29           -          -
Federal Home Loan Bank
advances                             315,805       1,015       1.29 %      313,677       1,047       1.34 %
Securities sold under
repurchase agreements              1,005,280      10,189       4.07 %      995,000      10,217       4.12 %
Long-term debt                       240,640       1,219       2.03 %      137,178         707       2.07 %
Total interest-bearing
liabilities                       17,520,676      27,992       0.64 %   15,468,377      27,709       0.72 %
Noninterest-bearing
liabilities:
Demand deposits                    6,553,899                             4,882,823
Other liabilities                    375,556                               312,158
Stockholders' equity               2,681,281                             2,331,306
Total liabilities and
stockholders' equity            $ 27,131,412                          $ 22,994,664
Interest rate spread                                           4.02 %                                4.09 %
Net interest income and net
interest margin                                $ 266,450       4.22 %                $ 227,644       4.29 %



(1) Annualized.

(2) Includes net amortization/(accretion) of premiums/(discounts) on investment securities and loans receivable totaling $55 thousand and ($5.5) million for the three months ended June 30, 2014 and 2013, respectively.

(3) Average balances include nonperforming loans.

(4) Includes the net amortization of deferred loans fees totaling $3.2 million and $4.1 million for the three months ended June 30, 2014 and 2013, respectively.


Table of Contents

                                                        Six Months Ended June 30,
                                               2014                                   2013
                                  Average                  Average       Average                  Average
                                  Balance      Interest    Rate (1)      Balance      Interest    Rate (1)
                                                             ($ in thousands)
ASSETS
Interest-earning assets:
Due from banks and short-term
investments                     $  1,326,696   $  11,956       1.82 %  $  1,227,261   $   8,568       1.41 %
Securities purchased under
resale agreements                  1,285,912       9,412       1.48 %     1,603,591      10,964       1.38 %
Investment securities
available-for-sale (2)             2,534,294      24,766       1.97 %     2,607,723      19,804       1.53 %
Loans receivable, excluding
covered loans (3)(4)              17,699,376     371,672       4.23 %    12,666,017     272,872       4.34 %
Covered Loans(3)                   1,984,549     159,383      16.20 %     2,742,595     178,577      13.13 %
Federal Home Loan Bank and
Federal Reserve Bank stock           105,016       3,426       6.58 %       147,059       2,991       4.10 %
Total interest-earning assets     24,935,843     580,615       4.70 %    20,994,246     493,776       4.74 %
Noninterest-earning assets:
Cash and cash equivalents            308,192                                308,725
Allowance for loan losses           (255,016 )                             (237,501 )
Other assets                       1,743,994                              1,721,336
Total assets                    $ 26,733,013                           $ 22,786,806
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Checking accounts               $  1,989,701   $   2,197       0.22 %  $  1,363,333   $   1,765       0.26 %
Money market accounts              5,968,502       7,765       0.26 %     5,325,624       8,213       0.31 %
Savings deposits                   1,471,449       1,260       0.17 %     1,239,544       1,054       0.17 %
Time deposits                      6,276,215      20,229       0.65 %     6,030,904      21,560       0.72 %
Federal funds purchased and
other borrowings                         205           -          -             153           -          -
Federal Home Loan Bank
advances                             383,469       2,060       1.08 %       313,416       2,086       1.34 %
Securities sold under
repurchase agreements              1,007,160      20,267       4.06 %       995,000      20,746       4.20 %
Long-term debt                       242,324       2,421       2.01 %       137,178       1,417       2.08 %
Total interest-bearing
liabilities                       17,339,025      56,199       0.65 %    15,405,152      56,841       0.74 %
Noninterest-bearing
liabilities:
Demand deposits                    6,338,968                              4,682,398
Other liabilities                    422,746                                345,597
Stockholders' equity               2,632,274                              2,353,659
Total liabilities and
stockholders' equity            $ 26,733,013                           $ 22,786,806
Interest rate spread                                           4.05 %                                 4.00 %
Net interest income and net
interest margin                                $ 524,416       4.24 %                 $ 436,935       4.20 %



(1) Annualized.

(2) Includes net amortization/(accretion) of premiums/(discounts) on investment securities and loans receivable totaling $2.4 million and ($13.0) million for the six months ended June 30, 2014 and 2013, respectively.

(3) Average balances include nonperforming loans.

(4) Includes the net amortization of deferred loans fees totaling $6.3 million and $8.4 million for the six months ended June 30, 2014 and 2013, 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 the table below.

                                          Three Months Ended June 30,               Six Months Ended June 30,
                                                 2014 vs. 2013                            2014 vs. 2013
                                       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                         $     2,062    $        891   $   1,171   $    3,388   $        738   $   2,650
Securities purchased under resale
agreements                                 (876 )        (1,266 )       390       (1,552 )       (2,285 )       733
Investment securities
available-for-sale                        2,896            (371 )     3,267        4,962           (572 )     5,534
Loans receivable, excluding
covered loans                            48,859          53,249      (4,390 )     98,800        105,860      (7,060 )
Covered Loans                           (13,665 )       (29,984 )    16,319      (19,194 )      (55,605 )    36,411
Federal Home Loan Bank and
Federal Reserve Bank stock                 (187 )          (610 )       423          435         (1,021 )     1,456
Total interest and dividend
income                              $    39,089    $     21,909   $  17,180   $   86,839   $     47,115   $  39,724
INTEREST-BEARING LIABILITIES:
Checking accounts                   $       340    $        401   $     (61 ) $      432   $        721   $    (289 )
Money market accounts                       107             483        (376 )       (448 )          924      (1,372 )
Savings deposits                            123             101          22          206            199           7
Time deposits                              (739 )           498      (1,237 )     (1,331 )          852      (2,183 )
Federal Home Loan Bank advances             (32 )             7         (39 )        (26 )          418        (444 )
Securities sold under repurchase
agreements                                  (28 )           105        (133 )       (479 )          251        (730 )
Long-term debt                              512             524         (12 )      1,004          1,052         (48 )
Total interest expense              $       283    $      2,119   $  (1,836 ) $     (642 ) $      4,417   $  (5,059 )
CHANGE IN NET INTEREST INCOME       $    38,806    $     19,790   $  19,016   $   87,481   $     42,698   $  44,783



(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 $8.9 million and $16.9 million, during the three and six months ended June 30, 2014, compared to $8.3 million and $7.5 million, during the three and six months ended June 30, 2013, respectively. The Company recorded $7.3 million and $11.3 million of net charge-offs on non-covered loans during the three and six months ended June 30, 2014, compared to $4.0 million and $4.6 million in net charge-offs recorded during the three and six months ended June 30, 2013, respectively.

During the three and six months ended June 30, 2014, the Company also recorded a provision for loan losses of $70 thousand and a net reversal of provision for loan losses of $884 thousand on covered advances, respectively. In comparison, the Company recorded a provision for loan losses of $186 thousand and $3.3 million on covered advances during the three and six months ended June 30, 2013, respectively. Net charge-offs of $694 thousand and $900 thousand were recorded on covered advances during the three and six months ended June 30, 2014, compared to net charge-offs of $1.2 million and $1.3 million recorded on covered advances during the three and six months ended June 30, 2013, respectively.

. . .

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