East West Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The interim consolidated financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Financial Position
East West Bancorp operates primarily through East West Bank, serving retail, commercial, real estate, trade finance and consumer lending customers. Total assets were $24.50 billion at September 30, 2013, up 9% from December 31, 2012. The company signed an agreement to acquire MetroCorp Bancshares, which had approximately $1.6 billion of assets and 18 branches; closing was expected in the first quarter of 2014.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net interest income | $254.3 million | $221.9 million | $691.2 million | $674.0 million |
| Net income | $73.2 million | $71.1 million | $219.3 million | $209.8 million |
| Net income available to common stockholders | $73.2 million | $69.4 million | $215.8 million | $204.6 million |
| Diluted EPS | $0.53 | $0.48 | $1.56 | $1.40 |
| Net interest margin | 4.54% | 4.46% | 4.32% | 4.59% |
| Annualized return on average assets | 1.22% | 1.30% | 1.27% | 1.30% |
| Annualized return on average common equity | 12.65% | 12.43% | 12.56% | 12.30% |
- Loans: Total loans, including covered loans, were $17.20 billion at quarter-end, up 6% from June 30, 2013. Non-covered loans increased to $14.34 billion net, while covered loans declined to $2.36 billion net.
- Deposits: Total deposits reached $20.36 billion, up 11% from year-end 2012. Core deposits increased 19% to $14.45 billion, led by a $1.22 billion increase in noninterest-bearing demand deposits. Time deposits declined 3%.
- Credit quality: The non-covered allowance for loan losses was $234.2 million, or 1.60% of non-covered loans. Non-covered nonperforming assets were $124.1 million, or 0.51% of total assets, compared with $141.0 million, or 0.63%, at year-end 2012.
- Capital: East West Bancorp reported a Tier 1 leverage ratio of 8.7%, Tier 1 risk-based capital ratio of 12.4% and total risk-based capital ratio of 14.0%. The bank subsidiary reported Tier 1 and total risk-based capital ratios of 11.9% and 13.1%, respectively.
- Liquidity and borrowings: Cash and cash equivalents were $1.32 billion. Federal Home Loan Bank advances were $314.6 million, repurchase agreements were $995.0 million and long-term debt was $187.2 million, including a new $50.0 million three-year term loan.
Cash Flow and Capital Allocation
- Operating activities provided $291.3 million of cash during the first nine months, compared with $194.2 million in the prior-year period.
- Investing activities used $2.10 billion, primarily for loan growth, investment securities and resale agreements.
- Financing activities provided $1.81 billion, principally from the $2.05 billion increase in deposits, partly offset by $200.0 million of share repurchases and $65.6 million of dividends.
- Stockholders’ equity declined to $2.31 billion from $2.38 billion at year-end 2012, primarily because of share repurchases, dividends and a $29.8 million other comprehensive loss.
- The Series A preferred stock was mandatorily converted into 5.6 million common shares on May 1, 2013. The board declared a $0.15 quarterly common dividend payable in November 2013.
Material Changes Versus Prior Comparable Period
- Q3 net income increased 3%, while diluted EPS increased 10%, reflecting higher net interest income, lower loan-loss provisions and reduced noninterest expense.
- Net interest income increased 15% in Q3, supported by loan growth, lower funding costs and covered-loan accretion. The nine-month net interest margin declined to 4.32% from 4.59% because of the low-rate environment and lower non-covered loan yields.
- Loan-loss provision expense declined materially: non-covered provision was $4.5 million in Q3 versus $13.3 million in Q3 2012; total nine-month provision was $16.9 million versus $52.1 million.
- Noninterest income changed from income of $2.8 million in Q3 2012 to a loss of $41.4 million in Q3 2013, primarily because of a $74.5 million reduction in the FDIC indemnification asset and receivable. The nine-month noninterest loss was $55.9 million versus income of $12.8 million.
- Noninterest expense declined 8% for the first nine months, to $291.1 million, helped by lower OREO-related costs, loan expenses, consulting expense and the absence of prior-year FHLB prepayment penalties.
- Other comprehensive income shifted to a $29.8 million loss, primarily from unrealized investment-security losses, compared with $32.4 million of income in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management stated that liquidity sources were stable and adequate for daily requirements and that capital levels exceeded regulatory minimums. No formal earnings guidance was provided.
- Covered loans acquired through FDIC-assisted transactions are subject to shared-loss agreements under which the FDIC generally reimburses 80% of eligible losses. The FDIC indemnification asset declined to $145.0 million from $316.3 million at year-end 2012, and the company recorded a $65.9 million estimated liability to the FDIC related to future settlement provisions.
- Covered-loan performance was better than originally expected, resulting in reductions to loss assumptions, increased accretable yield and higher interest-income accretion. This also created substantial reductions in the FDIC indemnification asset and caused significant quarter-to-quarter volatility in noninterest income.
- Key risks include California real-estate concentration, borrower performance, interest-rate changes, credit losses, FDIC shared-loss agreement expirations, regulatory and compliance costs, the MetroCorp acquisition and integration, litigation, China-related economic and monetary developments, and changes in consumer-lending rules.
- Off-balance-sheet exposures included $3.67 billion of undisbursed loan commitments, $985.4 million of standby letters of credit and $94.0 million of commercial letters of credit. Loans sold or securitized with recourse totaled $360.7 million.
- The company reported no material legal proceedings, but stated that pending or threatened legal and regulatory matters could adversely affect liquidity, financial position or results of operations.
Investor Verification Items
- Verify the expected timing, consideration, capital impact and integration assumptions for the MetroCorp acquisition.
- Reconcile the recurring earnings contribution from covered-loan accretion with the declining covered-loan balance and the FDIC indemnification-asset reductions.
- Monitor non-covered loan growth, California real-estate concentrations, impaired loans, nonaccrual trends and allowance adequacy.
- Assess the sensitivity of net interest income and portfolio value to interest-rate changes; management projected a 4.9% increase in annual net interest income under a 100-basis-point increase and a 0.4% decline under a 100-basis-point decrease.
- Review the company’s ability to fund continued loan growth through core deposits while managing repurchase agreements, FHLB advances and long-term debt.
- Confirm the sustainability of earnings excluding investment-security gains, FDIC-related accounting effects and covered-loan accretion.