East West Bancorp, Inc. — 2012 Q1 Form 10-Q Summary
Business context and reporting period
East West Bancorp, Inc. is a bank holding company whose principal subsidiary is East West Bank. The unaudited filing covers the three months ended March 31, 2012, with comparisons primarily to the three months ended March 31, 2011 and December 31, 2011. The company operates through Retail Banking, Commercial Banking and Other segments, with significant lending exposure to California real estate and commercial customers.
Key financial metrics
| Metric | Q1 2012 | Comparable period |
|---|---|---|
| Net interest income | $218.9 million | $208.8 million, Q1 2011 |
| Net income | $68.1 million | $56.1 million, Q1 2011 |
| Net income available to common stockholders | $66.4 million | $54.4 million, Q1 2011 |
| Diluted EPS | $0.45 | $0.37, Q1 2011 |
| Net interest margin | 4.51% | 4.52%, Q1 2011 |
| Efficiency ratio | 44.07% | 43.14%, Q1 2011 |
| Return on average assets | 1.26% | 1.07%, Q1 2011 |
| Return on average common equity | 12.01% | 10.50%, Q1 2011 |
| Net cash provided by operating activities | $60.0 million | $158.3 million, Q1 2011 |
| Net cash provided by investing activities | $424.3 million | $(354.1) million, Q1 2011 |
| Net cash used in financing activities | $(279.2) million | $355.9 million, Q1 2011 |
Net interest income increased 5%, supported by lower funding costs and higher average non-covered loan balances. Interest expense fell to $35.1 million from $45.5 million. The effective income tax rate was 36.8%, compared with 35.2% in Q1 2011.
Total assets were $21.75 billion at March 31, 2012, down from $21.97 billion at year-end 2011. Cash and cash equivalents increased to $1.64 billion. Net loans were $13.95 billion, including $10.26 billion of non-covered loans and $3.68 billion of covered loans. Total deposits were $17.34 billion, including $10.56 billion of core deposits and $6.78 billion of time deposits.
Borrowings included $394.7 million of Federal Home Loan Bank advances, $995.0 million of repurchase agreements and $212.2 million of long-term debt. Stockholders’ equity was $2.28 billion. Regulatory capital remained strong: Bancorp Tier 1 leverage was 9.5%, Tier 1 risk-based capital was 15.1% and total risk-based capital was 16.7%; the Bank’s corresponding ratios were 8.9%, 14.0% and 15.6%.
Material changes versus prior comparable periods
- Net income increased 21% year over year, while diluted EPS increased 22% to $0.45.
- Loan-loss provision declined to $18.1 million from $26.5 million, and net charge-offs declined to $10.3 million from $34.2 million.
- Non-covered nonperforming assets declined to $167.1 million, or 0.77% of total assets, from $175.0 million, or 0.80%, at December 31, 2011. Nonaccrual loans declined to $120.8 million from $145.6 million.
- Non-covered gross loans increased 2% to $10.50 billion, driven by single-family, commercial business and consumer loan growth. Covered loans declined 6% to $3.68 billion due primarily to paydowns, payoffs and charge-offs.
- Noninterest income increased to $21.7 million from $11.0 million, primarily because the decrease in the FDIC indemnification asset and receivable was smaller and letters-of-credit fees increased.
- Noninterest expense increased 7% to $114.8 million, principally due to higher compensation, legal expense and loan-related expenses. The efficiency ratio consequently worsened modestly.
- Investment securities available-for-sale declined 12% to $2.71 billion. The net unrealized loss improved to $31.0 million from $60.4 million at December 31, 2011.
- Core deposits increased 2.5% to $10.56 billion, while time deposits declined 5.2%. The overall cost of deposits declined to 0.47% from 0.55% in the prior quarter.
- The company repurchased 4.55 million common shares for $101.0 million under a newly authorized $200.0 million repurchase program and paid $14.8 million of common dividends.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or financial guidance. Management reported improving credit quality, strong capital and adequate liquidity, but noted that future results remain sensitive to borrower performance, California commercial and residential real estate conditions, interest rates, the economy, regulatory changes, funding and liquidity pressures, and additional loan-loss provisions.
- Covered assets from FDIC-assisted acquisitions remain material. The FDIC generally reimburses 80% of eligible losses, subject to agreement terms. The estimated potential liability payable to the FDIC at the end of the loss-share agreements increased to $13.5 million from $10.7 million.
- The FDIC indemnification asset declined to $457.3 million from $511.1 million during the quarter. The company recorded $10.1 million of amortization and a $41.0 million reduction related to covered-asset cash flows and charge-offs.
- Approximately 92% of non-covered commercial real estate and residential loans are secured by California real estate, creating geographic and collateral concentration risk.
- The available-for-sale portfolio included $79.2 million of gross unrealized losses, including $67.6 million on investment-grade corporate debt. The company recorded $99 thousand of credit-related impairment in earnings and $5.1 million of noncredit-related impairment in other comprehensive income.
- Off-balance-sheet commitments included $2.34 billion of undisbursed loan commitments, $1.80 billion of standby letters of credit and $80.1 million of commercial letters of credit. Loans sold or securitized with recourse totaled $561.2 million, supported by a $6.0 million reserve.
- Derivative agreements contained provisions that could require settlement if the company defaulted on indebtedness, failed to remain adequately capitalized or received a prompt-corrective-action notice. The termination value of affected derivatives in a net liability position was $16.8 million.
- In April 2012, the company sold approximately $150 million of student loans for a $5.1 million gain, repurchased approximately $13.7 million of additional common stock and declared second-quarter common and preferred dividends.
- Management stated that no material legal proceedings were pending, no material changes had occurred to previously disclosed risk factors, and disclosure controls were effective as of March 31, 2012.
Most important facts for an investor to verify
- Whether the improvement in net income and credit quality is sustainable after the effects of lower provisions, FDIC-related accounting and loan-sale gains.
- The performance and remaining loss exposure of the FDIC-covered loan portfolios, including the estimated $13.5 million potential payment obligation.
- California commercial and residential real estate concentrations, nonaccrual trends, OREO additions and future charge-offs.
- The quality and valuation sensitivity of corporate debt and pooled trust preferred securities, including unrealized losses and Level 3 assumptions.
- Liquidity under declining deposits, repurchase-agreement maturities, derivative collateral or termination requirements and other off-balance-sheet commitments.
- The effect of the $101.0 million share repurchase and continuing dividends on capital, tangible book value and future growth capacity.
- The transition risk for trust preferred securities as regulatory capital under the Dodd-Frank phase-out beginning in 2013.