East West Bancorp, Inc. — Q1 2011 Form 10-Q Summary
Business context and reporting period
East West Bancorp, Inc. is a bank holding company operating primarily through East West Bank, with retail banking, commercial banking and other centralized activities. The filing covers the unaudited three months ended March 31, 2011, with comparisons to March 31, 2010 and December 31, 2010. The company’s loan portfolio includes assets acquired through FDIC-assisted acquisitions of United Commercial Bank and Washington First International Bank, subject to FDIC shared-loss agreements.
Financial performance and key metrics
| Metric | Q1 2011 | Comparable period |
|---|---|---|
| Net income | $56.1 million | $24.9 million in Q1 2010 |
| Net income available to common stockholders | $54.4 million | $18.8 million in Q1 2010 |
| Diluted EPS | $0.37 | $0.13 in Q1 2010 |
| Net interest income | $208.8 million | $261.7 million in Q1 2010 |
| Net interest margin | 4.52% | 5.92% in Q1 2010 |
| Adjusted net interest margin | Approximately 3.94% | Approximately 4.49% in Q1 2010 |
| Provision for loan losses | $26.5 million | $76.4 million in Q1 2010 |
| Noninterest income | $11.0 million | $(8.5) million in Q1 2010 |
| Noninterest expense | $106.8 million | $138.9 million in Q1 2010 |
| Efficiency ratio | 43.14% | 49.03% in Q1 2010 |
| Return on average assets | 1.07% | 0.49% in Q1 2010 |
| Return on average common equity | 10.50% | 4.71% in Q1 2010 |
- Total assets were $21.15 billion at March 31, 2011, up 2.2% from $20.70 billion at year-end 2010.
- Total loans receivable, net, were $13.17 billion, including $8.57 billion of non-covered loans and $4.60 billion of covered loans. Loans held for sale were $303.7 million, approximately 95% of which consisted of student loans.
- Non-covered gross loans increased to $8.82 billion from $8.72 billion at year-end, led by commercial and industrial loans and single-family loans. Commercial real estate loans declined.
- Total deposits increased 5.1% to $16.44 billion. Core deposits rose 2.6% to $9.11 billion, while time deposits increased 8.3% to $7.33 billion.
- Cash and cash equivalents were $1.49 billion. Net cash provided by operating activities was $158.3 million, while investing activities used $354.1 million and financing activities provided $355.9 million. Cash increased $159.0 million during the quarter.
- Federal Home Loan Bank advances declined 34.6% to $793.6 million. Securities sold under repurchase agreements were $1.08 billion, and long-term debt remained $235.6 million.
- Stockholders’ equity increased to $2.16 billion from $2.11 billion at year-end 2010. The company’s Tier 1 and total risk-based capital ratios were 15.9% and 17.7%, respectively; the bank’s ratios were 15.6% and 17.3%.
- Net charge-offs were $34.2 million, or 1.54% annualized of average loans, compared with $63.9 million, or 2.97%, in Q1 2010. The allowance for loan losses was $226.2 million, including $220.4 million on non-covered loans.
Material changes versus prior comparable periods
- Net income increased 125% year over year, primarily because of substantially lower loan-loss provisions, lower operating expenses and improved noninterest income.
- Net interest income declined 20%, and net interest margin fell 140 basis points, principally because of reduced cash-flow and disposition activity in covered loans and the low-interest-rate environment.
- Noninterest income improved by $19.5 million year over year. The improvement reflected a smaller reduction in the FDIC indemnification asset, a $7.4 million gain on loan sales and lower securities impairment, partly offset by lower securities-sale gains.
- Noninterest expense declined 23%, driven by completed integration of UCB and related reductions in compensation, regulatory assessments, OREO costs and other operating expenses.
- Non-covered nonperforming assets declined to $188.3 million, or 0.89% of total assets, from $194.8 million, or 0.94%, at year-end 2010. Nonaccrual loans were broadly unchanged at $172.7 million.
- Covered loans declined $201.1 million during the quarter to $4.60 billion. Covered nonperforming assets were $442.4 million, including $300.0 million of covered nonaccrual loans and $142.4 million of covered OREO.
- The company repurchased all 1,517,555 U.S. Treasury warrants for $14.5 million. It did not repurchase common stock under its public repurchase program.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or financial guidance. Management stated that profitability and credit trends improved, with the provision for loan losses and net charge-offs declining for the sixth consecutive quarter. Management also described continued growth in commercial and industrial lending and further reduction of commercial real estate, land and construction exposure.
- FDIC shared-loss agreements reimburse 80% of eligible losses on covered assets, with enhanced reimbursement provisions for certain UCB losses. The FDIC indemnification asset declined to $717.3 million, and the FDIC loss-sharing receivable increased to $68.5 million.
- Covered-asset accounting remains material to reported earnings. Covered-loan accretion and FDIC indemnification amortization affected net interest income and noninterest income, and management’s estimates of expected cash flows are subject to change.
- The investment securities portfolio was $2.93 billion and included $42.6 million of gross unrealized losses. The company recorded $464 thousand of credit-related impairment in earnings and $5.1 million of noncredit-related impairment in accumulated other comprehensive income.
- Covered OREO increased to $142.4 million from $123.9 million despite sales activity; 30 properties were added through foreclosure during the quarter and 37 were sold.
- Key risks include deterioration in California commercial and residential real estate, borrower performance, additional loan-loss provisions, interest-rate changes, regulatory requirements, FDIC shared-loss estimates, liquidity and funding conditions, securities valuation, and reputational risk.
- Off-balance-sheet exposures included $1.95 billion of undisbursed loan commitments, $874.2 million of commercial and standby letters of credit, and $675.6 million of loans sold or securitized with recourse.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2011.
- Subsequent to quarter-end, the board declared a second-quarter Series A preferred dividend of $20 per share and increased the common dividend to $0.05 per share.
Important facts investors should verify
- Assess the sustainability of reported earnings after excluding covered-loan accretion, FDIC-related items, loan-sale gains and other unusual items.
- Reconcile the 4.52% reported net interest margin with management’s approximately 3.94% adjusted margin and evaluate sensitivity to lower covered-loan cash flows.
- Review California commercial real estate exposure, classified loans, nonaccrual trends, OREO additions and the adequacy of the $226.2 million loan-loss allowance.
- Monitor the $717.3 million FDIC indemnification asset, $68.5 million FDIC receivable and the assumptions underlying future reimbursements and shared-loss obligations.
- Evaluate deposit growth, the mix of core versus time deposits, FHLB paydowns, repurchase-agreement funding and available contingent liquidity.
- Consider unrealized securities losses, Level 3 valuations and the remaining pooled trust preferred securities exposure.
- Verify capital ratios and the potential effect of future regulatory phase-out of trust preferred securities as Tier 1 capital.