Business Context and Reporting Period
East West Bancorp, Inc. is a bank holding company whose principal subsidiary, East West Bank, provides commercial, residential, trade finance, retail and international banking services. The bank operates primarily in California, with additional U.S. and Greater China locations, and had 137 branches at December 31, 2011.
This Form 10-K covers the fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter information for the quarter ended December 31, 2011.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net interest income | $903.0 million | $894.7 million | Up 1% |
| Provision for loan losses | $95.0 million | $200.2 million | Down 53% |
| Noninterest income | $10.9 million | $39.3 million | Down 72% |
| Noninterest expense | $435.6 million | $477.9 million | Down 9% |
| Net income | $245.2 million | $164.6 million | Up 49% |
| Net income available to common stockholders | $238.4 million | $121.4 million | Up 96% |
| Diluted EPS | $1.60 | $0.83 | Up 93% |
| Net interest margin | 4.66% | 5.05% | Down 39 basis points |
| Return on average assets | 1.14% | 0.82% | Improved |
| Efficiency ratio | 43.04% | 47.51% | Improved |
| Net cash from operating activities | $255.3 million | $869.2 million | Down materially |
Fourth-quarter 2011 net income was $66.2 million, or $0.43 diluted EPS, compared with fourth-quarter 2010 net income of $56.3 million, or $0.22 diluted EPS. Fourth-quarter net interest income was $229.1 million, the provision for loan losses was $20.0 million, and noninterest income was $0.9 million.
Balance Sheet, Liquidity and Capital
- Total assets increased 6% to $21.97 billion at year-end 2011 from $20.70 billion.
- Total loans receivable, net, increased to $13.98 billion, including $10.06 billion of non-covered loans and $3.92 billion of FDIC-covered loans.
- Total deposits increased 12% to $17.45 billion; core deposits increased 16% to $10.31 billion.
- Cash and cash equivalents were $1.43 billion. Management stated that liquidity sources were stable and adequate for day-to-day needs.
- Federal Home Loan Bank advances declined 63% to $455.3 million, while repurchase agreements totaled $1.02 billion.
- Stockholders’ equity increased 9.4% to $2.31 billion. The company reported Tier 1 risk-based capital of 14.8%, total risk-based capital of 16.4%, and Tier 1 leverage capital of 9.7%, exceeding well-capitalized thresholds.
- Available borrowing capacity included approximately $3.61 billion from the FHLB and $1.02 billion from the Federal Reserve discount window.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially, primarily because of lower loan-loss provisions, lower operating costs and continued loan and deposit growth.
- Non-covered loans increased 19% to $10.06 billion. Commercial and trade finance loans increased 58% to $3.14 billion, while single-family loans increased 61% to $1.80 billion.
- Covered loans declined 18% to $3.92 billion, reflecting paydowns, payoffs, loan sales and charge-offs.
- Credit quality improved: nonaccrual loans declined to $145.6 million from $172.9 million, total nonperforming assets declined to $175.0 million from $194.8 million, and nonperforming assets-to-total-assets declined to 0.80% from 0.94%.
- Net charge-offs declined to $112.1 million, or 1.16% of average non-covered loans, from $202.5 million, or 2.35%.
- The allowance for loan losses declined to $216.5 million, including $209.9 million for non-covered loans, compared with $234.6 million at year-end 2010.
- Net interest margin contracted because of the extended low-interest-rate environment, although lower funding costs and covered-loan accretion partly offset lower asset yields.
- Noninterest income was pressured by a $100.1 million reduction in the FDIC indemnification asset and receivable. The prior year included a $22.9 million acquisition gain and higher investment-security gains.
- FHLB advances and long-term debt were reduced through repayments and prepayments. Prepayment penalties totaled approximately $12.3 million, including $11.8 million related to FHLB advances.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings or revenue guidance. Management stated that, given improving credit quality, loan-loss provisions and net charge-offs were expected to continue decreasing throughout 2012.
- FDIC-assisted acquisitions remain significant. The FDIC generally reimburses 80% of eligible covered-asset losses, with enhanced coverage for certain UCB losses. The FDIC indemnification asset declined to $511.1 million from $785.0 million.
- The company remains exposed to California commercial and residential real estate, interest-rate changes, borrower performance, deposit competition, liquidity conditions and economic weakness in the United States and Asia.
- Dodd-Frank and anticipated Basel III requirements may increase capital, liquidity, compliance and FDIC-insurance costs. Trust-preferred securities represented 6.4% of Tier 1 capital at year-end and are subject to regulatory phase-out provisions.
- Outstanding Series A preferred stock totaled approximately $83.0 million and carries an 8% non-cumulative dividend. Its terms restrict certain common-stock dividends and repurchases unless preferred dividends are current.
- The company recorded $0.6 million of credit-related other-than-temporary impairment on investment securities and had $107.7 million of gross unrealized losses in its available-for-sale portfolio.
- Off-balance-sheet exposures included $2.19 billion of undisbursed loan commitments, $1.58 billion of standby letters of credit and $61.6 million of commercial letters of credit.
- The filing reports no material legal proceedings. KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.
- After year-end, the board authorized a $200 million common-stock repurchase program and increased the quarterly common dividend to $0.10 per share. Approximately $100 million of shares had been repurchased by the filing date.
Important Facts for Investors to Verify
- Whether the expected decline in provisions and charge-offs continues as non-covered commercial and residential loan balances grow.
- The sustainability of earnings from covered-loan accretion and the remaining FDIC indemnification asset as shared-loss agreements run off.
- Exposure to California commercial real estate, construction, land and residential markets, including collateral values and concentration levels.
- The effect of a prolonged low-rate environment on the 4.66% net interest margin and the potential effect of rising rates on deposit costs and securities values.
- Future capital requirements and the effect of the phase-out of trust-preferred securities on regulatory capital and dividend capacity.
- Execution of the $200 million repurchase program and the resulting impact on capital, liquidity and per-share earnings.