East West Bancorp, Inc. — 2014 Form 10-K Summary
Business context and reporting period
East West Bancorp is a bank holding company whose principal subsidiary, East West Bank, provides retail, commercial, real estate, trade finance and cross-border banking services in the United States and Greater China. The filing covers the fiscal year ended December 31, 2014; quarterly information is provided for comparison. The company had $28.74 billion of consolidated assets, $21.51 billion of net loans and $24.01 billion of deposits at year-end.
The company completed its acquisition of MetroCorp Bancshares on January 17, 2014, expanding its presence in Texas and San Diego. Consideration was $291.4 million, consisting primarily of East West stock and cash; approximately $1.70 billion of assets and $1.41 billion of liabilities were acquired.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income before provisions | $1,040.9 million | $956.2 million | Up 9% |
| Net income | $342.5 million | $295.0 million | Up 16% |
| Diluted EPS | $2.38 | $2.10 | Up 13% |
| Net interest margin | 4.03% | 4.38% | Down 35 bps |
| Return on average assets | 1.24% | 1.25% | Down 1 bp |
| Return on average equity | 12.61% | 12.59% | Up 2 bps |
| Noninterest expense | $564.6 million | $415.5 million | Up 36% |
| Provision for loan losses | $49.2 million | $22.4 million | Up $26.8 million |
| Operating cash flow | $392.9 million | $425.8 million | Down $32.9 million |
- Revenue and profitability: Interest income increased to $1.154 billion from $1.069 billion, while interest expense was broadly stable at $112.8 million. Net income available to common stockholders was $342.5 million.
- Margins: The 35-basis-point decline in net interest margin primarily reflected reduced discount accretion as the FDIC-covered loan portfolio paid down.
- Credit quality: Non-covered nonperforming assets declined modestly to $128.7 million, or 0.45% of assets, from $130.6 million, or 0.53%. Nonaccrual loans declined 10% to $101.0 million. Net charge-offs on non-covered loans increased to $26.3 million, or 0.14% of average non-covered loans.
- Loan growth: Non-covered gross loans increased 29% to $20.25 billion, including $1.19 billion acquired from MetroCorp. Excluding the acquisition, non-covered loan growth was 22%, driven largely by commercial and industrial lending.
- Deposits and liquidity: Deposits increased 18% to $24.01 billion. Core deposits increased 23% to $17.90 billion, including $7.38 billion of noninterest-bearing demand deposits. The company reported stable and adequate liquidity, with $5.54 billion of available FHLB borrowing capacity and $3.03 billion of additional Federal Reserve discount-window capacity.
- Debt: Long-term debt was $225.8 million, FHLB advances were $317.2 million and repurchase agreements were $795.0 million at year-end. The $80.0 million term loan matures July 1, 2016.
- Capital: Stockholders’ equity rose 21% to $2.85 billion. The company reported Tier 1 and total risk-based capital ratios of 11.0% and 12.6%; the bank reported 10.6% and 11.8%, respectively, exceeding applicable well-capitalized thresholds.
Material changes versus the prior comparable period
- MetroCorp contributed to a 16% increase in total assets, a 28% increase in net non-covered loans and an 18% increase in deposits.
- Net interest income increased $84.7 million, primarily from higher non-covered loan volume, despite lower margins.
- Noninterest loss improved to $11.7 million from $92.5 million. The improvement primarily reflected higher loan-sale gains, lower adverse changes in the FDIC indemnification asset and increased fees.
- Noninterest expense increased $149.0 million. Major drivers included higher compensation, merger-related retention and integration costs, tax-credit investment amortization, legal expense and regulatory costs.
- The effective tax rate fell to 17.6% from 30.7%, primarily due to increased affordable housing and other tax-credit investments. Tax credits recognized in 2014 totaled approximately $85.7 million.
- The FDIC indemnification balance changed from a $74.7 million asset at December 31, 2013 to a $96.1 million payable at December 31, 2014, reflecting improved performance and paydowns of covered loans.
- The company did not repurchase shares under its $100 million authorization in 2014 or 2013. Quarterly common dividends increased from $0.15 per share in 2013 to $0.18 in 2014.
Guidance, outlook, commentary, risks and unusual items
- No formal earnings or operating guidance is provided in the filing. Management emphasizes continued commercial loan and core deposit growth, cross-border banking expansion and maintenance of strong capital and liquidity.
- Two Greater China branches opened during the fourth quarter, in Shenzhen and the Shanghai Pilot Free Trade Zone.
- Management expects Basel III capital rules to be effective beginning January 1, 2015 and believes the company and bank would meet fully phased-in requirements based on December 31, 2014 capital levels. Trust preferred securities are being phased out of Tier 1 capital through 2016.
- Legal expense included a $31.6 million accrual related to the F&F, LLC and 618 Investments, Inc. litigation. The company is appealing an unfavorable verdict; the court-adjusted verdict amount was $36.6 million.
- The company remains exposed to California commercial and residential real estate, interest-rate movements, borrower performance, deposit competition, regulatory and compliance costs, cybersecurity and technology risks, and economic conditions in China and other Asian markets.
- FDIC loss-sharing coverage for certain commercial assets acquired from UCB ended December 31, 2014, while WFIB commercial coverage extends through June 30, 2015. Residential loss-sharing periods extend into 2019 and 2020. Losses after coverage expiration will no longer be shared with the FDIC.
- Off-balance-sheet exposures included $3.87 billion of undisbursed loan commitments, $1.25 billion of commercial and standby letters of credit, and $249.8 million of maximum potential payments under loan-sale recourse arrangements.
- The filing reports no goodwill impairment, no other-than-temporary impairment charges on investment securities in 2014, effective disclosure controls and effective internal control over financial reporting. KPMG issued unqualified audit opinions.
- On January 21, 2015, the board declared a first-quarter 2015 dividend of $0.20 per share, an 11% increase from the prior quarterly dividend.
Most important facts for an investor to verify
- Whether rapid commercial loan growth, particularly in C&I and California real estate, leads to higher provisions, charge-offs or nonperforming assets.
- The sustainability of the 17.6% effective tax rate and the earnings contribution, cash requirements and potential recapture risks of tax-credit investments.
- The effect of declining FDIC-covered loan balances, expiring loss-sharing protection and the $96.1 million FDIC payable on future earnings and capital.
- The final outcome and potential additional exposure from the F&F litigation appeal.
- The effect of Basel III implementation and the phase-out of trust preferred securities on regulatory capital, dividends, acquisitions and share repurchases.
- Whether MetroCorp integration costs, goodwill and expected strategic benefits develop as planned.
- Liquidity and funding conditions, including deposit retention, repurchase-agreement calls, FHLB availability and the July 2016 term-loan maturity.
- Interest-rate sensitivity: the filing estimates that a 200-basis-point increase could raise modeled net interest income by 15.5% but increase exposure to changes in the value of equity and funding costs.