Table of Contents
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended
June 30, 2008
|
|
|
or
|
|
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
.
Commission file number 000-24939
EAST WEST
BANCORP, INC
.
(Exact name of registrant as specified in its
charter)
Delaware
|
|
95-4703316
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
135 N. Los
Robles Ave, 7
th
Floor, Pasadena, California 91101
(Address of
principal executive offices) (Zip Code)
(626)
768-6000
(Registrants
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filed, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer
and accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
|
Accelerated filer
o
|
Non-accelerated filer
o
|
Smaller reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
Number
of shares outstanding of the issuers common stock on the latest practicable
date: 63,468,321 shares of common stock as of July 31, 2008.
Table of Contents
Forward-Looking Statements
Certain matters discussed in this report may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the 1933 Act) and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act), and as such, may involve
risks and uncertainties. These
forward-looking statements relate to, among other things, expectations of the
environment in which the Company operates and projections of future performance
including future earnings, operating results, financial condition, and cash
flows. The Companys actual results,
performance, or achievements may differ significantly from the results,
performance, or achievements expected or implied in such forward-looking
statements as a result of the effect of interest rate and currency exchange
fluctuations; competition in the financial services market for both loans and
deposits; our ability to incorporate acquisitions into our operations; the
effect of regulatory and legislative action; and regional and general economic
conditions.
Such risk and uncertainties and other factors include,
but are not limited to, adverse developments or conditions related to or
arising from:
·
changes in our borrowers performance on
loans;
·
changes in the commercial and consumer
real estate markets;
·
changes in our costs of operation,
compliance and expansion;
·
changes in the economy, including
inflation;
·
changes in government interest rate
policies;
·
changes in laws or the regulatory
environment;
·
changes in accounting policies or
procedures;
·
changes in the equity and debt securities
markets;
·
changes in competitive pressures on
financial institutions;
·
effect of additional provision for loan
losses;
·
effect of any goodwill impairment;
·
fluctuations in our stock price;
·
success and timing of our business
strategies;
·
changes in our ability to receive
dividends from our subsidiaries; and
·
political developments, wars, acts of
terrorism or natural disasters such as earthquakes or floods.
For
a more detailed discussion of some of the factors that might cause such
differences, see the Companys 2007 Form 10-K under the heading ITEM 1A.
RISK FACTORS. The Company does not
undertake, and specifically disclaims any obligation to update any forward
looking statements to reflect the occurrence of events or circumstances after
the date of such statements except as required by law.
3
Table
of Contents
PART I -
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
424,058
|
|
$
|
160,347
|
|
Short term investments
|
|
880
|
|
|
|
Securities purchased under resale
agreements
|
|
50,000
|
|
150,000
|
|
Investment securities available-for-sale,
at fair value (with amortized cost of $2,009,573 in 2008 and $1,954,140 in
2007)
|
|
1,828,181
|
|
1,887,136
|
|
Loans receivable, net of allowance for loan
losses of $168,413 at June 30, 2008 and $88,407 at December 31,
2007
|
|
8,483,124
|
|
8,750,921
|
|
Investment in Federal Home Loan Bank stock,
at cost
|
|
90,683
|
|
84,976
|
|
Investment in Federal Reserve Bank stock,
at cost
|
|
27,589
|
|
21,685
|
|
Other real estate owned, net
|
|
17,490
|
|
1,500
|
|
Investment in affordable housing
partnerships
|
|
43,640
|
|
44,206
|
|
Premises and equipment, net
|
|
62,402
|
|
64,943
|
|
Due from customers on acceptances
|
|
9,538
|
|
15,941
|
|
Premiums on deposits acquired, net
|
|
23,896
|
|
28,459
|
|
Goodwill
|
|
337,574
|
|
335,366
|
|
Cash surrender value of life insurance
policies
|
|
90,408
|
|
88,658
|
|
Accrued interest receivable and other
assets
|
|
125,938
|
|
151,664
|
|
Deferred tax assets
|
|
169,499
|
|
66,410
|
|
TOTAL
|
|
$
|
11,784,900
|
|
$
|
11,852,212
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Customer deposit accounts:
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
1,419,183
|
|
$
|
1,431,730
|
|
Interest-bearing
|
|
6,099,819
|
|
5,847,184
|
|
Total customer deposits
|
|
7,519,002
|
|
7,278,914
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
86,149
|
|
222,275
|
|
Federal Home Loan Bank advances
|
|
1,543,389
|
|
1,808,419
|
|
Securities sold under repurchase agreements
|
|
1,000,812
|
|
1,001,955
|
|
Notes payable
|
|
13,533
|
|
16,242
|
|
Long-term debt
|
|
235,570
|
|
235,570
|
|
Bank acceptances outstanding
|
|
9,538
|
|
15,941
|
|
Accrued interest payable, accrued expenses
and other liabilities
|
|
104,707
|
|
101,073
|
|
Total liabilities
|
|
10,512,700
|
|
10,680,389
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
Preferred stock (par value of $0.001 per
share)
|
|
|
|
|
|
Authorized 5,000,000 shares
|
|
|
|
|
|
Issued and outstanding 200,000 shares of
Series A, convertible preferred stock, in 2008 and none in 2007
|
|
|
|
|
|
Common stock (par value of $0.001 per
share)
|
|
|
|
|
|
Authorized 200,000,000 shares
|
|
|
|
|
|
Issued 70,002,157 shares in 2008 and
69,634,811 shares in 2007
|
|
|
|
|
|
Outstanding 63,438,596 shares in 2008 and
63,137,221 shares in 2007
|
|
70
|
|
70
|
|
Additional paid in capital
|
|
855,082
|
|
652,297
|
|
Retained earnings
|
|
623,202
|
|
657,183
|
|
Treasury stock, at cost 6,563,561 shares
in 2008 and 6,497,590 shares in 2007
|
|
(101,029
|
)
|
(98,925
|
)
|
Accumulated other comprehensive loss, net
of tax
|
|
(105,125
|
)
|
(38,802
|
)
|
Total stockholders equity
|
|
1,272,200
|
|
1,171,823
|
|
TOTAL
|
|
$
|
11,784,900
|
|
$
|
11,852,212
|
|
See accompanying notes to condensed
consolidated financial statements.
4
Table of Contents
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
INTEREST AND DIVIDEND INCOME
|
|
|
|
|
|
|
|
|
|
Loans receivable, including fees
|
|
$
|
137,997
|
|
$
|
158,844
|
|
$
|
293,431
|
|
$
|
317,007
|
|
Investment securities available-for-sale
|
|
25,730
|
|
23,370
|
|
52,780
|
|
46,270
|
|
Securities purchased under resale
agreements
|
|
1,264
|
|
3,943
|
|
3,817
|
|
7,729
|
|
Investment in Federal Home Loan Bank stock
|
|
1,479
|
|
668
|
|
2,763
|
|
1,629
|
|
Short-term investments
|
|
1,051
|
|
117
|
|
1,589
|
|
217
|
|
Investment in Federal Reserve Bank stock
|
|
384
|
|
272
|
|
709
|
|
539
|
|
Total interest and dividend income
|
|
167,905
|
|
187,214
|
|
355,089
|
|
373,391
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
Customer deposit accounts
|
|
43,536
|
|
61,124
|
|
95,789
|
|
120,086
|
|
Federal Home Loan Bank advances
|
|
17,541
|
|
12,514
|
|
37,223
|
|
27,380
|
|
Securities sold under repurchase agreements
|
|
11,290
|
|
9,018
|
|
21,819
|
|
17,412
|
|
Long-term debt
|
|
2,994
|
|
3,752
|
|
6,717
|
|
7,134
|
|
Federal funds purchased
|
|
368
|
|
1,877
|
|
1,746
|
|
3,847
|
|
Total interest expense
|
|
75,729
|
|
88,285
|
|
163,294
|
|
175,859
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES
|
|
92,176
|
|
98,929
|
|
191,795
|
|
197,532
|
|
PROVISION FOR LOAN LOSSES
|
|
85,000
|
|
|
|
140,000
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
|
|
7,176
|
|
98,929
|
|
51,795
|
|
197,532
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
Branch fees
|
|
4,339
|
|
3,404
|
|
8,440
|
|
6,831
|
|
Net gain on sale of investment securities
available-for-sale
|
|
3,433
|
|
918
|
|
7,767
|
|
2,446
|
|
Letters of credit fees and commissions
|
|
2,476
|
|
2,633
|
|
5,153
|
|
4,986
|
|
Net gain on sale of loans
|
|
273
|
|
86
|
|
2,128
|
|
1,024
|
|
Ancillary loan fees
|
|
984
|
|
1,487
|
|
2,125
|
|
2,767
|
|
Income from life insurance policies
|
|
1,024
|
|
1,058
|
|
2,052
|
|
2,032
|
|
Other operating income
|
|
854
|
|
1,216
|
|
1,631
|
|
1,867
|
|
Total noninterest income
|
|
13,383
|
|
10,802
|
|
29,296
|
|
21,953
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
25,790
|
|
20,648
|
|
49,058
|
|
41,430
|
|
Occupancy and equipment expense
|
|
6,539
|
|
6,046
|
|
13,547
|
|
11,927
|
|
Impairment writedown on investment
securities
|
|
9,945
|
|
|
|
9,945
|
|
|
|
Amortization and impairment writedowns of
premiums on deposits acquired
|
|
1,827
|
|
1,525
|
|
4,564
|
|
3,057
|
|
Amortization of investments in affordable
housing partnerships
|
|
1,920
|
|
1,236
|
|
3,635
|
|
2,504
|
|
Deposit insurance premiums and regulatory
assessments
|
|
2,321
|
|
324
|
|
3,513
|
|
671
|
|
Legal expense
|
|
1,135
|
|
344
|
|
3,035
|
|
605
|
|
Data processing
|
|
1,135
|
|
1,070
|
|
2,331
|
|
2,052
|
|
Deposit-related expenses
|
|
1,237
|
|
1,862
|
|
2,185
|
|
3,549
|
|
Other real estate owned expense (income)
|
|
508
|
|
(2
|
)
|
1,397
|
|
(1,247
|
)
|
Impairment writedown on goodwill
|
|
586
|
|
|
|
586
|
|
|
|
Other operating expenses
|
|
12,657
|
|
10,210
|
|
24,694
|
|
19,689
|
|
Total noninterest expense
|
|
65,600
|
|
43,263
|
|
118,490
|
|
84,237
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES
|
|
(45,041
|
)
|
66,468
|
|
(37,399
|
)
|
135,248
|
|
(BENEFIT) PROVISION FOR INCOME TAXES
|
|
(19,154
|
)
|
25,978
|
|
(16,556
|
)
|
52,662
|
|
NET (LOSS) INCOME
|
|
$
|
(25,887
|
)
|
$
|
40,490
|
|
$
|
(20,843
|
)
|
$
|
82,586
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
(0.41
|
)
|
$
|
0.67
|
|
$
|
(0.33
|
)
|
$
|
1.36
|
|
DILUTED
|
|
$
|
(0.41
|
)
|
$
|
0.66
|
|
$
|
(0.33
|
)
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
62,599
|
|
60,381
|
|
62,542
|
|
60,515
|
|
DILUTED
|
|
62,599
|
|
61,346
|
|
62,542
|
|
61,523
|
|
See accompanying notes to condensed
consolidated financial statements.
5
Table
of Contents
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
|
|
Comprehensive
Income (Loss)
|
|
Total
Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JANUARY 1, 2007
|
|
$
|
|
|
$
|
66
|
|
$
|
544,469
|
|
$
|
525,247
|
|
$
|
(40,305
|
)
|
$
|
(10,087
|
)
|
|
|
$
|
1,019,390
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for
the period
|
|
|
|
|
|
|
|
82,586
|
|
|
|
|
|
$
|
82,586
|
|
82,586
|
|
Net unrealized
gain on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
1,549
|
|
1,549
|
|
1,549
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84,135
|
|
|
|
Cumulative effect
of change in accounting principle pursuant to adoption of FIN 48
|
|
|
|
|
|
|
|
(4,628
|
)
|
|
|
|
|
|
|
(4,628
|
)
|
Stock
compensation costs
|
|
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
3,150
|
|
Tax benefit from
stock option exercises
|
|
|
|
|
|
6,071
|
|
|
|
|
|
|
|
|
|
6,071
|
|
Tax benefit from
vested restricted stock
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
184
|
|
Issuance of
668,392 shares pursuant to various stock plans and agreements
|
|
|
|
1
|
|
5,708
|
|
|
|
|
|
|
|
|
|
5,709
|
|
Cancellation of
54,980 shares due to forfeitures of issued restricted stock
|
|
|
|
|
|
2,013
|
|
|
|
(2,013
|
)
|
|
|
|
|
|
|
Purchase of
21,747 shares of treasury stock due to the vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
(795
|
)
|
|
|
|
|
(795
|
)
|
Purchase of
1,175,000 shares of treasury stock pursuant to the Stock Repurchase Program
|
|
|
|
|
|
|
|
|
|
(45,815
|
)
|
|
|
|
|
(45,815
|
)
|
Dividends paid on
common stock
|
|
|
|
|
|
|
|
(12,230
|
)
|
|
|
|
|
|
|
(12,230
|
)
|
BALANCE,
JUNE 30, 2007
|
|
$
|
|
|
$
|
67
|
|
$
|
561,595
|
|
$
|
590,975
|
|
$
|
(88,928
|
)
|
$
|
(8,538
|
)
|
|
|
$
|
1,055,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JANUARY 1, 2008
|
|
$
|
|
|
$
|
70
|
|
$
|
652,297
|
|
$
|
657,183
|
|
$
|
(98,925
|
)
|
$
|
(38,802
|
)
|
|
|
$
|
1,171,823
|
|
Comprehensive
(loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) for
the period
|
|
|
|
|
|
|
|
(20,843
|
)
|
|
|
|
|
$
|
(20,843
|
)
|
(20,843
|
)
|
Net unrealized
loss on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
(66,323
|
)
|
(66,323
|
)
|
(66,323
|
)
|
Total
comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(87,166
|
)
|
|
|
Cumulative effect
of change in accounting principle pursuant to adoption of EITF 06-4
|
|
|
|
|
|
|
|
(479
|
)
|
|
|
|
|
|
|
(479
|
)
|
Stock
compensation costs
|
|
|
|
|
|
3,016
|
|
|
|
|
|
|
|
|
|
3,016
|
|
Tax benefit from
stock option exercises
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
141
|
|
Tax provision
from vested restricted stock
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
(370
|
)
|
Issuance of
200,000 shares Series A convertible preferred stock, net of stock issuance
costs
|
|
|
|
|
|
194,075
|
|
|
|
|
|
|
|
|
|
194,075
|
|
Issuance of
367,146 shares pursuant to various stock plans and agreements
|
|
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
1,529
|
|
Cancellation of
65,561 shares due to forfeitures of issued restricted stock
|
|
|
|
|
|
2,096
|
|
|
|
(2,096
|
)
|
|
|
|
|
|
|
Purchase
accounting adjustment pursuant to DCB Acquisition
|
|
|
|
|
|
2,298
|
|
|
|
|
|
|
|
|
|
2,298
|
|
Purchase of 410
shares of treasury stock due to the vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
(8
|
)
|
Dividends paid on
common stock
|
|
|
|
|
|
|
|
(12,659
|
)
|
|
|
|
|
|
|
(12,659
|
)
|
BALANCE,
JUNE 30, 2008
|
|
$
|
|
|
$
|
70
|
|
$
|
855,082
|
|
$
|
623,202
|
|
$
|
(101,029
|
)
|
$
|
(105,125
|
)
|
|
|
$
|
1,272,200
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Disclosure of reclassification amounts:
|
|
|
|
|
|
Unrealized holding (loss) gain on
securities arising during the period, net of tax benefit (expense) of $48,942
in 2008 and $(2,149) in 2007
|
|
$
|
(67,586
|
)
|
$
|
2,968
|
|
Less: Reclassification adjustment for loss
(gain) included in net income, net of tax expense (benefit) of $(915) in 2008
and $1,027 in 2007
|
|
1,263
|
|
(1,419
|
)
|
Net unrealized (loss) gain on securities,
net of tax benefit (expense) of $48,027 in 2008 and $(1,122) in 2007
|
|
$
|
(66,323
|
)
|
$
|
1,549
|
|
See accompanying notes to condensed
consolidated financial statements.
6
Table of Contents
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands)
(Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(20,843
|
)
|
$
|
82,586
|
|
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
10,103
|
|
8,430
|
|
Impairment writedown on goodwill
|
|
586
|
|
|
|
Impairment writedown of investment securities
|
|
9,945
|
|
|
|
Stock compensation costs
|
|
3,016
|
|
3,150
|
|
Deferred tax (benefit) provision
|
|
(49,444
|
)
|
(5,751
|
)
|
Provision for loan losses
|
|
140,000
|
|
|
|
Net gain on sales of investment securities, loans and other assets
|
|
(8,682
|
)
|
(4,191
|
)
|
Federal Home Loan Bank stock dividends
|
|
(2,362
|
)
|
(1,962
|
)
|
Originations of loans held for sale
|
|
(34,330
|
)
|
(21,938
|
)
|
Proceeds from sale of loans held for sale
|
|
34,655
|
|
21,939
|
|
Tax benefit from stock options exercised
|
|
(141
|
)
|
(6,071
|
)
|
Tax provision (benefit) from vested restricted stock
|
|
370
|
|
(184
|
)
|
Net change in accrued interest receivable and other assets
|
|
26,408
|
|
(17,952
|
)
|
Net change in accrued interest payable, accrued expenses and other
liabilities
|
|
(6,583
|
)
|
2,823
|
|
Total adjustments
|
|
123,541
|
|
(21,707
|
)
|
Net cash provided by operating activities
|
|
102,698
|
|
60,879
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Net loan originations
|
|
(41,862
|
)
|
(502,123
|
)
|
Purchases of:
|
|
|
|
|
|
Short term investments
|
|
(880
|
)
|
(1,537
|
)
|
Securities purchased under resale agreements
|
|
|
|
(100,000
|
)
|
Investment securities available-for-sale
|
|
(820,430
|
)
|
(394,758
|
)
|
Federal Home Loan Bank stock
|
|
(9,400
|
)
|
(8,243
|
)
|
Federal Reserve Bank stock
|
|
(5,904
|
)
|
(600
|
)
|
Premises and equipment
|
|
(1,742
|
)
|
(5,340
|
)
|
Proceeds from sale of:
|
|
|
|
|
|
Investment securities available-for-sale
|
|
376,148
|
|
206,987
|
|
Securities purchased under resale agreements
|
|
100,000
|
|
|
|
Loans receivable
|
|
146,556
|
|
16,057
|
|
Real estate owned
|
|
9,949
|
|
4,130
|
|
Premises and equipment
|
|
|
|
1,212
|
|
Repayments, maturity and redemption of investment securities
available-for-sale
|
|
388,627
|
|
773,455
|
|
Redemption of Federal Home Loan Bank stock
|
|
6,054
|
|
31,767
|
|
Acquisitions, net of cash acquired
|
|
(924
|
)
|
|
|
Net cash provided by investing activities
|
|
146,192
|
|
21,007
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
240,091
|
|
(87,990
|
)
|
Net (decrease) increase in federal funds purchased
|
|
(136,126
|
)
|
8,000
|
|
Net (decrease) increase in Federal Home Loan Bank advances
|
|
(265,000
|
)
|
28,000
|
|
Repayment of securities sold under repurchase agreements
|
|
(1,143
|
)
|
|
|
Repayment of notes payable on affordable housing investments
|
|
(5,709
|
)
|
(5,041
|
)
|
Proceeds from issuance of long-term debt
|
|
|
|
20,000
|
|
Proceeds from issuance of common stock pursuant to various stock
plans and agreements
|
|
1,529
|
|
5,709
|
|
Proceeds from issuance of convertible preferred stock, net of stock
issuance costs
|
|
194,075
|
|
|
|
Tax benefit from stock options exercised
|
|
141
|
|
6,071
|
|
Tax (provision) benefit from vested restricted stock
|
|
(370
|
)
|
184
|
|
Dividends paid on common stock
|
|
(12,659
|
)
|
(12,230
|
)
|
Purchase of treasury shares pursuant to stock repurchase program and
vesting of restricted stock
|
|
(8
|
)
|
(46,610
|
)
|
Net cash provided by (used in) financing activities
|
|
14,821
|
|
(83,907
|
)
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
263,711
|
|
(2,021
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
160,347
|
|
192,559
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
424,058
|
|
$
|
190,538
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
159,084
|
|
$
|
178,728
|
|
Income tax payments, net of refunds
|
|
36,477
|
|
59,803
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
Guaranteed mortgage loan securitizations
|
|
|
|
721,787
|
|
Affordable housing investment financed through notes payable
|
|
3,000
|
|
9,613
|
|
Equity interests in East West Capital Trusts
|
|
|
|
619
|
|
Real estate acquired through foreclosure
|
|
26,009
|
|
622
|
|
See accompanying notes to condensed
consolidated financial statements.
7
Table
of Contents
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
1.
BASIS
OF PRESENTATION
The condensed consolidated financial statements include the accounts of
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as
East West and on a consolidated basis as the Company) and its wholly-owned
subsidiaries, East West Bank and subsidiaries (the Bank) and East West
Insurance Services, Inc.
Intercompany transactions and accounts have been eliminated in
consolidation. East West also has nine
wholly-owned subsidiaries that are statutory business trusts (the
Trusts). In accordance with Financial
Accounting Standards Board Interpretation No. 46R,
Consolidation
of Variable Interest Entities
, the Trusts are not consolidated into
the accounts of East West Bancorp, Inc.
The interim condensed consolidated financial statements, presented in
accordance with accounting principles generally accepted in the United States
of America (GAAP), are unaudited and reflect all adjustments which, in the
opinion of management, are necessary for a fair statement of financial
condition and results of operations for the interim periods. All adjustments are of a normal and recurring
nature. Results for the six months ended
June 30, 2008 are not necessarily indicative of results that may be
expected for any other interim period or for the year as a whole. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
GAAP have been condensed or omitted. The
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
included in the Companys annual report on Form 10-K for the year ended
December 31, 2007.
Certain
items in the condensed consolidated statements of operations for the three and
six months ended 2008 and 2007 were reclassified to conform to the year-to-date
2008 presentation. These
reclassifications did not affect previously reported net income. In June 2008, the Company reclassified
net gain on sale of other real estate owned (OREO) of $1.3 million for the
six months ended June 30, 2007, previously included under the caption Noninterest
Income to OREO expenses (income), which is a component of Noninterest Expense,
in order to present all OREO activity in a single line item.
2.
SIGNIFICANT
ACCOUNTING POLICIES
Recent Accounting Standards
In
September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split-Dollar Life Insurance Arrangements,
which
requires employers to recognize an obligation associated with endorsement
split-dollar life insurance arrangements that extend into the employees
postretirement period. EITF 06-4 is
effective for financial statements issued for fiscal years beginning after
December 31, 2007. Upon adoption of
EITF 06-4, the Company recorded a net decrease to retained earnings of $479
thousand, net of tax.
8
Table
of Contents
In
September 2006, the Financial Accounting Standards Board (FASB) issued
SFAS 157,
Fair Value Measurements
(SFAS
157), which provides a definition of fair value, establishes a framework for
measuring fair value, and requires expanded disclosures about fair value
measurements. SFAS 157 provides a
definition of fair value, establishes a framework for measuring fair value
under accounting principles generally accepted in the United States (GAAP),
and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows
assets or liabilities to be measured at fair value and, therefore, does not
expand the use of fair value in any new circumstance. The Company adopted SFAS 157 on a
prospective basis.
The
adoption of SFAS No. 157 on January 1, 2008 did not have any impact
on the Companys financial condition, results of operations, or cash
flows. The adoption of this standard
resulted in additional disclosures which are presented in Note 3 of the
Companys condensed consolidated financial statements presented elsewhere in
this report. In February 2008, the
FASB issued SFAS No. 157-2,
Effective Date of FASB
Statement No.
157, which provided for a one-year deferral
of the implementation of this standard for other nonfinanical assets and
liabilities, effective for fiscal years beginning after November 15,
2008. This additional guidance is not expected to have a material impact on the
Companys consolidated financial statements upon adoption.
In September 2006, the FASB issued
SFAS No. 158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans
(SFAS 158), which amends SFAS No. 87,
Employers Accounting for Pensions;
SFAS No. 88,
Employers Accounting
for Settlements and Curtailments of
Defined
Benefit Pension Plans and for Termination Benefits;
SFAS No. 106,
Employers Accounting for Postretirement
Benefits Other Than Pensions;
and SFAS No. 132(R),
Employers Disclosures about Pensions and Other
Postretirement Benefits
(revised
2003). This Statement requires companies
to recognize an asset or liability for the overfunded or underfunded status of
their benefit plans in their financial statements. The asset or liability is the offset to other
accumulated comprehensive income, consisting of previously unrecognized prior
service costs and credits, actuarial gains or losses, and accumulated
transition obligations and assets.
SFAS 158 also requires the measurement date for plan assets and
liabilities to coincide with the sponsors year-end. The standard provides two transition
alternatives for companies to make the measurement-date provisions. The Company adopted the recognition and
disclosure elements of SFAS 158, effective January 1, 2008, which did
not have a material effect on its financial position, results of operations, or
cash flows.
In February 2007, the FASB issued SFAS
No. 159,
The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 would allow the
Company a one-time irrevocable election to measure certain financial assets and
liabilities on the balance sheet at fair value and report the unrealized gains
and losses on the elected items in earnings at each subsequent reporting
date. This Statement requires companies
to provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the Companys
choice to use fair value on its earnings.
SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company has elected not to measure any new
financial instruments at fair value, as permitted in SFAS 159, but to continue
recording its financial instruments in accordance with current practice.
In December 2007, the FASB issued
SFAS No. 141(R),
Business
Combinations
(SFAS 141(R)), which replaces FASB Statement
No. 141,
Business Combinations
. SFAS 141(R) establishes principles
and requirements for how an acquiring company (1) recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree, (2) recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (3) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.
SFAS 141(R) is effective for business combinations occurring
on or after the beginning of the fiscal year
9
Table
of Contents
beginning
on or after December 15, 2008.
SFAS 141(R), effective for
the Company on January 1, 2009, and applies to all transactions or
other events in which the Company obtains control in one or more
businesses. Management will assess each
transaction on a case-by-case basis as they occur.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements - an Amendment of ARB No. 51
(SFAS 160). This Statement requires
that noncontrolling or minority interests in subsidiaries be presented in the
consolidated statement of financial position within equity, but separate from
the parents equity, and that the amount of the consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of
income. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008. The Company does not expect this guidance to
have a material effect on its financial condition, results of operations, or
cash flows.
In
February 2008, the FASB issued FASB Staff
Position FAS No. 140-3,
Accounting
for Transfers of Financial Assets and Repurchase Financing Transactions
(FSP No. 140-3)
,
which provides a consistent
framework for the evaluation
of a
transfer of a financial asset and subsequent repurchase agreement entered into
with the same
counterparty. FSP FAS No. 140
-
3 provides guidelines that must be met in order for an
initial transfer and
subsequent
repurchase agreement to not be considered linked for evaluation. If the transactions do not meet the
specified criteria, they are required to
be accounted for as one transaction.
This FSP is effective for fiscal years
beginning after November 15, 2008, and shall be applied
prospectively to initial transfers and repurchase financings
for which the initial transfer is
executed on or after adoption. The
Company does not expect this guidance to have a material effect on its
financial condition, results of operations, or cash flows.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities
(SFAS 161). SFAS 161 requires specific disclosures
regarding the location and amounts of derivative instruments in the financial
statements; how derivative instruments and related hedged items are accounted
for; and how derivative instruments and related hedged items affect the
financial position, financial performance, and cash flows of the Company. It is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early
adoption encouraged. The Company does
not expect this guidance to have a material effect on its financial condition,
results of operations, or cash flows.
In
April 2008, the FASB directed the FASB Staff to issue
FSP No. FAS 142-3,
Determination of the
Useful Life of Intangible Assets
.
FSP No. FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used for purposes of
determining the useful life of a recognized intangible asset under
SFAS 142,
Goodwill and Other Intangible Assets
(SFAS 142). FSP No. FAS 142-3
is intended to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS 141(R) and other
GAAP. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008.
Earlier application is not permitted.
The Company does not expect this guidance to
have a material effect on its financial
condition, results of operations, or cash flows.
In
May 2008, the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162
identifies a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities (the Hierarchy).
The Hierarchy within SFAS 162 is consistent with that previously
defined in the AICPA Statement on Auditing Standards No. 69,
The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles
(SAS 69). SFAS 162 is effective 60 days
following the SECs approval of the
10
Table of Contents
Public Company Accounting Oversight Board
amendments to AU Section 411,
The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.
The Company does not expect this guidance to have a material effect on
its financial condition, results of operations, or cash flows.
In
June 2008, the FASB issued FSP EITF 03-06-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.
FSP
EITF 03-06-1 requires all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends to be considered participating
securities and requires entities to apply the two-class method of computing
basic and diluted earnings per share.
This FSP is effective for fiscal years beginning after December 31,
2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the
impact that this FSP will have on the Companys consolidated financial
statements.
3.
FAIR
VALUE MEASUREMENT
The
Company adopted SFAS 157 and SFAS 159, effective January 1, 2008. SFAS 157 provides a framework for measuring
fair value under GAAP. This standard
applies to all financial assets and liabilities that are being measured and
reported at fair value on a recurring and non-recurring basis. For the Company, this includes the investment
securities available-for-sale (AFS) portfolio, equity swap agreements,
derivatives payable mortgage servicing assets
and
impaired loans
.
As
defined in SFAS 157, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In
determining fair value, the Company uses various methods including market and
income approaches. Based on these
approaches, the Company often utilizes certain assumptions that market
participants would use in pricing the asset or liability. These inputs can be readily observable,
market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable
inputs. Based on the observability of
the inputs used in the valuation techniques, the Company is required to provide
the following information according to the fair value hierarchy. The hierarchy ranks the quality and
reliability of the information used to determine fair values. The hierarchy gives the highest priority to
quoted prices available in active markets and the lowest priority to data
lacking transparency. Financial assets
and liabilities carried at fair value will be classified and disclosed in one
of the following three categories:
·
Level 1 Quoted prices for identical
instruments that are highly liquid, observable and actively traded in
over-the-counter markets. Level 1
financial instruments typically include U.S. Treasury securities.
·
Level 2 Quoted prices for similar
instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations whose
inputs are observable and can be corroborated by market data. Level 2 financial instruments typically
include U.S. Government and agency mortgage-backed securities, corporate debt
securities, equity swap agreements and derivatives payable.
·
Level 3 Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
Level 3 assets and liabilities include financial instruments whose value
is determined using pricing models, discounted cash flow methodologies, or
similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation. This category typically
11
Table
of Contents
includes mortgage servicing assets, impaired loans, private label
mortgage-backed securities, retained residual interests in securitizations, and
pooled trust preferred securities.
In
determining the appropriate levels, the Company performs a detailed analysis of
assets and liabilities that are subject to SFAS 157. The following table presents financial assets
and liabilities that are measured at fair value on a recurring and
non-recurring basis. These assets and
liabilities are reported on the condensed consolidated statements of financial
condition at their fair values as of June 30, 2008. As required by SFAS 157, financial assets are
classified in their entirety based on the lowest level of input that is
significant to their fair value measurement.
|
|
Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of June 30, 2008
|
|
|
|
Fair Value
Measurements
June 30, 2008
|
|
Quoted Prices in
Active Markets for
Identifical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities (AFS)
|
|
$
|
1,828,181
|
|
$
|
5,030
|
|
$
|
1,215,667
|
|
$
|
607,484
|
|
Equity Swap Agreements
|
|
17,806
|
|
|
|
17,806
|
|
|
|
Derivatives Payable
|
|
(17,806
|
)
|
|
|
(17,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Non-Recurring Basis as of June 30, 2008
|
|
|
|
Fair Value
Measurements
June 30, 2008
|
|
Quoted Prices in
Active Markets for
Identifical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
|
(In Thousands)
|
|
Mortgage Servicing Assets
|
|
$
|
19,391
|
|
$
|
|
|
$
|
|
|
$
|
19,391
|
|
Impaired Loans
|
|
157,461
|
|
|
|
|
|
157,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
each reporting period, all assets and liabilities for which the fair value
measurement is based on significant unobservable inputs are classified as Level
3. The following table provides a
reconciliation of the beginning and ending balances for asset categories
measured at fair value using significant unobservable inputs (level 3) for the
three and six months ended June 30, 2008:
12
Table of Contents
|
|
Investment
Securities
Available for
Sale
|
|
Mortgage
Servicing
Assets
|
|
Impaired
Loans
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Beginning balance, March 31, 2008
|
|
$
|
572,371
|
|
$
|
20,886
|
|
$
|
158,446
|
|
Total gains or losses (1)
|
|
|
|
|
|
|
|
Included in earnings (realized)
|
|
1,097
|
|
(1,563
|
)
|
(39,470
|
)
|
Included in other comprehensive loss
(unrealized) (2)
|
|
64,258
|
|
|
|
|
|
Purchases, issuances, sales, settlements
(3)
|
|
(30,242
|
)
|
68
|
|
|
|
Transfers in and/or out of Level 3 (4)
|
|
|
|
|
|
38,485
|
|
Ending balance June 30, 2008
|
|
$
|
607,484
|
|
$
|
19,391
|
|
$
|
157,461
|
|
Changes in unrealized losses included in
earnings relating to assets and liabilities still held at June 30, 2008
(4)
|
|
$
|
(1,574
|
)
|
$
|
|
|
$
|
|
|
|
|
Investment
Securities
Available for
Sale
|
|
Mortgage
Servicing
Assets
|
|
Impaired
Loans
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2008
|
|
$
|
700,434
|
|
$
|
21,558
|
|
$
|
107,544
|
|
Total gains or losses (1)
|
|
|
|
|
|
|
|
Included in earnings (realized)
|
|
3,471
|
|
(3,031
|
)
|
(39,408
|
)
|
Included in other comprehensive loss
(unrealized) (2)
|
|
(35,965
|
)
|
|
|
|
|
Purchases, issuances, sales, settlements
(3)
|
|
(60,456
|
)
|
864
|
|
|
|
Transfers in and/or out of Level 3 (4)
|
|
|
|
|
|
89,325
|
|
Ending balance June 30, 2008
|
|
$
|
607,484
|
|
$
|
19,391
|
|
$
|
157,461
|
|
Changes in unrealized losses included in
earnings relating to assets and liabilities still held at June 30, 2008
(4)
|
|
$
|
(1,574
|
)
|
$
|
|
|
$
|
|
|
(1)
Total gains or losses
represent the total realized and unrealized gains and losses recorded for Level
3 assets and liabilities. Realized gains
or losses are reported in the condensed consolidated statements of income.
(2)
Unrealized gains or losses
on investment securities are reported in accumulated other comprehensive income
(loss), net of tax in the condensed consolidated statements of changes in
stockholders equity.
(3)
Purchases, issuances,
sales and settlements represent Level 3 assets and liabilities that were either
purchased, issued, sold, or settled during the period. The amounts are recorded at their end of
period fair values.
(4)
Transfers in and/or out
represent existing assets and liabilities that were either previously
categorized as a higher level and the inputs to the model became unobservable
or assets and liabilities that were previously classified as Level 3 and the
lowest significant input became observable during the period. These assets and liabilities are recorded at
their end of period fair values.
Valuation Methodologies
Investment
Securities Available-for-Sale
The fair values of available-for-sale investment securities
are generally determined by reference to the average of at least two quoted
market prices
13
Table of Contents
obtained from
independent external brokers or prices obtained from independent external
pricing service providers who have experience in valuing these securities. In obtaining such valuation information from
third parties, the Company has reviewed the methodologies used to develop the
resulting fair values.
For those securities for
which the Company is unable to obtain more than one outside quoted market
price, the Company evaluates the brokers valuation methodology for reasonableness
and obtains an independent validation of the market price received from another
broker who has experience with such investments.
The
Companys Level 3 available-for-sale securities include private label
mortgage-backed securities, and residual securities that have been retained by
the Company in connection with loan securitization activities, as well as
pooled trust preferred securities. The
fair values of private label mortgage-backed securities and pooled trust
preferred securities are generally based on the average of two quoted market
prices obtained from independent external brokers. The valuation of residual securities is based
on a discounted cash flow approach utilizing several assumption factors. Assumptions related to prepayment speeds,
forward yield curves, financial characteristics of the underlying assets,
delinquency trends, and other factors are taken into consideration in
determining the discount margin on residual securities. Furthermore, the liquidity of the market for
similar securities is also incorporated in the valuation analysis to better
determine the fair value of residual securities.
Equity Swap Agreements
The Company has entered into several equity swap agreements with a
major investment brokerage firm to hedge against market fluctuations in a
promotional equity index certificate of deposit product offered to bank
customers. This deposit product, which
has a term of 5 years or 5½ years, pays interest based on the performance of the
Hang Seng China Enterprises Index (HSCEI).
The fair value of these equity swap agreements is based on the income
approach. The fair value is based on the
change in the value of the HSCEI and the volatility of the call option over the
life of the individual swap agreement.
The option value is derived based on the volatility, the interest rate
and the time remaining to maturity of the call option. The Company considered the counterpartys
credit risk in determining the valuation. The valuation of equity swap
agreements falls within Level 2 of the fair value hierarchy due to the
observable nature of the inputs used in deriving the fair value of these
derivative contracts.
Derivatives Payable
The Companys derivatives payable are
recorded in conjunction with the certificate of deposits (host instrument)
that pays interest based on changes in the HSCEI and are included in
interest-bearing deposits on the condensed consolidated balance sheets. The
fair value of these embedded derivatives is based on the income approach. The
Company considered its own credit risk in determining the valuation. The
valuation of the derivatives payable falls within Level 2 of the fair value
hierarchy due to the observable nature of the inputs used in deriving the fair
value of these derivative contracts.
Mortgage Servicing Assets (MSAs)
The Company records MSAs in conjunction
with its loan sale and securitization activities since the servicing of the
underlying loans is retained by the Bank.
MSAs are initially measured at fair value using an income approach. The initial fair value of MSAs is determined
based on the present value of estimated net future cash flows related to
contractually specified servicing fees.
The valuation for MSAs falls within Level 3 of the fair value hierarchy
since there are no quoted prices for MSAs and the significant inputs used to
determine fair value are not directly observable. The valuation of MSAs is determined using a
discounted cash flow approach utilizing the appropriate yield curve and several
market-derived assumptions including prepayment speeds, servicing cost,
delinquency and foreclosure costs and behavior, and float earnings rate, to
name a few. Net cash flows are present
valued using a market-derived discount rate.
The resulting fair value is then compared to recently observed bulk
market transactions with similar characteristics. The fair value is adjusted accordingly to be
better aligned with current observed market trends and activity.
Impaired Loans
In accordance with SFAS No. 114,
Accounting
by Creditors for Impairment of a Loan, an Amendment of FASB Statements
No. 5 and 15,
the Companys impaired loans are generally
measured using the fair value of the underlying collateral, which is determined
based on the most recent appraisal information received, less costs to
sell. Appraised values may be adjusted
based on factors such as the Companys historical knowledge and changes in
market conditions from the time of valuation.
As of June 30, 2008, the impaired loan balance, net of the specific
reserve, was $157.5
14
Table of Contents
million.
Impaired loans fall within Level 3 of the fair value hierarchy since
they were measured at fair value based on appraisals of the underlying
collateral.
4.
STOCK-BASED
COMPENSATION
The
Company issues stock-based compensation to certain employees, officers and
directors under share-based compensation plans.
The Company adopted SFAS No. 123(R),
Share-Based
Payment
on January 1, 2006 using the modified prospective
method. Under this method, the
provisions of SFAS No. 123(R) are applied to new awards and to awards
modified, repurchased or canceled after December 31, 2005 and to awards
outstanding on December 31, 2005 for which requisite service has not yet
been rendered. SFAS
No. 123(R) requires companies to account for stock options using the
fair value method, which generally results in compensation expense
recognition. Prior to the adoption of SFAS
No. 123(R), the Company applied APB No. 25 to account for its stock
based awards.
During
the three and six months ended June 30, 2008, total compensation cost
recognized in the consolidated statements of income related to stock options
and restricted stock awards amounted to $1.5 million and $3.0 million,
respectively, with related tax benefits of $613 thousand and $1.3 million,
respectively. During the three and six
months ended June 30, 2007, total compensation cost recognized in the
consolidated statements of income related to stock options and restricted stock
awards amounted to $1.7 million and $3.1 million, respectively, with related
tax benefits of $698 thousand and $1.3 million, respectively.
Stock
Options
The
Company issues fixed stock options to certain employees, officers, and
directors. Stock options are issued at
the current market price on the date of grant with a three-year or four-year
vesting period and contractual terms of 7 years. Stock options issued prior to July 2002
had contractual terms of 10 years. The
Company issues new shares upon the exercise of stock options.
A
summary of activity for the Companys stock options as of and for the six
months ended June 30, 2008 is presented below:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(In thousands) (1)
|
|
Outstanding at beginning of period
|
|
2,099,120
|
|
$
|
21.71
|
|
|
|
|
|
Granted
|
|
721,499
|
|
18.71
|
|
|
|
|
|
Exercised
|
|
(49,116
|
)
|
10.36
|
|
|
|
|
|
Forfeited
|
|
(44,364
|
)
|
33.22
|
|
|
|
|
|
Outstanding at end of period
|
|
2,727,139
|
|
$
|
20.94
|
|
3.84 years
|
|
$
|
37
|
|
Vested or expected to vest
|
|
2,647,620
|
|
$
|
20.79
|
|
3.77 years
|
|
$
|
37
|
|
Exercisable at end of period
|
|
1,598,087
|
|
$
|
17.56
|
|
2.31 years
|
|
$
|
37
|
|
(1) The
aggregate intrinsic value excludes shares of 1,051,929 weighted average options
outstanding for the six months ended June 30, 2008, respectively, as well
as 176,036 weighted average options outstanding for the six months ended
June 30, 2007, respectively, for which the exercise price exceeded the
average market price of the Companys common stock during these periods.
15
Table of Contents
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Expected term (1)
|
|
4 years
|
|
4 years
|
|
4 years
|
|
4 years
|
|
Expected volatility (2)
|
|
28.9
|
%
|
23.8
|
%
|
27.9
|
%
|
24.1
|
%
|
Expected dividend yield (3)
|
|
1.3
|
%
|
1.1
|
%
|
1.2
|
%
|
1.1
|
%
|
Risk-free interest rate (4)
|
|
3.0
|
%
|
4.8
|
%
|
2.6
|
%
|
4.5
|
%
|
(1)
|
The expected term (estimated period of time outstanding) of stock
options granted was estimated using the historical exercise behavior of
employees.
|
|
|
(2)
|
The expected volatility was based on historical volatility for a
period equal to the stock options expected term.
|
|
|
(3)
|
The expected dividend yield is based on the Companys prevailing
dividend rate at the time of grant.
|
|
|
(4)
|
The risk-free rate is based on the U.S. Treasury strips in effect at
the time of grant equal to the stock options expected term.
|
During
the three and six months ended June 30, 2008 and 2007, information related
to stock options is presented as follows:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of stock
options granted during the period
|
|
$
|
3.59
|
|
$
|
9.21
|
|
$
|
4.27
|
|
$
|
9.27
|
|
Total intrinsic value of options exercised
(in thousands)
|
|
$
|
170
|
|
$
|
8,113
|
|
$
|
337
|
|
$
|
14,439
|
|
Total fair value of options vested (in
thousands)
|
|
$
|
116
|
|
$
|
41
|
|
$
|
1,222
|
|
$
|
662
|
|
As of June 30, 2008,
total unrecognized compensation cost related to stock options amounted to $5.2
million. The cost is expected to be
recognized over a weighted average period of 3.2 years.
Restricted Stock
In addition to stock
options, the Company also grants restricted stock awards to directors, certain
officers and employees. The restricted
shares awarded become fully vested after three to five years of continued
employment from the date of grant. The
Company becomes entitled to an income tax deduction in an amount equal to the
taxable income reported by the holders of the restricted shares when the
restrictions are released and the shares are issued. Restricted shares are forfeited if officers
and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted
stock as treasury share repurchases.
A
summary of the activity for restricted stock as of June 30, 2008,
including changes during the six months then ended, is presented below:
16
Table of Contents
|
|
Shares
|
|
Weighted
Average
Price
|
|
Outstanding at beginning of period
|
|
683,336
|
|
$
|
34.48
|
|
Granted
|
|
254,102
|
|
20.38
|
|
Vested
|
|
(46,956
|
)
|
36.32
|
|
Forfeited
|
|
(65,561
|
)
|
31.94
|
|
Outstanding at end of period
|
|
824,921
|
|
$
|
30.23
|
|
The weighted average fair
values of restricted stock awards granted during the six months ended
June 30, 2008 and 2007 were $20.38 and $38.71, respectively.
As of June 30, 2008,
total unrecognized compensation cost related to restricted stock awards
amounted to $15.5 million. This cost is
expected to be recognized over a weighted average period of 3.0 years.
The Company also grants
performance restricted stock with a two-year cliff vesting to an executive
officer. The number of shares that the
executive will receive under these stock awards will ultimately depend on the
Companys achievement of specified performance targets over the specified
performance periods. At the end of each
performance period, the number of stock awards issued will be determined by
adjusting upward or downward from the target amount of shares in a range
approximately between 25% and 125%. The
final performance percentages on which the payouts will be based, considering
performance metrics established for the performance periods, will be determined
by the Board of Directors or a committee of the Board. If the Company performs below its performance
targets, the Board or the committee may, at its discretion, choose not to award
any shares. Shares of stock, if any,
will be issued following the end of each performance period. Compensation costs are accrued over the
service period and are based on the probable outcome of the performance
condition. The maximum number of shares
subject to these stock awards varies for each grant representing a maximum
total of 99,767 shares as of June 30, 2008.
5.
INVESTMENTS
AVAILABLE FOR SALE
As
a result of periodic reviews for impairment in accordance with SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities
,
and
FSP FAS 115-1 and FAS 124-1
,
The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments,
the Company recorded $9.9
million in other-than-temporary impairment charges on certain available-for-sale
securities during the second quarter of 2008.
Of the $9.9 million in total impairment charges, $8.4 million related to
certain Fannie Mae and Freddie Mac preferred securities. These preferred securities are perpetual in
nature and, as a result, are treated similar to equity securities for purposes
of impairment analysis. Both Fannie Mae
and Freddie Mac preferred securities had investment grade ratings at the time
of purchase and they maintained their investment grade status as of
June 30, 2008.
The
remaining $1.5 million in impairment charges were related to pooled trust
preferred securities that were determined to be other than temporarily impaired
in accordance with EITF 99-20,
Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets
.
17
Table
of Contents
6.
GOODWILL
AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill amounted to $337.6 million and $335.4
million at June 30, 2008 and December 31, 2007, respectively. Goodwill is tested for impairment on an
annual basis, or more frequently, as events occur or as current
circumstances and conditions warrant.
The Company records impairment writedowns as charges to noninterest
expense and adjustments to the carrying value of goodwill. Subsequent reversals of goodwill impairment
are prohibited.
During the second quarter of 2008, the banking industry continued
to experience volatility and the effect of such volatility unfavorably impacted
the market prices of banking stocks, including the Companys. As such, the Company has deemed it
prudent to perform a goodwill impairment test on an interim
basis. As of June 30, 2008, the Companys market capitalization
based on total outstanding common and preferred shares was $605.9 million
and its total stockholders equity was $1.27 billion. As a result, the Company performed an
impairment analysis as of June 30, 2008 to determine whether and to what
extent, if any, recorded goodwill was impaired.
The valuation analysis compared the fair value of each of the reporting
units, including goodwill, to the respective carrying amounts. If the carrying amount of the reporting unit,
including goodwill exceeds the fair value of that reporting unit, then further
testing for goodwill impairment is performed.
As a result of this analysis, it was determined that the fair value of
the Companys insurance agency reporting unit, East West Insurance Services, Inc.,
was less than its carrying value and that goodwill was impaired. The Company recorded goodwill impairment of
$586 thousand as a charge to earnings.
This impairment charge had no effect on the Companys cash balances or
liquidity. In addition, because goodwill
and other intangible assets are not included in the calculation of regulatory
capital, the Companys well capitalized regulatory ratios are not affected by
this non-cash expense. No assurance can
be given that goodwill will not be written down further in future periods. The Company did n
ot record any goodwill impairment writedowns during
the first half of 2007.
The Company also
has premiums on
acquired deposits which represent the intangible
value of depositor relationships resulting from deposit liabilities assumed
from various acquisitions. The gross
carrying amount of deposit premiums totaled $43.0 million and $46.9 million,
respectively, with related accumulated amortization amounting to $18.3 million
and $18.5 million, respectively, at June 30, 2008 and December 31,
2007. During the first quarter of 2008,
the Company recorded an $855 thousand impairment writedown on deposit premiums
initially recorded for the Desert Community Bank (DCB) acquisition due to
higher than anticipated runoffs in certain deposit categories. The Company did not record any impairment writedowns
on deposit premiums during 2007.
18
Table of Contents
7.
ALLOWANCE
FOR LOAN LOSSES
The following table summarizes activity in the allowance for loan
losses for the periods indicated:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance balance, beginning of period
|
|
$
|
117,120
|
|
$
|
75,970
|
|
$
|
88,407
|
|
$
|
78,201
|
|
Allowance for unfunded loan commitments and
letters of credit
|
|
1,136
|
|
1,886
|
|
232
|
|
(189
|
)
|
Provision for loan losses
|
|
85,000
|
|
|
|
140,000
|
|
|
|
Chargeoffs:
|
|
|
|
|
|
|
|
|
|
Single family real estate
|
|
634
|
|
|
|
709
|
|
|
|
Multifamily real estate
|
|
436
|
|
|
|
436
|
|
|
|
Commercial and industrial real estate
|
|
16,337
|
|
|
|
21,418
|
|
|
|
Construction
|
|
15,726
|
|
|
|
24,291
|
|
|
|
Commercial business
|
|
1,919
|
|
865
|
|
13,735
|
|
1,045
|
|
Automobile
|
|
134
|
|
|
|
163
|
|
|
|
Other consumer
|
|
23
|
|
|
|
40
|
|
11
|
|
Total chargeoffs
|
|
35,209
|
|
865
|
|
60,792
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Single family real estate
|
|
2
|
|
|
|
2
|
|
|
|
Commercial and industrial real estate
|
|
3
|
|
|
|
6
|
|
|
|
Commercial business
|
|
357
|
|
289
|
|
537
|
|
323
|
|
Automobile
|
|
4
|
|
|
|
21
|
|
1
|
|
Total recoveries
|
|
366
|
|
289
|
|
566
|
|
324
|
|
Net chargeoffs
|
|
34,843
|
|
576
|
|
60,226
|
|
732
|
|
Allowance balance, end of period
|
|
$
|
168,413
|
|
$
|
77,280
|
|
$
|
168,413
|
|
$
|
77,280
|
|
Average loans outstanding
|
|
$
|
8,773,028
|
|
$
|
8,097,386
|
|
$
|
8,864,142
|
|
$
|
8,137,161
|
|
Total gross loans outstanding, end of
period
|
|
$
|
8,656,427
|
|
$
|
8,030,111
|
|
$
|
8,656,427
|
|
$
|
8,030,111
|
|
Annualized net chargeoffs to average loans
|
|
1.59
|
%
|
0.03
|
%
|
1.36
|
%
|
0.02
|
%
|
Allowance for loan losses to total gross
loans, end of period
|
|
1.95
|
%
|
0.96
|
%
|
1.95
|
%
|
0.96
|
%
|
At June 30, 2008, the allowance for loan losses amounted to $168.4
million, or 1.95% of total loans, compared with $88.4 million, or 1.00% of
total loans, at December 31, 2007, and $77.3 million, or 0.96% of total
loans, at June 30, 2007. The
increase in the allowance for loan losses is primarily due to the $140.0
million in provisions for loan losses recorded during the first half of
2008. In comparison, no loss provisions
were recorded during the first half of 2007.
In response to the unprecedented downturn in the real estate and housing
markets, the Company performed an extensive evaluation of certain sectors of
its credit portfolio during the second quarter of 2008 to identify and mitigate
potential losses in loan categories that were especially hard hit by current
market conditions. As part of this
evaluation process, the Company ordered new appraisals for land and residential
construction loans and also engaged the services of an independent third party
to make a current assessment as to the financial strength of the
borrowers. The significant increase in
loss provisions recorded during the second quarter reflects the findings and
results from the Companys comprehensive loan review efforts. During the first half of 2008, the Company
recorded $60.2 million in net chargeoffs, compared to $732 thousand in net
chargeoffs recorded during the first half of 2007. Moreover, the volume of delinquent and
19
Table of Contents
nonperforming loans also increased significantly in 2008 relative to
2007 as a result of the deterioration in the real estate and housing markets.
The Company is currently undergoing a similar evaluation process for
other sectors of its loan portfolio to proactively manage potential loss
exposures in other loan categories.
Although the Company expects to record additional loss provisions for
the remainder of the year due to the challenging market and ongoing decline in
the credit markets, the Company anticipates these additional provisions to be
at lower levels than those recorded during the first half of 2008.
8.
COMMITMENTS
AND CONTINGENCIES
Credit Extensions
- In the normal course of business, the Company has various
outstanding commitments to extend credit that are not reflected in the
accompanying interim condensed consolidated financial statements. As of June 30, 2008 and December 31,
2007, respectively, undisbursed loan commitments amounted to $2.13 billion and
$2.72 billion, respectively. Commercial
and standby letters of credit amounted to $602.2 million and $619.9 million as
of June 30, 2008 and December 31, 2007, respectively.
Guarantees
From time to time, the Company securitizes loans with recourse in the ordinary
course of business. For loans that have
been securitized with recourse, the recourse component is considered a
guarantee. When the Company securitizes
a loan with recourse, it commits to stand ready to perform if the loan
defaults, and to make payments to remedy the default. As of June 30, 2008, total loans
securitized with recourse amounted to $593.9 million and were comprised of
$67.2 million in single family loans with full recourse and $526.6 million in
multifamily loans with limited recourse.
In comparison, total loans securitized with recourse amounted to $650.2
million at December 31, 2007, comprised of $72.7 million in single family
loans with full recourse and $577.5 million in multifamily loans with limited
recourse. The recourse provision on
multifamily loans is limited to 2.5% of the top loss on the underlying
loans. All of these transactions
represent securitizations with Fannie Mae. The Companys recourse reserve
related to these loan securitizations totaled $1.3 million
and
$3.0 million as of June 30, 2008 and December 31, 2007, respectively,
and is included in accrued expenses and other liabilities in the accompanying
condensed consolidated balance sheets.
Despite the challenging conditions in the real estate market, the
Company continues to experience minimal losses from single family and
multifamily loan portfolios.
The Company also sells or securitizes loans without recourse that may
have to be subsequently repurchased if a defect that occurred during the loan
origination process results in a violation of a representation or warranty made
in connection with the securitization or sale of the loan. When a loan sold or securitized to an
investor without recourse fails to perform according to its contractual terms,
the investor will typically review the loan file to determine whether defects
in the origination process occurred and if such defects give rise to a
violation of a representation or warranty made to the investor in connection
with the sale or securitization. If such
a defect is identified, the Company may be required to either repurchase the
loan or indemnify the investor for losses sustained. If there are no such defects, the Company has
no commitment to repurchase the loan. As
of June 30, 2008 and December 31, 2007, the amount of loans sold
without recourse totaled $769.0 million and $606.5 million, respectively. Total loans securitized without recourse
amounted to $1.12 billion and $1.19 billion, respectively, at June 30,
2008 and December 31, 2007. The
loans sold or securitized without recourse represent the unpaid principal
balance of the Companys loans serviced for others portfolio.
20
Table of Contents
Litigation
-
Neither the Company nor the Bank is involved in any material legal proceedings
at June 30, 2008. The Bank, from
time to time, is a party to litigation which arises in the ordinary course of
business, such as claims to enforce liens, claims involving the origination and
servicing of loans, and other issues related to the business of the Bank. After taking into consideration information
furnished by counsel to the Company and the Bank, management believes that the
resolution of such issues will not have a material adverse impact on the
financial position, results of operations, or liquidity of the Company or the
Bank.
Regulated Investment Company
(RIC) On December 31,
2003
, the California
Franchise Tax Board (FTB) announced that it is taking the position that
certain tax deductions relating to regulated investment companies will be
disallowed pursuant to California Senate Bill 614 and California Assembly Bill
1601, which were signed into law in the fourth quarter of 2003.
East West
Securities Company, Inc. (the Fund), a RIC formed and funded in July 2000
to raise capital in an efficient and economical manner was dissolved on December 30,
2002 as a result of, among other reasons, proposed legislation to change the
tax treatments of RICs. The Fund
provided state tax benefits beginning in 2000 until the end of 2002, when the
RIC was officially dissolved. While the
Companys management continues to believe that the tax benefits realized in
previous years were appropriate and fully defensible under the existing tax
codes at that time, the Company has deemed it prudent to participate in the
voluntary compliance initiative, or VCI offered by the State of California to
avoid certain potential penalties should the FTB choose to litigate its
announced position about the tax treatment of RICs for periods prior to
enactment of the legislation described above and should the FTB be successful
in that litigation.
Pursuant to the VCI program, the Company filed amended California
income tax returns on April 15, 2004 for all affected years and paid the
resulting taxes and interest due to the FTB.
This amounted to an aggregate payment of $14.2 million for tax years
2000, 2001, and 2002. As the Companys
management believes that the tax deductions were appropriate, refund claims
were filed for the amounts paid with the amended returns. These refund claims were reflected as assets
in the Companys consolidated financial statements. As a result of these actionsamending the
Companys California income tax returns and subsequent related filing of refund
claimsthe Company retains its potential exposure for assertion of an accuracy-related
penalty should the FTB prevail in its position.
The Companys potential exposure to all other penalties, however, has
been eliminated through this course of action.
Management has considered this claim as part of
its evaluation of the Companys uncertain tax positions in accordance with the
provisions of FIN 48. Pursuant to the
adoption of FIN 48 on January 1, 2007, the Company increased its existing
unrecognized tax benefits by $7.1 million in connection with these refund
claims. During the second quarter of
2008, the Company received notification from the FTB that refund claims for tax
years 2000 through 2002 have been denied.
Accordingly, the Company has deemed it prudent to write off the
remaining $7.1 million tax receivable as a charge against the provision for
income taxes during the second quarter of 2008.
The Company will continue to appeal and pursue these claims.
9.
STOCKHOLDERS
EQUITY
Earnings (Loss) Per Share (EPS)
The actual number of shares outstanding at
June 30, 2008 was 63,438,596. Basic
EPS excludes dilution and is computed by dividing income or loss available to
common stockholders by the weighted-average number of shares outstanding during
the period. Diluted EPS is calculated on
the basis of the weighted average number of shares outstanding during the period
plus restricted stock and shares issuable upon the assumed exercise of
outstanding convertible preferred
21
Table of Contents
stock, common stock options and warrants, unless they have an
antidilutive effect. In accordance with
SFAS No. 128,
Earnings Per Share
,
due to the net loss recorded during the three and six months ended June 30,
2008, incremental shares resulting from the assumed conversion, exercise, or
contingent issuance of securities are not included as their effect on earnings
or loss per share would be antidilutive.
The following table sets forth (loss) earnings per share calculations
for the three and six months ended June 30, 2008 and 2007:
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Net (Loss)
|
|
Number
|
|
Per Share
|
|
Net
|
|
Number
|
|
Per Share
|
|
|
|
Income
|
|
of Shares
|
|
Amounts
|
|
Income
|
|
of Shares
|
|
Amounts
|
|
|
|
(In thousands, except per share data)
|
|
Basic (loss) earnings per share
|
|
$
|
(25,887
|
)
|
62,599
|
|
$
|
(0.41
|
)
|
$
|
40,490
|
|
60,381
|
|
$
|
0.67
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
724
|
|
(0.01
|
)
|
Restricted stock
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
Stock warrants
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(25,887
|
)
|
62,599
|
|
$
|
(0.41
|
)
|
$
|
40,490
|
|
61,346
|
|
$
|
0.66
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Net (Loss)
|
|
Number
|
|
Per Share
|
|
Net
|
|
Number
|
|
Per Share
|
|
|
|
Income
|
|
of Shares
|
|
Amounts
|
|
Income
|
|
of Shares
|
|
Amounts
|
|
|
|
(In thousands, except per share data)
|
|
Basic (loss) earnings per share
|
|
$
|
(20,843
|
)
|
62,542
|
|
$
|
(0.33
|
)
|
$
|
82,586
|
|
60,515
|
|
$
|
1.36
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
769
|
|
(0.02
|
)
|
Restricted stock
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
Stock warrants
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(20,843
|
)
|
62,542
|
|
$
|
(0.33
|
)
|
$
|
82,586
|
|
61,523
|
|
$
|
1.34
|
|
The following outstanding convertible preferred stock, stock options,
restricted stock and stock warrants for the three and six months ended June 30,
2008 and 2007, respectively, were excluded from the computation of diluted EPS
because including them would have had an antidilutive effect.
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months
Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Convertible preferred stock
|
|
9,838
|
|
|
|
4,919
|
|
|
|
Stock options
|
|
2,113
|
|
26
|
|
1,234
|
|
176
|
|
Restricted stock
|
|
58
|
|
|
|
97
|
|
|
|
22
Table of Contents
Convertible Preferred Stock Offering
- In April 2008, the Company issued
200,000 shares of 8% Non-Cumulative Perpetual Convertible Preferred Stock, Series A
(Preferred Stock). The Company
received net proceeds of approximately $194.1 million after deducting
underwriting discounts, commissions and offering expenses. The holders of the Preferred Stock will have
the right at any time to convert each share of Preferred Stock into 64.9942
shares of the Companys common stock, plus cash in lieu of fractional shares. This represents an initial conversion price of
approximately $15.39 per share of common stock or a 22.5% conversion premium
based on the closing price of the Companys common stock on April 23, 2008
of $12.56 per share. On or after May 1,
2013, the Company will have the right, under certain circumstances, to cause
the Preferred Stock to be converted into shares of the Companys common
stock. Dividends on the Preferred Stock,
if declared, will accrue and be payable quarterly in arrears at a rate per
annum equal to 8% on the liquidation preference of $1,000 per share, commencing
on August 1, 2008. The proceeds
from this offering were used to augment the Companys liquidity and capital
positions and reduce its borrowings.
Stock Repurchase Program
During 2007, the Companys Board of Directors authorized a new stock
repurchase program to buy back up to $80.0 million of the Companys common
stock. The Company did not repurchase
any shares during the six months ended June 30, 2008 in connection with
this stock repurchase program.
Quarterly Dividends
The Companys Board of Directors declared and paid quarterly common
stock cash dividends of $0.10 per share payable on or about May 14, 2008
to shareholders of record on April 30, 2008. Cash dividends totaling $6.3 million and
$12.7 million were paid to the Companys shareholders during the second quarter
and first half of 2008, respectively.
10.
BUSINESS
SEGMENTS
The
Company utilizes an internal reporting system to measure the performance of
various operating segments within the Bank and the Company overall. The Company has identified four principal
operating segments for purposes of management reporting: retail banking,
commercial lending, treasury, and residential lending. Information related to the Companys
remaining centralized functions and eliminations of inter-segment amounts have
been aggregated and included in Other.
Although all four operating segments offer financial products and
services, they are managed separately based on each segments strategic
focus. While the retail banking segment
focuses primarily on retail operations through the Banks branch network,
certain designated branches have responsibility for generating commercial
deposits and loans. The commercial
lending segment, which includes commercial real estate, primarily generates
commercial loans and deposits through the efforts of commercial lending
officers located in the Banks northern and southern California production
offices. The treasury departments
primary focus is managing the Banks investments, liquidity, and interest rate
risk; the residential lending segment is mainly responsible for the Banks
portfolio of single family and multifamily residential loans.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies described in Note 1 of the Companys
annual report on Form 10-K for the year ended December 31, 2007. Operating segment results are based on the
Companys internal management reporting process, which reflects assignments and
allocations of capital, certain operating and administrative costs and the
provision for loan losses. Net interest
income is based on the Companys internal funds transfer pricing system which
assigns a cost of funds or a credit for funds to assets or liabilities based on
their type, maturity or repricing characteristics. Noninterest income and noninterest expense,
including depreciation and amortization, directly attributable to a segment are
23
Table of Contents
assigned
to that business. Indirect costs,
including overhead expense, are allocated to the segments based on several
factors, including, but not limited to, full-time equivalent employees, loan
volume and deposit volume. The provision
for credit losses is allocated based on actual losses incurred and an
allocation of the remaining provision based on new loan origination volume for
the period. The Company evaluates
overall performance based on profit or loss from operations before income taxes
excluding nonrecurring gains and losses.
During
the second quarter of 2008, the Company revised the allocation of certain
investment securities and related revenues and expenses previously included in
the Treasury segment. Specifically,
investment securities that have resulted from the Companys in-house
securitization activities have been allocated to the operating segments (i.e.
retail banking, commercial lending, and residential lending) that initially
originated the underlying loans.
Interest income, related premium amortizations and discount accretions,
as well as any gains or losses from the sale of these investment securities
have also been allocated to the appropriate operating segments. As a result of these changes, the Company has
revised its results for the comparable periods in 2007 to reflect the current
allocation methodology between the treasury segment and the other operating
segments.
The
following tables present the operating results and other key financial measures
for the individual operating segments for the three and six months ended June 30,
2008 and 2007:
24
Table of Contents
|
|
Three Months Ended June 30, 2008
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
51,316
|
|
$
|
81,067
|
|
$
|
17,078
|
|
$
|
17,597
|
|
$
|
847
|
|
$
|
167,905
|
|
Charge for funds used
|
|
(23,206
|
)
|
(36,189
|
)
|
(31,414
|
)
|
(8,294
|
)
|
|
|
(99,103
|
)
|
Interest spread on funds used
|
|
28,110
|
|
44,878
|
|
(14,336
|
)
|
9,303
|
|
847
|
|
68,802
|
|
Interest expense
|
|
(32,681
|
)
|
(5,668
|
)
|
(37,380
|
)
|
|
|
|
|
(75,729
|
)
|
Credit on funds provided
|
|
49,219
|
|
7,933
|
|
41,951
|
|
|
|
|
|
99,103
|
|
Interest spread on funds provided
|
|
16,538
|
|
2,265
|
|
4,571
|
|
|
|
|
|
23,374
|
|
Net interest income (expense)
|
|
$
|
44,648
|
|
$
|
47,143
|
|
$
|
(9,765
|
)
|
$
|
9,303
|
|
$
|
847
|
|
$
|
92,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
$
|
3,929
|
|
$
|
205
|
|
$
|
(1,592
|
)
|
$
|
(118
|
)
|
$
|
2,399
|
|
$
|
4,823
|
|
Goodwill
|
|
269,841
|
|
16,865
|
|
|
|
50,595
|
|
273
|
|
337,574
|
|
Segment pretax profit (loss)
|
|
35
|
|
(27,609
|
)
|
(21,975
|
)
|
5,970
|
|
(1,462
|
)
|
(45,041
|
)
|
Segment assets
|
|
3,481,179
|
|
5,126,660
|
|
1,462,164
|
|
1,086,918
|
|
627,979
|
|
11,784,900
|
|
|
|
Three Months Ended June 30, 2007
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
67,507
|
|
$
|
82,937
|
|
$
|
14,750
|
|
$
|
20,653
|
|
$
|
1,367
|
|
$
|
187,214
|
|
Charge for funds used
|
|
(47,092
|
)
|
(56,711
|
)
|
(17,670
|
)
|
(15,047
|
)
|
|
|
(136,520
|
)
|
Interest spread on funds used
|
|
20,415
|
|
26,226
|
|
(2,920
|
)
|
5,606
|
|
1,367
|
|
50,694
|
|
Interest expense
|
|
(40,955
|
)
|
(9,004
|
)
|
(38,326
|
)
|
|
|
|
|
(88,285
|
)
|
Credit on funds provided
|
|
74,471
|
|
14,426
|
|
47,623
|
|
|
|
|
|
136,520
|
|
Interest spread on funds provided
|
|
33,516
|
|
5,422
|
|
9,297
|
|
|
|
|
|
48,235
|
|
Net interest income
|
|
$
|
53,931
|
|
$
|
31,648
|
|
$
|
6,377
|
|
$
|
5,606
|
|
$
|
1,367
|
|
$
|
98,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
$
|
2,551
|
|
$
|
136
|
|
$
|
(99
|
)
|
$
|
(51
|
)
|
$
|
1,254
|
|
$
|
3,791
|
|
Goodwill
|
|
181,910
|
|
12,127
|
|
|
|
48,509
|
|
1,717
|
|
244,263
|
|
Segment pretax profit (loss)
|
|
35,476
|
|
28,154
|
|
6,498
|
|
5,028
|
|
(8,688
|
)
|
66,468
|
|
Segment assets
|
|
3,716,324
|
|
4,296,370
|
|
959,965
|
|
1,343,389
|
|
513,309
|
|
10,829,357
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
108,174
|
|
$
|
174,117
|
|
$
|
34,186
|
|
$
|
36,785
|
|
$
|
1,827
|
|
$
|
355,089
|
|
Charge for funds used
|
|
(56,261
|
)
|
(87,985
|
)
|
(41,276
|
)
|
(20,208
|
)
|
|
|
(205,730
|
)
|
Interest spread on funds used
|
|
51,913
|
|
86,132
|
|
(7,090
|
)
|
16,577
|
|
1,827
|
|
149,359
|
|
Interest expense
|
|
(72,459
|
)
|
(11,988
|
)
|
(78,847
|
)
|
|
|
|
|
(163,294
|
)
|
Credit on funds provided
|
|
110,378
|
|
17,024
|
|
78,328
|
|
|
|
|
|
205,730
|
|
Interest spread on funds provided
|
|
37,919
|
|
5,036
|
|
(519
|
)
|
|
|
|
|
42,436
|
|
Net interest income (expense)
|
|
$
|
89,832
|
|
$
|
91,168
|
|
$
|
(7,609
|
)
|
$
|
16,577
|
|
$
|
1,827
|
|
$
|
191,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
$
|
7,088
|
|
$
|
422
|
|
$
|
(1,978
|
)
|
$
|
(18
|
)
|
$
|
4,589
|
|
$
|
10,103
|
|
Goodwill
|
|
269,841
|
|
16,865
|
|
|
|
50,595
|
|
273
|
|
337,574
|
|
Segment pretax (loss) profit
|
|
(6,891
|
)
|
(19,104
|
)
|
(20,380
|
)
|
12,733
|
|
(3,757
|
)
|
(37,399
|
)
|
Segment assets
|
|
3,481,179
|
|
5,126,660
|
|
1,462,164
|
|
1,086,918
|
|
627,979
|
|
11,784,900
|
|
|
|
Six Months Ended June 30, 2007
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
133,755
|
|
$
|
162,085
|
|
$
|
32,899
|
|
$
|
41,830
|
|
$
|
2,822
|
|
$
|
373,391
|
|
Charge for funds used
|
|
(93,203
|
)
|
(110,955
|
)
|
(36,910
|
)
|
(30,040
|
)
|
|
|
(271,108
|
)
|
Interest spread on funds used
|
|
40,552
|
|
51,130
|
|
(4,011
|
)
|
11,790
|
|
2,822
|
|
102,283
|
|
Interest expense
|
|
(80,042
|
)
|
(17,102
|
)
|
(78,715
|
)
|
|
|
|
|
(175,859
|
)
|
Credit on funds provided
|
|
148,242
|
|
27,884
|
|
94,982
|
|
|
|
|
|
271,108
|
|
Interest spread on funds provided
|
|
68,200
|
|
10,782
|
|
16,267
|
|
|
|
|
|
95,249
|
|
Net interest income
|
|
$
|
108,752
|
|
$
|
61,912
|
|
$
|
12,256
|
|
$
|
11,790
|
|
$
|
2,822
|
|
$
|
197,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
$
|
4,956
|
|
$
|
351
|
|
$
|
(949
|
)
|
$
|
(8
|
)
|
$
|
2,238
|
|
$
|
6,588
|
|
Goodwill
|
|
181,910
|
|
12,127
|
|
|
|
48,509
|
|
1,717
|
|
244,263
|
|
Segment pretax profit (loss)
|
|
74,786
|
|
55,670
|
|
12,307
|
|
11,100
|
|
(18,615
|
)
|
135,248
|
|
Segment assets
|
|
3,716,324
|
|
4,296,370
|
|
959,965
|
|
1,343,389
|
|
513,309
|
|
10,829,357
|
|
25
Table of Contents
11.
SUBSEQUENT
EVENTS
On July 17, 2008, the Company announced that its
Board of Directors has authorized dividends on its 8% non-cumulative perpetual
convertible preferred stock, Series A.
A regular quarterly cash dividend of $20.00 per share on the preferred
stock is payable on August 1, 2008 to shareholders of record as of July 15,
2008.
On July 22, 2008, the Company announced that its
Board of Directors declared a quarterly common stock cash dividend of $0.10 per
share for the third quarter of 2008. The
dividend will be payable on or about August 19, 2008 to shareholders of
record on August 6, 2008.
26
Table of Contents
ITEM 2.
|
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion provides information about
the results of operations, financial condition, liquidity, cash flows and
capital resources of East West Bancorp, Inc. and its subsidiaries. This information is intended to facilitate
the understanding and assessment of significant changes and trends related to
our financial condition and the results of our operations. This discussion and analysis should be read
in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2007, and the accompanying interim unaudited consolidated
financial statements and notes hereto.
Critical Accounting Policies
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
a number of judgments, estimates and assumptions that affect the reported
amount of assets, liabilities, income and expenses in our consolidated
financial statements and accompanying notes.
We believe that the judgments, estimates and assumptions used in the
preparation of our consolidated financial statements are appropriate given the
factual circumstances as of June 30, 2008.
Various
elements of our accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective
assessments. In particular, we have
identified five accounting policies that, due to judgments, estimates and
assumptions inherent in those policies, are critical to an understanding of our
consolidated financial statements. These
policies relate to the following areas:
·
classification and valuation
of investment securities;
·
allowance for loan losses;
·
valuation of retained
interests and mortgage servicing assets related to securitizations and sales of
loans;
·
goodwill impairment; and
·
share-based compensation
In
each area, we have identified the variables most important in the estimation
process. We have used the best
information available to make the estimations necessary to value the related
assets and liabilities. Actual
performance that differs from our estimates and future changes in the key
variables could change future valuations and impact net income.
Our
significant accounting policies are described in greater detail in our 2007
Annual Report on Form 10-K in the Critical Accounting Policies section
of Managements Discussion and Analysis and in Note 1 to the Consolidated
Financial StatementsSignificant Accounting Policies which are essential to
understanding Managements Discussion and Analysis of Results of Operations and
Financial Condition.
Overview
During
the second quarter of 2008, we continued to manage adversities posed by the
downturn of the real estate housing market and volatility in the overall
banking industry. In response to the
challenging economic environment, we undertook several initiatives during the
second quarter of 2008 to further strengthen our balance sheet by increasing
capital, liquidity and our allowance for loan losses.
27
Table of Contents
As
previously reported, we raised $194.1 million in additional capital, net of
underwriting discounts, commissions and offering expenses, during
April 2008 through the issuance of 200,000 shares of non-cumulative,
perpetual convertible preferred stock.
The proceeds from this offering were used to reduce our borrowings,
enhance our liquidity position, and boost our already strong capital levels. As of June 30, 2008, our total
risk-based capital ratio is 13.01% or $317.4 million more than the 10.00%
regulatory requirement for well-capitalized banks. Our Tier 1 risk-based capital ratio of 11.04%
and our Tier 1 leverage ratio of 10.01% as of June 30, 2008 exceeded the regulatory
guidelines for well-capitalized banks.
In July 2008, the Board of Directors approved the payment of
dividends on both our common and preferred stock which affirms our financial
strength and our solid commitment to our shareholders.
In
addition to strengthening our capital position, the convertible preferred stock
offering completed in April 2008 also augmented our overall liquidity
position. As of June 30, 2008, we
have $424.0 million in cash and cash equivalents and approximately $1.29 billion
in excess borrowing capacity from various sources including the Federal Home
Loan Bank (FHLB), the Federal Reserve Bank (FRB) and federal funds
facilities with several financial institutions.
Despite volatile and challenging market conditions, we experienced a 3%
or $240.1 million deposit growth during the first half of 2008, with total
deposits increasing to $7.52 billion as of June 30, 2008, compared with
$7.28 billion as of December 31, 2007.
We believe that our liquidity position is strong and is more than
sufficient to meet our operating expenses, borrowing needs and other
obligations.
During
the second quarter of 2008, we performed a comprehensive review of our loan
portfolio to identify existing and potential weaknesses. As part of this extensive review process, we
ordered new appraisals for our land and residential construction loans to
quantify our potential loss exposures in these sectors of our credit portfolio
that are especially impacted by the downturn in the real estate market. Additionally, we also engaged the services of
a third party to make a current assessment of the financial strength of these
borrowers. As a consequence of this
comprehensive review process, we sustained higher chargeoff levels and recorded
higher loss provisions during the second quarter of 2008. Specifically, net chargeoffs
totaled $34.8
million during the second quarter of 2008, representing an annualized 1.59% of
average loans for the quarter. This
compares with $576 thousand in net chargeoffs, or an annualized 0.03% of
average loans, during the same quarter in 2007.
Approximately 91%, or $32.1 million, of the $35.2 million in gross
chargeoffs during the second quarter of 2008 were related to land and
residential construction loans.
Total nonperforming assets also increased to $193.1
million, or 1.64% of total assets at June 30, 2008, compared with $74.5
million or 0.63% of total assets at March 31, 2008, and $67.5 million or
0.57% of total assets at December 31, 2007. Nonperforming assets as of June 30, 2008
is comprised of nonaccrual loans totaling $170.9 million, other real estate
owned (OREO) totaling $17.5 million and loans modified or restructured
amounting to $4.7 million. The increase
in nonperforming assets is primarily due to a considerable increase in
nonaccrual loans resulting from our comprehensive loan review. Included in nonaccrual loans as of
June 30, 2008 are twenty loans totaling $40.4 million which were not 90
days past as of June 30, 2008, but have been proactively classified as nonaccrual
due to concerns surrounding collateral values and future collectibility. As a result of our extensive loan review
measures as well as our higher chargeoff and nonperforming asset levels,
we recorded $85.0 million in loan loss
provisions during the second quarter of 2008, increasing our allowance for loan
losses to $168.4 million, or 1.95% of total gross loans as of June 30,
2008. This compares to $88.4 million, or
1.00% of outstanding total loans at December 31, 2007.
Due to
the substantial increase in loss provisions recorded during the second quarter
of 2008, we reported a quarterly net loss for the first time in nearly three
decades. Total net loss amounted to
$25.9
28
Table of Contents
million, or $(0.41) per basic and diluted share, for the second quarter
of 2008.
This compares with $40.5
million, or $0.67 per basic share and $0.66 per diluted share, reported during
the second quarter of 2007. The
annualized return on average assets during the second quarter of 2008 was
(0.88%), compared with 1.52% for the same quarter in 2007. The annualized return on average equity was
(8.48%) during the second quarter of 2008, compared to 15.53% during the same
period in 2007.
T
he $25.9 million net loss reported for the second quarter of 2008
reflects several charges to income that fall outside the Companys normal
operating activities. In addition to the
significant loss provisions totaling $85.0 million recorded during the second
quarter of 2008, we recorded $9.9 million in other-than-temporary impairment
(OTTI) on certain investment securities.
Of the total OTTI amount recorded during the second quarter of 2008,
$8.4 million was related to certain Fannie Mae and Freddie Mac preferred stock
and the remaining $1.5 million was related to certain pooled trust preferred
securities. Moreover, we also deemed it
appropriate to write off the remaining $7.1 million tax receivable related to our
dissolved registered investment company, East West Securities
Company, Inc. During the second
quarter of 2008, the California Franchise Tax Board denied our tax refund claim
related to the RIC prompting our decision to write off the remaining $7.1
million tax receivable from our balance sheet.
Management will continue to appeal and pursue this refund claim in the
legal system. Excluding the collective
impact of these items,
our core pre-tax operating income remained solid and
amounted to $49.9 million for the second quarter of 2008.
Net
interest income decreased to $92.2 million during the quarter ended
June 30, 2008, compared with $98.9 million during the same quarter in
2007. Our net interest margin decreased
64 basis points to 3.33% during the second quarter of 2008. This compares with 3.97% during the same
period in 2007 and 3.63% during the first quarter 2008. Relative to the second quarter of 2007 and
the first quarter of 2008, our net interest margin during the quarter ended
June 30, 2008 was adversely impacted by the sharp decline in interest
rates prompted by several recent consecutive Federal Reserve rate cuts, the
reversal of interest from nonaccrual loans, and the reinvestment of loan
payoffs into lower yielding investment securities and other short-term
investments. We anticipate net interest
margin pressures to continue throughout the remainder of 2008 and we estimate
our net margin to be in the range of 3.28% to 3.32% for the full year of 2008.
Total
noninterest income increased 24% to $13.4 million during the second quarter of
2008, compared with $10.8 million for the corresponding quarter in 2007. This increase is attributable primarily to
higher net gain on sales of investment securities and higher branch-related fee
income, partially offset by lower ancillary loan fees. Core noninterest income, excluding the impact
of gains on sales of investment securities, loans and other assets, remained
stable at $9.6 million, decreasing only 2% from the same period last year.
Total noninterest
expense increased 52% to $65.6 million during the second quarter of 2008,
compared with $43.3 million for the same period in 2007. Excluding the impact of the $9.9 million in
OTTI writedowns on investment securities, the rise in total operating expenses
can be attributed predominantly to $3.8 million in higher compensation expenses
that are directly correlated to reduced
deferred loan origination costs, $3.2 million in increased
credit-related cycle costs including legal, appraisal, consulting, and OREO
expenses, $3.0 million in compensation, occupancy and other operating expenses
related to the acquisition of Desert Community Bank (DCB) consummated in
August 2007, and $2.0 million in higher deposit insurance premiums and
regulatory assessments. Our efficiency
ratio, which represents noninterest expense (excluding amortization and
impairment writedowns on intangible assets, impairment writedowns on investment
securities, and amortization of investments in affordable housing partnerships)
divided by the aggregate of net interest income before provision for loan
losses and noninterest income, increased to 48.62% during the second quarter of
2008 compared with 36.91% for
29
Table of Contents
the same period in 2007. We
anticipate noninterest expense for the remainder of 2008 to trend down from the
first half of the year as we continue to monitor all expenditures.
Total
consolidated assets at June 30, 2008 decreased marginally to $11.78
billion, compared with $11.85 billion at December 31, 2007. The net decrease in total consolidated assets
is primarily comprised of decreases in net loans of $267.8 million, securities
purchased under resale agreements of $100.0 million and available-for-sale
investment securities of $59.0 million, partially offset by increases in cash
and cash equivalents of $263.7 million, deferred tax assets of $103.1 million
and OREO, net of $16.0 million. Total
liabilities decreased 2% to $10.51 billion as of June 30, 2008, compared
to $10.68 billion as of December 31, 2007.
The net decrease in liabilities is primarily due to decreases in FHLB
advances of $265.0 million and federal funds purchased of $136.1 million,
partially offset by an increase in total deposits of $240.1 million.
Total
average assets increased 10% to $11.77 billion during the second quarter of
2008, compared to $10.65 billion for the same quarter in 2007, due primarily to
growth in average loans and available-for-sale securities. Total average loans grew 8% to $8.77 billion
during the quarter ended June 30, 2008, with double-digit increases in all
major loan sectors, except for multifamily real estate loans due to $390.6
million in multifamily loan securitizations since the second quarter of
2007. Total average investment
securities increased 22% to $1.99 billion during the quarter ended
June 30, 2008 primarily due to $458.4 million in both single family and
multifamily loan securitizations since the second quarter of 2007. Total average deposits rose 5% during the
second quarter of 2008 to $7.50 billion, compared to $7.17 billion for the same
quarter in 2007. Except for money market
deposits and time deposits less than $100 thousand, all average deposit
categories grew during the second quarter of 2008, with the largest dollar
impact coming from time deposits $100 thousand or greater, noninterest bearing
demand deposits, and savings accounts.
As
of June 30, 2008, the Companys market capitalization based on total
outstanding common and preferred shares was $605.9 million compared to
total stockholders equity of $1.27 billion.
As a result, management updated its valuation analysis to determine
whether and to what extent our goodwill asset was impaired. As a result of this updated analysis, we
recorded a $586 thousand goodwill impairment charge related to East West
Insurance Services, Inc. This
impairment writedown had no effect on our cash balances, liquidity or
regulatory capital ratios.
Results
of Operations
We reported a net loss for the second quarter 2008 of $25.9 million, or
$(0.41) per basic and diluted share, compared with net income of $40.5 million,
representing $0.67 per basic and $0.66 per diluted share, reported during the
second quarter of 2007. During the second
quarter of 2008, our operating results were significantly impacted by the $85.0
million in provision for loan losses recorded during the period. In comparison, we did not record any
provision for loan losses during the same period in 2007. Our annualized return on average total assets
decreased to (0.88%) for the quarter ended June 30, 2008, compared to
1.52% for the same period in 2007. The
annualized return on average stockholders equity decreased to (8.48%) for the
second quarter of 2008, compared with 15.53% for the second quarter of 2007.
We incurred a net loss for the six months ended June 30, 2008 of
$20.8 million, or $(0.33) per basic and diluted share, compared with net income
of $82.6 million, or $1.36 per basic and $1.34 per diluted share, reported
during the corresponding period in 2007.
The net loss reported during the first half of 2008 was primarily due to
the $140.0 million in loan loss provisions recorded during the first half
30
Table of Contents
of 2008.
In comparison, we did not record any provision for loan losses during
the same period in 2007. Our annualized
return on average total assets decreased to (0.35%) for the six months ended
June 30, 2008, compared to 1.54% for the same period in 2007. The annualized return on average
stockholders equity decreased to (3.51%) for the first half of 2008, compared
with 16.00% for the same period in 2007.
Components of Net (Loss) Income
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
(In millions)
|
|
Net interest income
|
|
$
|
92.2
|
|
$
|
98.9
|
|
$
|
191.8
|
|
$
|
197.5
|
|
Provision for loan losses
|
|
(85.0
|
)
|
|
|
(140.0
|
)
|
|
|
Noninterest income
|
|
13.4
|
|
10.8
|
|
29.3
|
|
22.0
|
|
Noninterest expense
|
|
(65.6
|
)
|
(43.2
|
)
|
(118.5
|
)
|
(84.2
|
)
|
Benefit (provision) for income taxes
|
|
19.1
|
|
(26.0
|
)
|
16.6
|
|
(52.7
|
)
|
Net (loss) income
|
|
$
|
(25.9
|
)
|
$
|
40.5
|
|
$
|
(20.8
|
)
|
$
|
82.6
|
|
|
|
|
|
|
|
|
|
|
|
Annualized return on average total assets
|
|
(0.88
|
)%
|
1.52
|
%
|
(0.35
|
)%
|
1.54
|
%
|
Annualized return on average stockholders
equity
|
|
(8.48
|
)%
|
15.53
|
%
|
(3.51
|
)%
|
16.00
|
%
|
Net Interest Income
Our
primary source of revenue is net interest income, which is the difference
between interest income on earning assets and interest expense on
interest-bearing liabilities. Net
interest income for the second quarter of 2008 totaled $92.2 million, a 7%
decrease over net interest income of $98.9 million recorded for the same period
in 2007. For the first half of 2008, net
interest income decreased 3% to $191.8 million, compared to $197.5 million for
the first half of 2007.
Net
interest margin, defined as taxable equivalent net interest income divided by
average earning assets, decreased 64 basis points to 3.33% during the second
quarter of 2008, compared with 3.97% during the second quarter of 2007. Similarly, the net interest margin for the
first half of 2008 decreased 48 basis points to 3.48%, compared with 3.96%
during the same period in 2007. The
decline in the net interest margin for both periods reflects the steep decrease
in the federal funds target rate, a notable increase in the overall level of
nonaccrual loans, and the reinvestment of net loan payoffs in lower yielding
investment securities and short-term investments.
The following table presents the net interest spread, net interest
margin, average balances, interest income and expense, and the average yields
and rates by asset and liability component for the three months ended
June 30, 2008 and 2007:
31
Table of Contents
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
|
Volume
|
|
Interest
|
|
Rate (1)
|
|
Volume
|
|
Interest
|
|
Rate (1)
|
|
|
|
(Dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (2)
|
|
$
|
194,206
|
|
$
|
1,051
|
|
2.17
|
%
|
$
|
7,151
|
|
$
|
117
|
|
6.56
|
%
|
Securities purchased under resale
agreements (3)
|
|
50,000
|
|
1,264
|
|
10.14
|
%
|
195,055
|
|
3,943
|
|
8.11
|
%
|
Investment securities available-for-sale
(4) (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,931,648
|
|
24,869
|
|
5.16
|
%
|
1,607,571
|
|
22,939
|
|
5.72
|
%
|
Tax-exempt (6)
|
|
58,614
|
|
1,185
|
|
8.09
|
%
|
27,220
|
|
595
|
|
8.74
|
%
|
Loans receivable (4) (7)
|
|
8,773,028
|
|
137,997
|
|
6.31
|
%
|
8,097,386
|
|
158,844
|
|
7.87
|
%
|
FHLB and FRB stock
|
|
117,608
|
|
1,863
|
|
6.35
|
%
|
74,967
|
|
940
|
|
5.03
|
%
|
Total interest-earning assets
|
|
11,125,104
|
|
168,229
|
|
6.07
|
%
|
10,009,350
|
|
187,378
|
|
7.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
123,646
|
|
|
|
|
|
143,474
|
|
|
|
|
|
Allowance for loan losses
|
|
(136,109
|
)
|
|
|
|
|
(76,102
|
)
|
|
|
|
|
Other assets
|
|
658,495
|
|
|
|
|
|
577,056
|
|
|
|
|
|
Total assets
|
|
$
|
11,771,136
|
|
|
|
|
|
$
|
10,653,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
412,422
|
|
$
|
681
|
|
0.66
|
%
|
$
|
407,669
|
|
$
|
1,617
|
|
1.59
|
%
|
Money market accounts
|
|
1,103,522
|
|
6,118
|
|
2.22
|
%
|
1,328,806
|
|
13,982
|
|
4.22
|
%
|
Savings deposits
|
|
468,541
|
|
958
|
|
0.82
|
%
|
350,208
|
|
589
|
|
0.67
|
%
|
Time deposits less than $100,000
|
|
964,196
|
|
7,560
|
|
3.14
|
%
|
975,979
|
|
9,330
|
|
3.83
|
%
|
Time deposits $100,000 or greater
|
|
3,148,739
|
|
28,219
|
|
3.59
|
%
|
2,846,255
|
|
35,606
|
|
5.02
|
%
|
Fed funds purchased
|
|
93,125
|
|
368
|
|
1.59
|
%
|
139,755
|
|
1,877
|
|
5.39
|
%
|
FHLB Advances
|
|
1,579,062
|
|
17,541
|
|
4.46
|
%
|
982,837
|
|
12,514
|
|
5.11
|
%
|
Securities sold under repurchase agreements
|
|
1,000,797
|
|
11,290
|
|
4.52
|
%
|
975,000
|
|
9,018
|
|
3.71
|
%
|
Long-term debt
|
|
235,570
|
|
2,994
|
|
5.10
|
%
|
204,642
|
|
3,752
|
|
7.35
|
%
|
Total interest-bearing liabilities
|
|
9,005,974
|
|
75,729
|
|
3.37
|
%
|
8,211,151
|
|
88,285
|
|
4.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
1,405,040
|
|
|
|
|
|
1,265,108
|
|
|
|
|
|
Other liabilities
|
|
138,837
|
|
|
|
|
|
134,507
|
|
|
|
|
|
Stockholders equity
|
|
1,221,285
|
|
|
|
|
|
1,043,012
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
11,771,136
|
|
|
|
|
|
$
|
10,653,778
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
2.70
|
%
|
|
|
|
|
3.20
|
%
|
Net interest income and net margin (6)
|
|
|
|
$
|
92,500
|
|
3.33
|
%
|
|
|
$
|
99,093
|
|
3.97
|
%
|
(1) Annualized.
|
(2) Includes
short-term securities purchased under resale agreements.
|
(3) The
terms for the purchase of securities under resale agreements range from ten
to fifteen years.
|
(4) Includes
amortization of premium and accretion of discounts on investment securities
and loans receivable totaling $(1.8)
|
million
and $(220) thousand for the three months ended June 30, 2008, and 2007,
respectively. Also includes the amortization
|
of
deferred loan fees totaling $834 thousand and $1.4 million for the three
months ended June 30, 2008 and 2007, respectively.
|
(5) Average
balances exclude unrealized gains or losses on available for sales
securities.
|
(6) Amounts
calculated on a fully taxable equivalent basis using the current statutory
federal tax rate. Total interest income and average yield rate on an
unadjusted basis for tax-exempt investment securities available-for-sale is
$861 thousand and 5.88% for three months ended June 30, 2008,
respectively. Total interest income and average yield rate on an unadjusted
basis for tax-exempt investment securities available-for-sale is $431
thousand and 6.33% for the three months ended June 30, 2007,
respectively.
|
(7) Average
balances include nonperforming loans.
|
32
Table of Contents
The
following table presents the net interest spread, net interest margin, average
balances, interest income and expense and the average yields and rates by asset
and liability component for the six months ended June 30, 2008 and 2007:
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
|
|
Volume
|
|
Interest
|
|
Rate (1)
|
|
Volume
|
|
Interest
|
|
Rate (1)
|
|
|
|
(Dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (2)
|
|
$
|
135,373
|
|
$
|
1,589
|
|
2.35
|
%
|
$
|
7,429
|
|
$
|
217
|
|
5.89
|
%
|
Securities purchased under resale
agreements (3)
|
|
57,143
|
|
3,817
|
|
13.40
|
%
|
195,313
|
|
7,729
|
|
7.98
|
%
|
Investment securities available-for-sale
(4) (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,851,596
|
|
50,873
|
|
5.51
|
%
|
1,623,905
|
|
45,718
|
|
5.68
|
%
|
Tax-exempt (6)
|
|
63,046
|
|
2,626
|
|
8.33
|
%
|
18,069
|
|
760
|
|
8.41
|
%
|
Loans receivable (4) (7)
|
|
8,864,142
|
|
293,431
|
|
6.64
|
%
|
8,137,161
|
|
317,007
|
|
7.86
|
%
|
FHLB and FRB stock
|
|
116,627
|
|
3,472
|
|
5.97
|
%
|
80,677
|
|
2,168
|
|
5.42
|
%
|
Total interest-earning assets
|
|
11,087,927
|
|
355,808
|
|
6.44
|
%
|
10,062,554
|
|
373,599
|
|
7.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
137,057
|
|
|
|
|
|
145,483
|
|
|
|
|
|
Allowance for loan losses
|
|
(113,098
|
)
|
|
|
|
|
(77,140
|
)
|
|
|
|
|
Other assets
|
|
668,126
|
|
|
|
|
|
575,214
|
|
|
|
|
|
Total assets
|
|
$
|
11,780,012
|
|
|
|
|
|
$
|
10,706,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
407,631
|
|
$
|
2,048
|
|
1.01
|
%
|
$
|
411,692
|
|
$
|
3,339
|
|
1.64
|
%
|
Money market accounts
|
|
1,099,111
|
|
14,582
|
|
2.66
|
%
|
1,322,191
|
|
27,557
|
|
4.20
|
%
|
Savings deposits
|
|
469,989
|
|
2,412
|
|
1.03
|
%
|
357,360
|
|
1,213
|
|
0.68
|
%
|
Time deposits less than $100,000
|
|
951,241
|
|
16,401
|
|
3.46
|
%
|
983,705
|
|
18,881
|
|
3.87
|
%
|
Time deposits $100,000 or greater
|
|
3,088,157
|
|
60,346
|
|
3.92
|
%
|
2,803,930
|
|
69,096
|
|
4.97
|
%
|
Fed funds purchased
|
|
129,405
|
|
1,746
|
|
2.71
|
%
|
143,947
|
|
3,847
|
|
5.39
|
%
|
FHLB Advances
|
|
1,663,188
|
|
37,223
|
|
4.49
|
%
|
1,087,453
|
|
27,380
|
|
5.08
|
%
|
Securities sold under repurchase agreements
|
|
1,000,991
|
|
21,819
|
|
4.37
|
%
|
975,000
|
|
17,412
|
|
3.60
|
%
|
Long-term debt
|
|
235,570
|
|
6,717
|
|
5.72
|
%
|
194,617
|
|
7,134
|
|
7.39
|
%
|
Total interest-bearing liabilities
|
|
9,045,283
|
|
163,294
|
|
3.62
|
%
|
8,279,895
|
|
175,859
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
1,399,920
|
|
|
|
|
|
1,254,959
|
|
|
|
|
|
Other liabilities
|
|
145,586
|
|
|
|
|
|
138,845
|
|
|
|
|
|
Stockholders equity
|
|
1,189,223
|
|
|
|
|
|
1,032,412
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
11,780,012
|
|
|
|
|
|
$
|
10,706,111
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
2.82
|
%
|
|
|
|
|
3.21
|
%
|
Net interest income and net margin (6)
|
|
|
|
$
|
192,514
|
|
3.48
|
%
|
|
|
$
|
197,740
|
|
3.96
|
%
|
(1) Annualized.
|
(2) Includes
short-term securities purchased under resale agreements.
|
(3) The
terms for the purchase of securities under resale agreements range from ten
to fifteen years.
|
(4) Includes
amortization of premium and accretion of discounts on investment securities
and loans receivable totaling $(2.1) million
|
and
$(1.1) million for the six months ended June 30, 2008, and 2007,
respectively. Also includes the amortization
|
of
deferred loan fees totaling $1.8 million and $2.8 million for the six months
ended June 30, 2008 and 2007, respectively.
|
(5) Average
balances exclude unrealized gains or losses on available for sales
securities.
|
(6) Amounts
calculated on a fully taxable equivalent basis using the current statutory
federal tax rate. Total interest income and average yield rate on an
unadjusted basis for tax-exempt investment securities available-for-sale is
$1.9 million and 6.05% for the six months ended June 30, 2008, respectively.
Total interest income and average yield rate on an unadjusted basis for
tax-exempt investment securities available-for-sale is $552 thousand and
6.11% for the six months ended June 30, 2007, respectively.
|
(7) Average
balances include nonperforming loans.
|
33
Table
of Contents
Analysis
of Changes in Net Interest Income
Changes in net interest income are a function
of changes in rates and volumes of both interest-earning assets and interest-bearing
liabilities. The following table sets
forth information regarding changes in interest income and interest expense for
the periods indicated. The total change
for each category of interest-earning asset and interest-bearing liability is
segmented into the change attributable to variations in volume (changes in
volume multiplied by old rate) and the change attributable to variations in
interest rates (changes in rates multiplied by old volume). Nonaccrual loans are included in average
loans used to compute this table.
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008 vs. 2007
|
|
2008 vs. 2007
|
|
|
|
Total
|
|
Changes Due to
|
|
Total
|
|
Changes Due to
|
|
|
|
Change
|
|
Volume (1)
|
|
Rates (1)
|
|
Change
|
|
Volume (1)
|
|
Rates (1)
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
INTEREST-EARNING
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
934
|
|
$
|
1,063
|
|
$
|
(129
|
)
|
$
|
1,372
|
|
$
|
1,577
|
|
$
|
(205
|
)
|
Securities purchased under resale
agreements
|
|
(2,679
|
)
|
(3,482
|
)
|
803
|
|
(3,912
|
)
|
(7,375
|
)
|
3,463
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,930
|
|
4,320
|
|
(2,390
|
)
|
5,155
|
|
6,278
|
|
(1,123
|
)
|
Tax-exempt (2)
|
|
590
|
|
638
|
|
(48
|
)
|
1,866
|
|
1,873
|
|
(7
|
)
|
Loans receivable
|
|
(20,847
|
)
|
12,476
|
|
(33,323
|
)
|
(23,576
|
)
|
26,735
|
|
(50,311
|
)
|
FHLB and FRB stock
|
|
923
|
|
631
|
|
292
|
|
1,304
|
|
1,050
|
|
254
|
|
Total interest and dividend income
|
|
$
|
(19,149
|
)
|
$
|
15,646
|
|
$
|
(34,795
|
)
|
$
|
(17,791
|
)
|
$
|
30,138
|
|
$
|
(47,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
(936
|
)
|
$
|
19
|
|
$
|
(955
|
)
|
$
|
(1,291
|
)
|
$
|
(33
|
)
|
$
|
(1,258
|
)
|
Money market accounts
|
|
(7,864
|
)
|
(2,075
|
)
|
(5,789
|
)
|
(12,975
|
)
|
(4,114
|
)
|
(8,861
|
)
|
Savings deposits
|
|
369
|
|
225
|
|
144
|
|
1,199
|
|
457
|
|
742
|
|
Time deposits less than $100,000
|
|
(1,770
|
)
|
(111
|
)
|
(1,659
|
)
|
(2,480
|
)
|
(608
|
)
|
(1,872
|
)
|
Time deposits $100,000 or greater
|
|
(7,387
|
)
|
3,491
|
|
(10,878
|
)
|
(8,750
|
)
|
6,527
|
|
(15,277
|
)
|
Federal funds purchased
|
|
(1,509
|
)
|
(484
|
)
|
(1,025
|
)
|
(2,101
|
)
|
(356
|
)
|
(1,745
|
)
|
FHLB advances
|
|
5,027
|
|
6,791
|
|
(1,764
|
)
|
9,843
|
|
13,165
|
|
(3,322
|
)
|
Securities sold under resale agreements
|
|
2,272
|
|
244
|
|
2,028
|
|
4,407
|
|
475
|
|
3,932
|
|
Long-term debt
|
|
(758
|
)
|
510
|
|
(1,268
|
)
|
(417
|
)
|
1,339
|
|
(1,756
|
)
|
Total interest expense
|
|
(12,556
|
)
|
8,610
|
|
(21,166
|
)
|
(12,565
|
)
|
16,852
|
|
(29,417
|
)
|
CHANGE
IN NET INTEREST INCOME
|
|
$
|
(6,593
|
)
|
$
|
7,036
|
|
$
|
(13,629
|
)
|
$
|
(5,226
|
)
|
$
|
13,286
|
|
$
|
(18,512
|
)
|
(1) Change in interest income/expense not arising from volume or
rate variances are allocated proportionately to rate and volume.
(2) Amounts
calculated on a fully taxable equivalent basis using the current statutory
federal tax rate. Total change on an
unadjusted basis for tax-exempt investment securities available-for-sale is
$430 thousand, and total changes due to volume and rates on an unadjusted basis
for tax-exempt investment securities available-for-sale is $463 thousand and
$(33) thousand for the three months ended June 30, 2008, respectively.
Total change on an unadjusted basis for tax-exempt investment securities
available-for-sale is $1.4 million, and total changes due to volume and rates
on an unadjusted basis for tax-exempt investment securities available-for-sale
is $1.4 million and $(6) thousand for the six months ended June 30,
2008, respectively.
Provision for Loan Losses
We recorded $85.0 million and $140.0 million in provisions for loan
losses during the second quarter and first half of 2008, respectively. In comparison, no loss provisions were
recorded during the
34
Table of Contents
first two quarters of 2007. The
significant increase in loss provisions recorded during the first half of 2008
reflects our increased chargeoff levels as well as our higher volume of
classified and nonperforming loans caused by the challenging conditions in the
real estate housing market, further disruptions in the financial markets, as
well as mounting recessionary pressures in the overall economic
environment. During the second quarter
of 2008, we performed a comprehensive review to assess the potential loss
exposure in our land and residential construction loan portfolios. This extensive review entailed obtaining new
appraisals and making a current assessment of the financial strength of our
borrowers. We are also aggressively
monitoring delinquencies and proactively reviewing the credit risk exposure in
various other sectors of our loan portfolio to minimize and mitigate potential
losses.
Provisions for loan losses are charged to income to bring the allowance
for credit losses to a level deemed appropriate by management based on the
factors discussed under the Allowance for Loan Losses section of this report.
Noninterest Income
Components of Noninterest Income
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June, 30
|
|
June, 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
(In millions)
|
|
Branch fees
|
|
$
|
4.34
|
|
$
|
3.40
|
|
$
|
8.44
|
|
$
|
6.83
|
|
Net gain on sale of investment securities
available-for-sale
|
|
3.43
|
|
0.92
|
|
7.77
|
|
2.45
|
|
Letters of credit fees and commissions
|
|
2.48
|
|
2.63
|
|
5.15
|
|
4.99
|
|
Net gain on sale of loans
|
|
0.27
|
|
0.09
|
|
2.13
|
|
1.02
|
|
Ancillary loan fees
|
|
0.98
|
|
1.49
|
|
2.13
|
|
2.77
|
|
Income from life insurance policies
|
|
1.02
|
|
1.06
|
|
2.05
|
|
2.03
|
|
Other operating income
|
|
0.86
|
|
1.21
|
|
1.63
|
|
1.86
|
|
Total
|
|
$
|
13.38
|
|
$
|
10.80
|
|
$
|
29.30
|
|
$
|
21.95
|
|
Noninterest income includes revenues earned from sources other than
interest income. These sources
include: net gain on sale of investment
securities available-for-sale, service charges and fees on deposit accounts,
fees and commissions generated from trade finance activities and the issuance
of letters of credit, net gain on sale of loans, ancillary fees on loans,
income from life insurance policies, and other noninterest-related revenues.
Noninterest
income increased 24% to $13.4 million during the three months ended
June 30, 2008 from $10.8 million for the same quarter in 2007. For the first half of 2008, noninterest
income increased 33% to $29.3 million, compared to $22.0 million for the first
half of 2007. The increase in
noninterest income for both periods in 2008 is primarily attributable to higher
net gain on sales of available-for-sale securities, higher branch-related fee
income, and higher net gain on sales of loans.
Net
gain on sales of investment securities available-for-sale increased to $3.4
million during the second quarter of 2008, compared to $918 thousand during the
same quarter in 2007. During the first
six months of 2008, net gain on sales of available-for-sale securities grew
218% to $7.8 million, from $2.4 million during the same period in 2007. The proceeds from the sale of investment
securities during the second quarter and first half of 2008 provided additional
liquidity to purchase additional investment securities, pay down our borrowings
and to sustain our loan production activity.
Branch
fees, which represent revenues derived from branch operations, increased 27% to
$4.3 million in the second quarter of 2008 from $3.4 million for the same
quarter in 2007. Similarly, branch
35
Table of Contents
fee
income for the first six months of 2008 increased 24% to $8.4 million, compared
to $6.8 million in the same prior year period.
The increase in branch-related fees for both periods in 2008 can be
attributed primarily to higher revenues from service and transaction charges on
deposit accounts.
Net
gain on sales of loans consists of revenues earned from the sale of loans through
our secondary market activities and bulk loan sale transactions. During the second quarter of 2008, net gain
on sales of loans increased 217% to $273 thousand, compared to $86 thousand
during the same quarter in 2007. During
the first half of 2008, net gain on sale of loans increased 108% to $2.1
million, compared to $1.0 million during the same period in 2007. The increase in net gain on sales of loans
for both periods in 2008 is primarily due to bulk sales of commercial real
estate loans to various third parties.
Prior to 2008, we have previously not sold commercial real estate loans
in bulk sale transactions. As part of
our efforts to deleverage our balance sheet, we plan to sell more commercial
real estate loans when presented with attractive pricing opportunities.
Ancillary loan fees consist of revenues earned from the servicing of
mortgages, fees related to the monitoring and disbursement of construction loan
proceeds, and other miscellaneous loan income.
Ancillary loan fees decreased 34% to $984 thousand during the second
quarter of 2008, compared to $1.5 million recorded during the same period in
2007. For the first half of 2008,
ancillary loan fees decreased 23% to $2.1 million, compared to $2.8 million for
the first half of 2007. The decrease in
ancillary loan fees for both periods in 2008 is primarily due to $800 thousand
in impairment writedowns on mortgage servicing assets recorded during the
second quarter of 2008. The decrease in
MSA values during 2008 resulted from the recent decline in interest rates as
well as increased borrower refinancing and prepayment activity on mortgage
loans.
Other noninterest income, which includes insurance commissions and
insurance-related service fees, rental income, and other miscellaneous income,
decreased 30% to $854 thousand during the second quarter of 2008, from $1.2
million recorded during the same quarter of 2007. For the first six months of 2008, other
noninterest income decreased 13% to $1.6 million, compared to $1.9 million for
the first six months of 2007. The
decrease in other noninterest income for both periods is primarily due to lower
insurance commissions and insurance-related revenues earned in 2008 relative to
2007.
36
Table of Contents
Noninterest Expense
Components of Noninterest Expense
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
(In millions)
|
|
Compensation and employee benefits
|
|
$
|
25.79
|
|
$
|
20.65
|
|
$
|
49.06
|
|
$
|
41.43
|
|
Occupancy and equipment expense
|
|
6.54
|
|
6.05
|
|
13.55
|
|
11.93
|
|
Impairment writedown on investment
securities
|
|
9.95
|
|
|
|
9.95
|
|
|
|
Amortization and impairment writedowns of
premiums on deposits acquired
|
|
1.83
|
|
1.53
|
|
4.56
|
|
3.06
|
|
Amortization of investments in affordable
housing partnerships
|
|
1.92
|
|
1.24
|
|
3.64
|
|
2.50
|
|
Deposit insurance premiums and regulatory
assessments
|
|
2.32
|
|
0.32
|
|
3.51
|
|
0.67
|
|
Legal expense
|
|
1.14
|
|
0.34
|
|
3.04
|
|
0.61
|
|
Data processing
|
|
1.14
|
|
1.07
|
|
2.33
|
|
2.05
|
|
Deposit-related expenses
|
|
1.24
|
|
1.86
|
|
2.19
|
|
3.55
|
|
Other real estate owned expense (income)
|
|
0.51
|
|
|
|
1.40
|
|
(1.25
|
)
|
Impairment writedown on goodwill
|
|
0.59
|
|
|
|
0.59
|
|
|
|
Other operating expenses
|
|
12.63
|
|
10.20
|
|
24.67
|
|
19.69
|
|
Total
|
|
$
|
65.60
|
|
$
|
43.26
|
|
$
|
118.49
|
|
$
|
84.24
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency Ratio (1)
|
|
49
|
%
|
37
|
%
|
45
|
%
|
36
|
%
|
(1) Represents noninterest expense (exluding the amortization of
intangibles, amortization and impairment writedowns of premiums on deposits
acquired, impairment writedown on goodwill and investment securities, and
amortization of investments in affordable housing partnerships) divided by the
aggregate of net interest income before provision for loan losses and
noninterest income.
Noninterest expense, which is comprised primarily of compensation and
employee benefits, occupancy and other operating expenses increased 52% to
$65.6 million during the second quarter of 2008, from $43.3 million for the
same quarter in 2007. For the first half
of 2008, noninterest expense increased 41% to $118.5 million, compared with
$84.2 million during the same period in 2007.
Compensation and employee benefits increased 25% to $25.8 million
during the second quarter of 2008, compared to $20.6 million for the same
quarter in 2007. For the first half of
2008, compensation and employee benefits increased 18% to $49.1 million,
compared with $41.4 million for the first half of 2007. The increase in compensation and employee
benefit expenses for both periods in 2008 is primarily due to a decrease in
deferred loan origination costs during 2008 which are recorded as a reduction
to compensation expense. The decrease in
deferred loan origination costs is directly correlated to the notable decrease
in our loan origination volume during 2008 relative to 2007 as a result of
current market conditions. Additionally,
compensation and employee benefits also increased due to higher staffing levels
related to the acquisition of DCB in August 2007.
Occupancy and equipment expenses increased 8% to $6.5 million during
the quarter ended June 30, 2008, compared with $6.0 million during the
same period in 2007. For the first half
of 2008, occupancy and equipment expenses totaled $13.5 million, a 14% increase
from $11.9 million incurred during the first half of 2007. The increase in occupancy and equipment
expenses during both periods in 2008 can be attributed primarily to the nine
branch locations acquired from DCB in August 2007 as well as several new
leases related to new branch locations that we entered into during the past
year to accommodate our continuing growth and expansion.
37
Table
of Contents
During the second quarter of 2008, we recorded $9.9 million in OTTI
writedowns on our available-for-sale securities portfolio. Of the $9.9 million total impairment charge,
$8.4 million related to certain Fannie Mae and Freddie Mac preferred securities
with the remaining $1.5 million related to certain pooled trust preferred
securities. There were no OTTI charges
recorded during the first half of 2007.
Also
see Note 5 to the Condensed Consolidated Financial
Statements presented elsewhere in this report.
Amortization expense and impairment writedowns of premiums on deposits
acquired increased 20% to $1.8 million during the quarter ended June 30,
2008, compared with $1.5 million during the same period in 2007. For the first half of 2008, amortization
expense and impairment writedowns of premiums on deposits totaled $4.6 million,
compared with $3.1 million incurred during the same period in 2007. The increase in amortization expense is
primarily due to additional deposit premiums of $14.9 million recorded in
connection with the acquisition of DCB in August 2007. We also recorded an $855 thousand impairment
writedown on deposit premiums initially recorded for the DCB acquisition due to
higher than anticipated runoffs in certain deposit categories.
Amortization of investments in affordable housing partnerships
increased 55% to $1.9 million during the quarter ended June 30, 2008,
compared with $1.2 million during the same period in 2007. For the first half of 2008, amortization of
investments in affordable housing partnerships increased 45% to $3.6 million
compared to $2.5 million for the first half of 2007. The increase in amortization expense is
primarily due to additional purchases of investments in affordable housing
partnerships since the second quarter of 2007.
Deposit insurance premiums and regulatory assessments increased 616% to
$2.3 million during the quarter ended June 30, 2008, compared with $324
thousand during the same period in 2007.
For the first half of 2008, deposit insurance premiums and regulatory
assessments increased 424% to $3.5 million compare to $671 thousand for the
same period in 2007. Pursuant to the
Federal Deposit Insurance Reform Act of 2005, the Bank was eligible to share in
a one-time assessment credit pool of approximately $4.7 billion. The Banks pro rata share of this one-time
assessment credit was approximately $3.4 million, of which $2.8 million was
applied to reduce deposit insurance assessments in 2007. The remaining credit of $628 thousand
was applied in full during the first quarter of 2008. Since this one-time assessment credit has
been fully utilized, we anticipate deposit insurance premiums and regulatory
assessments to increase during the remainder of 2008.
Legal expenses increased to $1.1 million for the second quarter of
2008, compared to $344 thousand during the same period in 2007. For the first half of 2008, legal expenses
increased to $3.0 million, compared to $605 thousand during the same period in
2007. The increase in legal expenses for
both periods in 2008 is primarily due to attorney fees and other legal costs
incurred in defending one claim which resulted in a favorable outcome for the
Bank in April 2008.
Deposit-related expenses decreased 34% to $1.2 million during the
second quarter of 2008, compared to $1.9 million for the same quarter last
year. For the first half of 2008,
deposit-related expenses decreased 38% to $2.2 million from $3.5 million for
the first half of 2007. Deposit-related
expenses represent various business expenses paid by the Bank on behalf of its
commercial account customers. The
decrease in deposit-related expenses can be correlated to the decline in the
volume of title and escrow deposit balances during the second quarter and first
half of 2008 relative to the same periods in 2007.
This segment of our deposit base has been
adversely impacted by the overall slowing in the housing market both in
production and sale.
38
Table of Contents
Net
OREO expenses increased to $508 thousand during the second quarter of 2008,
compared to a net OREO income of $2 thousand for the second quarter of
2007. For the first half of 2008, net
OREO expenses increased to $1.4 million, compared with $1.2 million in net OREO
income during the first half of 2007.
Total gross OREO expenses during the first half of 2008 totaled $1.4
million. These expenses were partially
offset by total net gains on sales of five OREO properties amounting to $71
thousand during the same period. In
comparison, we recorded a $1.3 million net gain from the sale of one OREO
property during the first half of 2007.
As
a result of the recent market volatility in banking industry stock prices, we
recorded $586 thousand in goodwill impairment charges related to the Companys
insurance agency, East West Insurance Services, Inc. during the second
quarter of 2008. No goodwill impairment
writedowns were recorded during the first six months of 2007. Also
see Note 6 to the
Condensed Consolidated Financial Statements presented elsewhere in this report.
Other operating expenses include advertising and public relations,
telephone and postage, stationery and supplies, bank and item processing
charges, insurance, and other professional fees. Other operating expenses increased 24% to
$12.7 million for the second quarter of 2008, compared to the $10.2 million
recorded during the same period in 2007.
Similarly, other operating expenses increased 25% to $24.7 million for
the first half of 2008, from $19.7 million for the same period in 2007. The increase in other operating expenses is
largely due to additional credit cycle expenses incurred in conjunction with
our comprehensive review of our loan portfolio to identify and mitigate
potential credit losses. Various
expenses related to the acquisition of DCB in August 2007 further
contributed to higher other operating expenses during the second quarter and
first half of 2008 relative to the same periods in 2007.
Our efficiency ratio increased to 48.62% for the quarter ended
June 30, 2008, compared with 36.91% for the corresponding quarter in
2007. For the first half of 2008, the
efficiency ratio was 45.12% compared with 35.85% for the same period in
2007. Although our efficiency ratio has
increased, we anticipate noninterest expenses for the remainder of 2008 to
decrease moderately relative to the first half of 2008 as we continue to carefully
monitor all expenditures.
Income Taxes
The
income tax benefit for the three months ended June 30, 2008 amounted to
$19.2 million representing an effective tax rate of 42.5% for the period. In comparison, the provision for income taxes
of $26.0 million for the three months ended June 30, 2007 represented an
effective tax rate of 39.1% for the quarter.
The income tax benefit for the second quarter of 2008 reflects the
utilization of affordable housing tax credits totaling $1.7 million, compared to
$1.3 million in tax credits utilized during the second quarter of 2007. The $586 thousand goodwill impairment charge
recorded during the second quarter of 2008 is not deductible for tax purposes.
For
the first half of 2008, the income tax benefit totaled $16.6 million
representing an effective tax rate of 44.3%.
This compares to $52.7 million income tax expense, representing a 38.9%
effective tax rate, recorded for the first half of 2007. For the first six months of 2008, the income
tax benefit reflects the utilization of $3.3 million in tax credits, compared
to $2.5 million in tax credits utilized during the same period in 2007. Due to the high degree of variability of the
estimated annual effective tax rate when considering the range of projected income
for the remainder of the year, the Company has determined that the actual
year-to-date effective tax rate is the best estimate of the annual effective
tax rate.
39
Table
of Contents
As previously reported, the California Franchise Tax Board announced
that it is taking the position that certain tax deductions related to regulated
investment companies will be disallowed pursuant to California Senate Bill 614
and California Assembly Bill 1601, which were signed into law in the fourth
quarter of 2003. East West Securities
Company, Inc., a regulated investment company formed and funded in
July 2000 to raise capital in an efficient and economical manner was
dissolved on December 30, 2002 as a result of, among other reasons,
proposed legislation to change the tax treatments of RICs. The Fund provided state tax benefits
beginning in 2000 until the end of 2002, when the RIC was officially
dissolved. While the Companys management
continued to believe that the tax benefits realized in previous years were
appropriate and fully defensible under the existing tax codes at that time, the
Company deemed it prudent to participate in the voluntary compliance initiative
offered by the State of California to avoid certain potential penalties should
the FTB choose to litigate its announced position about the tax treatment of
RICs for periods prior to enactment of the legislation described above and
should the FTB be successful in that litigation.
Pursuant to the VCI program, we filed amended
California income tax returns on April 15, 2004 for all affected years and
paid the resulting taxes and interest due to the FTB. This amounted to an aggregate payment of
$14.2 million for tax years 2000, 2001, and 2002. Since we continue to believe that the tax
deductions are appropriate, we have also filed refund claims for the amounts
paid with the amended returns. These refund
claims were reflected as assets in our consolidated financial statements. As a result of these actionsamending our
California income tax returns and subsequent related filing of refund claimswe
retain our potential exposure for assertion of an accuracy-related penalty
should the FTB prevail in its position, in addition to our risk of not being
successful in our refund claim for taxes and interest. We believe our potential exposure to all
other penalties, however, has been eliminated through this course of action.
Management has considered this claim as part of
its evaluation of the Companys uncertain tax positions in accordance with the
provisions of FIN 48. Pursuant to the
adoption of FIN 48 on January 1, 2007, the Company increased its existing
unrecognized tax benefits by $7.1 million in connection with these refund claims. During the second quarter of 2008, the
Company received notification from the FTB that our refund claims for tax years
2000 through 2002 have been denied.
Accordingly, the Company has deemed it prudent to write off the
remaining $7.1 million tax receivable as a charge against the provision for
income taxes during the second quarter of 2008.
The Company will continue to appeal and pursue these claims. Also see Note 8 to the Condensed Consolidated
Financial Statements presented elsewhere in this report.
Operating Segment Results
We
have identified four principal operating segments for purposes of management
reporting: retail banking, commercial lending, treasury, and residential
lending. Although all four operating
segments offer financial products and services, they are managed separately
based on each segments strategic focus.
While the retail banking segment focuses primarily on retail operations
through the Banks branch network, certain designated branches have
responsibility for generating commercial deposits and loans. The commercial lending segment, which
includes commercial real estate, primarily generates commercial loans and
deposits through the efforts of commercial lending officers located in the
Banks northern and southern California production offices. The treasury departments primary focus is
managing the Banks investments, liquidity, and interest rate risk; the
residential lending segment is mainly responsible for the Banks portfolio of
single family and multifamily residential loans. The remaining centralized functions and
eliminations of inter-segment amounts have been aggregated and included in
Other.
40
Table
of Contents
Future
changes in our management structure or reporting methodologies may result in
changes in the measurement of operating segment results. Results for prior periods are generally
restated for comparability for changes in management structure or reporting
methodologies. During the second quarter
of 2008, we revised the allocation of certain investment securities resulting
from our securitization activities. We
securitized a total of $1.18 billion in single family and multifamily loans
during 2007. Due to a significant
increase in our loan securitization activities during 2007, we determined that
it was more appropriate to reallocate investment securities, and their related
income components, resulting from our securitization activities to the
operating segments that originated the underlying loans to derive a more
equitable allocation of profitability amongst the various operating
segments. Initially, these securities
were allocated to the treasury segment upon securitization. As a result of our new profitability
allocation structure, investment securities resulting from our securitization
activities are being allocated to the operating segments (i.e., retail banking,
commercial lending, and residential lending) that initially originated the
underlying loans. As a result of these
changes implemented during the second quarter of 2008, we have revised the
results for the comparable periods in 2007 to reflect our current allocation
methodology between the treasury segment and the other operating segments.
For
more information about our segments, including information about the underlying
accounting and reporting process, please see Note 10 to the Condensed
Consolidated Financial Statements presented elsewhere in this report.
Retail Banking
The retail banking segment reported a $35 thousand pretax income, or a
100% decrease, for the three months ended June 30, 2008, as compared to a
$35.5 million pre-tax income for the same quarter in 2007. The decrease in pretax income for this segment
during the second quarter of 2008 is comprised of a 17% or $9.3 million
decrease in net interest income to $44.7 million, a $16.0 million increase in
loan loss provisions, an 18% or $3.7 million increase in noninterest expense to
$24.8 million, and a $6.8 million increase in corporate overhead expense
allocations.
For the six months ended June 30, 2008, the pretax loss for the
retail banking segment amounted to $(6.9) million, representing a 109%
decrease, as compared to the $74.8 million pretax income recorded for the same
period in 2007. The decrease in pretax
income for this segment during the six months ended June 30, 2008 is
comprised of a 17% or $18.9 million decrease in net interest income to $89.8
million, a $43.0 million increase in loan loss provisions, a 19% or $8.0
million increase in noninterest expense to $49.9 million, and a $13.5 million
increase in corporate overhead expense allocations.
The decrease in net interest income during the second quarter and first
half of 2008 is attributable largely to the 325 basis point decrease in
interest rates since August 2007 partially offset by additional interest
income on investment securities that have been reallocated to this segment from
the treasury segment. As previously
mentioned, the investment securities that were reallocated to the retail
banking segment represent loans originated by this segment that have been
securitized as part of the Companys securitization activities. The increase in loan loss provisions for this
segment during the second quarter and first half of 2008, relative to the same
periods in 2007, was due to increased chargeoff activity, as well as higher
levels of nonperforming and classified assets, resulting from the downturn in
the real estate housing market. Corporate
overhead expense allocations are based on several factors including, but not
limited to loan and deposit volume and full-time employee equivalents. The increase in corporate overhead expense
allocations for this segment is attributable to the acquisition of DCB in
41
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August 2007 which resulted in a rise in loan and deposit volume
and total number of employees for this segment.
Noninterest income for this segment increased 11%, to $6.3 million for
the quarter ended June 30, 2008, from $5.7 million recorded during the
same period in 2007. For the first half
of 2008, noninterest income for the retail banking segment increased 12%, to
$13.3 million, compared to $11.8 million for the same period in 2007. The increase in noninterest income for both
periods in 2008 is primarily due to the increase in
branch-related fees, specifically service and
transaction charges on deposit accounts, as a result of the DCB acquisition in
August 2007.
Noninterest expense for this segment increased 18% to $24.8 million
during the second quarter of 2008, compared with $21.0 million recorded during
the second quarter of 2007. For the first
half of 2008, noninterest expense increased 19% to $49.9 million, from $42.0
million for the same period in 2007. The
increase in noninterest expense is primarily due to higher compensation and
employee benefits, occupancy expenses and other operating expenses, partially
offset by a decrease in commercial deposit-related expenses. The increase in compensation and employee
benefits can be attributed to higher staffing levels due to the acquisition of
DCB in August 2007. Higher
occupancy expenses are primarily due to increased expenses associated with the
nine additional branch locations from DCB as well as several leases entered
into during 2007 related to new branch locations. The decrease in commercial deposit-related
expenses can be correlated to lower title and escrow deposit balances during
the second quarter and first half of 2008 relative to the same periods in 2007.
Title
and escrow deposits have been negatively impacted by the sustained contraction
in the housing market.
Commercial Lending
The commercial lending segment reported a pretax loss of $(27.6)
million during the quarter ended June 30, 2008, or a 198% decrease,
compared with pretax income of $28.2 million for the same period in 2007. For the first six months of 2008, the pretax
loss for the commercial lending segment amounted to $(19.1) million, or a 134%
decrease from pretax income of $55.7 million recorded during the same period in
2007. The primary driver of the decrease
in pretax income for this segment for both periods is a significant increase in
loan loss provisions resulting from increased chargeoff activity as well as
higher levels of nonperforming and classified assets.
Noninterest income for this segment decreased 31% to $5.4 million
during the second quarter of 2008, compared with $7.8 million recorded in the
same quarter of 2007. For the first half
of 2008, noninterest income decreased 15% to $13.1 million, from $15.5 million
for the same period in 2007. The
decrease in noninterest income is primarily due to a decrease in loan fee
income resulting from the downturn in the real estate market.
Noninterest expense for this segment increased 8% to $10.9 million
during the second quarter of 2008, from $10.1 million during the same quarter
last year. For the first half of 2008,
noninterest expense for this segment increased 28%, to $24.6 million, from
$19.2 million for the same period in 2007.
The increase in noninterest expense is due to higher credit cycle
expenses related to OREO/foreclosure transactions and legal expenses.
Treasury
The treasury segment reported a pretax loss of $(22.0) million during
the second quarter of 2008, compared to pretax income of $6.5 million for the
same quarter in 2007. For the first six
months of
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2008, the pretax loss for the treasury segment was $(20.4) million,
representing a 266% decrease from pretax income of $12.3 million recorded
during the same period in 2007.
Specifically, the treasury segment reported a net interest expense of
$(9.8) million for the second quarter of 2008, compared to a net interest
income of $6.4 million reported during the same quarter in 2007. For the first half of 2008, net interest
expense for this segment was $(7.6) million, compared to net interest income of
$12.3 million during the same period in 2007.
Net interest income for this segment is directly correlated to net interest
earned on investment securities allocated to this reporting segment relative to
the interest expense paid on brokered deposits, borrowings and long-term debt.
Noninterest income for this segment increased to $269 thousand during
the second quarter of 2008, compared to $28 thousand for the same period in
2007. For the first half of 2008,
noninterest income increased to $734 thousand, compared with $51 thousand for
the same period in 2007. The increase in
noninterest income during the quarter and six months ended June 30, 2008
can be attributed entirely to higher net gains on sales of investment
securities relative to the comparable periods in 2007.
Noninterest expense for this segment increased to $10.5 million during
the second quarter of 2008, from $308 thousand during the same quarter in
2007. For the first six months of 2008,
noninterest expense for this segment increased to $11.0 million, from $781
thousand during the
same
period in 2007. The increase in noninterest expense is primarily due to the
$9.9 million in OTTI impairment charges recorded during the second quarter of
2008 related to certain Fannie Mae and Freddie Mac preferred securities and in
pooled trust preferred securities.
Residential Lending
The residential lending segments pretax income increased 19% to $6.0
million during the second quarter of 2008, from $5.0 million during the same
quarter in 2007. For the first half of
2008, pretax income for this segment increased 15% to $12.7 million, from $11.1
million for the same period in 2007. Net
interest income for this segment increased 66% to $9.3 million during the
second quarter of 2008, compared with $5.6 million for the corresponding
quarter in 2007. During the first half
of 2008, net interest income for this segment increased 41% to $16.6 million,
compared with $11.8 million during the first half of 2007. The increase in net interest income for this
segment was primarily due to the decrease in the charge for funds on loans
resulting from the 325 basis point decrease in interest rates since
August 2007, partly offset by the contraction of the housing market.
Noninterest income for this segment increased 47% to $4.1 million
during the second quarter of 2008, compared to $2.8 million recorded during the
second quarter of 2007. For the first
six months of 2008, noninterest income for this segment increased 62% to $9.1
million, compared to $5.6 million during the first half of 2007. The net increase in noninterest income during
2008 is primarily due to higher servicing income received as a result of the
Banks securitization of its residential and multifamily loan portfolios in
2007 and higher net gain on sale of loans in 2008 relative to 2007.
Noninterest expense for this segment increased 27% to $3.0 million
during the three months ended June 30, 2008, from $2.4 million during the
same period in 2007. For the first six
months of 2008, noninterest expense increased 36% to $6.5 million, from $4.8
million for the first half of 2007. The
increase in noninterest expense during 2008 is due to an increase in credit
cycle costs as well as compensation expenses and other operating expenses
primarily due to the restructuring and consolidation of two departments. During the first quarter of 2008, the
administrative department that provides backoffice support to the lending function
was merged into the lending unit to enhance operational efficiencies in this
segment of our business.
43
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Balance
Sheet Analysis
Our
total assets decreased $67.3 million, or 1%, to $11.78 billion, as of
June 30, 2008, relative to total assets of $11.85 billion at December 31,
2007. The net decrease in total assets
is comprised predominantly of decreases in net loans receivable of $267.8
million, securities purchased under resale agreements amounting to $100.0
million, and available-for-sale investment securities totaling $59.0
million. These decreases were partially
offset by increases in cash and cash equivalents of $263.7 million, deferred
tax assets of $103.1 million, and OREO, net of $16.0 million.
Adoption of SFAS 157,
Fair Value Measurement,
and SFAS 159,
Fair Value Option
The
Company adopted SFAS 157 and SFAS 159, effective January 1, 2008. SFAS 157 provides a framework for measuring
fair value under GAAP. This standard
applies to all financial assets and liabilities that are being measured and
reported at fair value on a recurring and non-recurring basis. For the Company, this includes the investment
securities available-for-sale portfolio, equity swap agreements, derivatives
payable mortgage servicing assets and impaired loans
.
The
adoption of SFAS 157 did not have any impact on the Companys financial
condition, results of operations, or cash flows. See Note 3 to the Companys condensed
consolidated financial statements presented elsewhere in this report.
Securities
Purchased Under Resale
Agreements
We
purchase securities under resale agreements with terms that range from one day
to several years. Total resale
agreements decreased to $50.0 million as of June 30, 2008, compared with
$150.0 million as of December 31, 2007, all of which are long-term agreements. The decrease as of June 30, 2008
reflects the early termination of a $100.0 million resale agreement on
January 14, 2008 which had a stated termination date of January 14,
2017. In conjunction with the early
termination of this agreement, we received $1.0 million from the counterparty
which we recorded as a yield adjustment during the first quarter of 2008.
Purchases
of securities under resale agreements are overcollateralized to ensure against
unfavorable market price movements. We
monitor the market value of the underlying securities which collateralize the
related receivable on resale agreements, including accrued interest. In the event that the fair market value of
the securities decreases below the carrying amount of the related repurchase
agreement, our counterparty is required to designate an equivalent value of
additional securities. The
counterparties to these agreements are nationally recognized investment banking
firms that meet credit eligibility criteria and with whom a master repurchase
agreement has been duly executed.
Investment Securities
Available-for-Sale
Total
investment securities available-for-sale decreased 3% to $1.83 billion as of
June 30, 2008, compared with $1.89 billion at December 31, 2007. Total repayments/maturities and proceeds from
sale of available-for-sale securities amounted to $388.6 million and $376.1
million, respectively, during the six months ended June 30, 2008. Proceeds from repayments, maturities, sales,
and redemptions were applied towards additional investment securities
purchases, funding loan originations, and paying down borrowings. We recorded net gains on sales of
available-for-sale securities totaling $3.4 million during the second quarter
of 2008, compared to $918 thousand during the same period in 2007. For the first half
44
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of 2008, we recorded net gains
on sales of available-for-sale securities totaling $7.8 million, compared with
$2.4 million during the first half of 2007.
We
perform regular impairment analyses on the investment securities
available-for-sale portfolio. If we
determine that a decline in fair value is other-than-temporary, an impairment
writedown is recognized in current earnings.
Other-than-temporary declines in fair value are assessed based on the
duration the security has been in a continuous unrealized loss position, the
severity of the decline in value, the rating of the security and our ability
and intent on holding the securities until the fair values recover.
The fair values of the investment securities are generally determined
by reference to the average of at least two quoted market prices obtained from
independent external brokers or prices obtained from independent external
pricing service providers who have
experience in valuing these securities. In obtaining such valuation information from
third parties, the Company has reviewed the methodologies used to develop the
resulting fair values.
The majority of unrealized losses in the available-for-sale portfolio
at June 30, 2008 are related to AAA-rated private label
mortgage-backed securities that we
have retained in connection with our loan securitization activities. As of June 30, 2008, the fair value of
these securities totaled $555.6 million, representing 30% of our total
investment portfolio. Gross unrealized
losses related to these securities amounted to $103.5 million, or 16% of the
aggregate amortized cost basis of these
securities as of June 30, 2008.
These unrealized losses are caused by lack of liquidity and historically
wide market spreads resulting from instability in the residential real
estate and credit markets. The
underlying loans are not subprime in nature and were originated by the Bank in
accordance with our customary underwriting standards. The securities are
supported by overcollateralization as of June 30, 2008. Additionally, these securities are insured by
a financially sound monoline insurance company and whose credit rating has been
affirmed by a major rating agency.
As
of June 30, 2008, we had $60.1 million in corporate debt securities,
representing 3% of our total investment portfolio. These debt instruments, which represent
pooled trust preferred securities, had gross unrealized losses amounting to
$67.7 million, or 53% of
the
total amortized cost basis of these securities as of June 30, 2008. Almost all of the corporate debt instruments
held by the Company are trust preferred securities issued by banks and
insurance companies. Of the 15 different
corporate debt securities that we have purchased, only four securities were
issued by a combination of bank, insurance, real estate investment trusts or
homebuilder companies. Most of the
corporate debt securities are overcollateralized and have subordination
structures that management believes will afford sufficient principal and
interest protection. One corporate debt
security was downgraded to a B+ rating, from a BBB rating, by one rating agency
shortly before year-end 2007. The
ratings for all other trust preferred securities in our available-for-sale
portfolio have remained at investment grade as of June 30, 2008.
We
also had $44.6 million in preferred stock issued by Fannie Mae and the Federal
Home Loan Mortgage Corporation (Freddie Mac), representing 2% of our total
investment portfolio as of June 30, 2008.
Gross unrealized losses on these securities amounted to $5.7 million as
of June 30, 2008, all of which is unrealized loss under twelve months, or
19% of the aggregate amortized cost basis of these securities. These unrealized losses have resulted from
changes in interest rates, deterioration of the housing market and general
market spreads. As a result of our
periodic reviews for impairment in accordance with SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities,
and
FSP FAS 115-1 and FAS 124-1,
The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
,
we recorded $8.4 million in OTTI charges on certain Fannie Mae and Freddie Mac
preferred securities. Since preferred
securities are perpetual in nature, they are treated similar to equity
45
Table
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securities for purposes of
impairment analysis. All Fannie Mae and
Freddie Mac preferred securities had investment grade ratings at the time of
purchase and they maintained their investment grade status as of June 30,
2008.
We retain residual
securities in securitized mortgage loans in connection with our securitization
activities. The fair value of residual
securities is subject to credit, prepayment, and interest rate risk on the underlying
mortgage loans. Fair value is estimated
based on a discounted cash flow analysis.
These cash flows are projected over the lives of the receivables using
prepayment speed, expected credit losses, and the forward interest rate
environment on the residual securities.
At June 30, 2008, the fair values of the residual securities
totaled $38.1 million based on a weighted average projected prepayment rate of
18%, a weighted average annual expected credit loss rate of 0.06%, and a
weighted average discount rate of 15%.
As of December 31, 2007, the fair values of residual securities
totaled $40.7
million based on a weighted
average projected prepayment rate of 15%, a weighted average annual expected
credit loss rate of 0.05%, and a weighted average discount rate of 11%.
We
also have pooled trust preferred securities with fair values totaling $2.5
million as of June 30, 2008. As a
result of our periodic reviews for impairment in accordance with EITF 99-20,
Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets,
,
we recorded
$1.5 million in impairment charges related to pooled trust preferred
securities.
In
addition to the Fannie Mae and Freddie Mac preferred securities for which we
recorded OTTI writedowns as of June 30, 2008, there were twelve other
individual securities that have been in a continuous unrealized loss position
for twelve months or longer as of June 30, 2008. These securities are comprised of seven
corporate debt securities, four mortgage-backed securities and one agency debt
security. All of these securities had
investment grade ratings upon purchase and various rating agencies have
reaffirmed these securities long-term investment grade status at June 30,
2008. The unrealized losses on these
securities are primarily attributed to changes in interest rates as well as the
liquidity crisis that has impacted all financial industries. The issuers of these securities have not, to
our knowledge, established any cause for default on these securities. These securities have fluctuated in value
since their purchase dates as market interest rates have fluctuated. However, we have the ability and the
intention to hold these securities until their fair values recover to
cost. As such, management does not deem
these securities to be other-than-temporarily impaired.
The following table sets
forth the amortized cost and the estimated fair values of investment securities
available-for-sale as of June 30, 2008 and December 31, 2007:
46
Table
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|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
As of
June 30, 2008
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
2,502
|
|
$
|
1
|
|
$
|
(1
|
)
|
$
|
2,502
|
|
U.S. Government agency securities and U.S.
Government sponsored enterprise debt securities
|
|
919,023
|
|
762
|
|
(9,645
|
)
|
910,140
|
|
U.S. Government sponsored enterprise
mortgage-backed securities
|
|
173,972
|
|
1,384
|
|
(598
|
)
|
174,758
|
|
Other mortgage-backed securities
|
|
704,989
|
|
|
|
(111,983
|
)
|
593,006
|
|
Corporate debt securities
|
|
127,752
|
|
|
|
(67,658
|
)
|
60,094
|
|
U.S. Government sponsored enterprise equity
securities
|
|
50,317
|
|
|
|
(5,726
|
)
|
44,591
|
|
Residual securities
|
|
25,892
|
|
12,181
|
|
|
|
38,073
|
|
Other securities
|
|
5,126
|
|
|
|
(109
|
)
|
5,017
|
|
Total investment securities
available-for-sale
|
|
$
|
2,009,573
|
|
$
|
14,328
|
|
$
|
(195,720
|
)
|
$
|
1,828,181
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2007
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
2,487
|
|
$
|
5
|
|
$
|
|
|
$
|
2,492
|
|
U.S. Government agency securities and U.S.
Government sponsored enterprise debt securities
|
|
427,004
|
|
576
|
|
(1,090
|
)
|
426,490
|
|
U.S. Government sponsored enterprise
mortgage-backed securities
|
|
527,373
|
|
8,257
|
|
(354
|
)
|
535,276
|
|
Other mortgage-backed securities
|
|
750,864
|
|
455
|
|
(70,721
|
)
|
680,598
|
|
Corporate debt securities
|
|
127,420
|
|
1,708
|
|
(9,501
|
)
|
119,627
|
|
U.S. Government sponsored enterprise equity
securities
|
|
83,744
|
|
500
|
|
(9,189
|
)
|
75,055
|
|
Residual securities
|
|
28,332
|
|
12,384
|
|
|
|
40,716
|
|
Other securities
|
|
6,916
|
|
253
|
|
(287
|
)
|
6,882
|
|
Total investment securities
available-for-sale
|
|
$
|
1,954,140
|
|
$
|
24,138
|
|
$
|
(91,142
|
)
|
$
|
1,887,136
|
|
Loans
We offer a broad range of
products designed to meet the credit needs of our borrowers. Our lending activities consist of residential
single family loans, residential multifamily loans, commercial real estate
loans, construction loans, commercial business loans, trade finance loans, and
consumer loans. Total gross loans
decreased $188.7 million, or 2% to $8.66 billion at June 30, 2008,
relative to December 31, 2007.
The following table sets forth the composition of the loan portfolio as
of the dates indicated:
47
Table
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|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Residential, single family
|
|
$
|
474,774
|
|
5.5
|
%
|
$
|
433,337
|
|
4.9
|
%
|
Residential, multifamily
|
|
742,025
|
|
8.6
|
%
|
690,941
|
|
7.8
|
%
|
Commercial and industrial real estate
|
|
4,077,163
|
|
47.1
|
%
|
4,183,473
|
|
47.3
|
%
|
Construction
|
|
1,554,192
|
|
18.0
|
%
|
1,547,082
|
|
17.5
|
%
|
Total real estate loans
|
|
6,848,154
|
|
79.1
|
%
|
6,854,833
|
|
77.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
1,165,655
|
|
13.5
|
%
|
1,314,068
|
|
14.8
|
%
|
Trade finance
|
|
436,969
|
|
5.0
|
%
|
491,690
|
|
5.6
|
%
|
Automobile
|
|
11,916
|
|
0.1
|
%
|
23,946
|
|
0.3
|
%
|
Other consumer
|
|
193,733
|
|
2.2
|
%
|
160,572
|
|
1.8
|
%
|
Total other loans
|
|
1,808,273
|
|
20.9
|
%
|
1,990,276
|
|
22.5
|
%
|
Total gross loans
|
|
8,656,427
|
|
100.0
|
%
|
8,845,109
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Unearned fees, premiums and discounts, net
|
|
(4,890
|
)
|
|
|
(5,781
|
)
|
|
|
Allowance for loan losses
|
|
(168,413
|
)
|
|
|
(88,407
|
)
|
|
|
Loan receivable, net
|
|
$
|
8,483,124
|
|
|
|
$
|
8,750,921
|
|
|
|
Nonperforming
Assets
Nonperforming
assets are comprised of nonaccrual loans, loans past due 90 days or more but
not on nonaccrual, restructured loans, doubtful loans and other real estate
owned, net. Nonperforming assets totaled
$193.1 million or 1.64% of total assets at June 30, 2008 and $67.5 million
or 0.57% of total assets at December 31, 2007. Nonaccrual loans amounted to $170.8 million
at June 30, 2008, compared with $63.9 million at year-end 2007. Loans totaling $148.7 million were placed on
nonaccrual status during the second quarter of 2008. As a part of our comprehensive loan review
during the second quarter of 2008, we identified 20 loans totaling $40.4
million which were not 90 days past due, but were placed on nonaccrual status
due to concerns regarding collateral values and future collectibility. Additions to nonaccrual loans were offset by
$9.2 million in chargeoffs, $930 thousand in payoffs and principal paydowns,
$12.5 million in loans that were transferred to other real estate owned, and
$13.1 million in loans brought current.
The additions to nonaccrual loans during the second quarter of 2008 were
comprised of $6.8 million in single family loans, $3.4 million in multifamily
loans, $88.6 million in commercial real estate loans, $40.5 million in
construction loans, $5.0 million in commercial business loans, $3.0 million in
SBA loans, $1.0 million in trade finance loans, $399 thousand in consumer loans
and $57 thousand in auto loans.
We
had one loan amounting to $71 thousand that was past due 90 days or more but
not placed on nonaccrual status as of June 30, 2008. This loan is guaranteed in full by the
Export-Import Bank of the United States.
There were no loans past due 90 days or more but not on nonaccrual
status at December 31, 2007.
Restructured
loans represent loans that have had their original terms modified. There were $4.7 million in restructured loans
as of June 30, 2008, compared to $2.1 million as of December 31,
2007.
Other
real estate owned includes properties acquired through foreclosure or through
full or partial satisfaction of loans.
We had nine OREO properties at June 30, 2008 with a combined aggregate
48
Table
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carrying value of $17.5
million. Of this amount, 68% is located
in the Greater Los Angeles area, 27% is located in Northern California, and the
remaining 5% is located in the Inland Empire region of Southern
California. In comparison, we had three
OREO properties at December 31, 2007 with a combined aggregate carrying
value of $1.5 million located predominantly in Northern California. We foreclosed on eleven properties with an
aggregate carrying value of $26.7 million as of the foreclosure date during the
first six months of 2008. During the
first half of 2008, we sold five OREO properties with a combined carrying value
of $10.0 million for a total net gain on sale of $71 thousand. During the same period in 2007, we sold one
OREO property with a carrying value of $2.8 million for a net gain on sale of
$1.3 million.
The
following table sets forth information regarding nonaccrual loans, loans past
due 90 days or more but not on nonaccrual, restructured loans and other real
estate owned as of the dates indicated:
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
170,824
|
|
$
|
63,882
|
|
Loans past due 90 days or more but not on
nonaccrual
|
|
71
|
|
|
|
Total nonperforming loans
|
|
170,895
|
|
63,882
|
|
|
|
|
|
|
|
Restructured loans
|
|
4,692
|
|
2,081
|
|
Other real estate owned, net
|
|
17,490
|
|
1,500
|
|
Total nonperforming assets
|
|
$
|
193,077
|
|
$
|
67,463
|
|
|
|
|
|
|
|
Total nonperforming assets to total assets
|
|
1.64
|
%
|
0.57
|
%
|
Allowance for loan losses to nonperforming
loans
|
|
98.59
|
%
|
138.39
|
%
|
Nonperforming loans to total gross loans
|
|
1.97
|
%
|
0.72
|
%
|
We evaluate loan impairment according to the provisions of SFAS
No. 114,
Accounting by Creditors for Impairment of a
Loan
(SFAS 114), as amended.
Under SFAS 114, loans are considered impaired when it is probable that
we will be unable to collect all amounts due according to the contractual terms
of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loans effective
interest rate or, as an expedient, at the loans observable market price or the
fair value of the collateral if the loan is collateral dependent, less costs to
sell. If the measure of the impaired
loan is less than the recorded investment in the loan, the deficiency will be
charged off against the allowance for loan losses, or alternatively, a specific
allocation will be established. Also, in
accordance with SFAS 114, loans that are considered impaired are specifically
excluded from the quarterly migration analysis when determining the amount of
the allowance for loan and lease losses required for the period.
At June 30, 2008, we classified
$213.1
million of our loans as impaired, compared with $123.8
million at December 31, 2007.
Specific reserves on impaired loans amounted to $55.7 million and $16.3
million at June 30, 2008 and December 31, 2007, respectively. Our average recorded investment in impaired
loans for the six months ended June 30, 2008 and 2007 were $234.9 million
and $38.2 million, respectively. During
the six months ended June 30, 2008 and 2007, gross interest income that
would have been recorded on impaired loans, had they performed in accordance
with their original terms,
49
Table of Contents
totaled
$8.8 million and $1.6 million, respectively.
Of this amount, actual interest recognized on impaired loans, on a cash
basis, was $5.4 million and $748 thousand, respectively.
In
light of the credit and mortgage crisis affecting the entire financial industry
and its impact on our borrowers, the Company took a more proactive approach
during the latter part of 2007 and 2008 to assess potential loan impairment in
our overall portfolio. We expanded our
scope to perform focused reviews of certain sectors of our loan portfolio to
identify and mitigate potential losses.
Our recent experience made us aware of the rapid deterioration occurring
in the market in a relatively short period of time. Specifically, we have noted that while our borrowers
may continue to pay as agreed in accordance with their contractual terms and/or
even though loans may not have reached a significant stage of delinquency, the
existence of certain warning signs indicating possible collectibility issues
warranted a more careful scrutiny of these loans for potential impairment. Specifically, we reviewed loans that
exhibited the following characteristics:
·
diminishing or adverse changes in cash flows
that serve as the principal source of repayment;
·
adverse changes in the financial position or
net worth of guarantors or investors;
·
adverse changes in collateral values for
collateral-dependent loans;
·
declining or adverse changes in inventory
levels securing commercial business and trade finance;
·
failure in meeting financial covenants; or
·
other changes or conditions that may
adversely impact the ultimately collectibility of loans.
Although certain loans are not 90 days or more delinquent and therefore
still accruing interest, we have classified them as impaired as of
June 30, 2008 because they exhibit one or more of the characteristics
described above
.
Allowance for Loan Losses
We are committed to maintaining the allowance
for loan losses at a level that is considered to be commensurate with estimated
and known risks in the portfolio. In
addition to regular, quarterly reviews of the appropriateness of the allowance
for loan losses, management performs an ongoing assessment of the risks
inherent in the loan portfolio. While we
believe that the allowance for loan losses is appropriate at June 30,
2008, future additions to the allowance will be subject to a continuing
evaluation of estimated and known, as well as inherent, risks in the loan
portfolio.
The allowance for loan losses is increased by the provision for loan
losses which is charged against current period operating results, and is
increased or decreased by the amount of net recoveries or net chargeoffs,
respectively, during the period. At
June 30, 2008, the allowance for loan losses amounted to $168.4 million,
or 1.95% of total loans, compared with $88.4 million, or 1.00% of total loans,
at December 31, 2007, and $77.3 million, or 0.96% of total loans, at
June 30, 2007. The allowance for
unfunded loan commitments, off-balance sheet credit exposures, and recourse
provisions is included in accrued expenses and other liabilities and amounted
to $11.2 million at June 30, 2008, compared to $11.4 million at
December 31, 2007.
We recorded $85.0 million in loan loss provisions during the second
quarter of 2008 and $140.0 million during the first half of 2008. In comparison, we did not record any loss
provisions for the same periods in 2007.
The significant increase in loss provisions recorded during the second
quarter of 2008 was deemed prudent by management to proactively and
aggressively address asset quality issues brought on by the downturn in the
real estate market and the instability in the overall economy. During the second quarter of 2008, net loan
chargeoffs amounted to $34.8 million, or an annualized 1.59% of
50
Table
of Contents
average
loans outstanding during the quarter.
This compares to net loan chargeoffs of $576 thousand, or an annualized
0.03% of average loans outstanding for the same quarter in 2007. Of the $35.2 million in total gross
chargeoffs recorded for the quarter, 46% or $16.3 million were land loans and
45% or $15.7 million were residential construction loans. During the first six months of 2008, net
chargeoffs amounted to $60.2 million, or 1.36% of average loans outstanding
during the period. This compares to net
chargeoffs of $732 thousand, representing 0.02% of average loans outstanding
during the same period in 2007.
The
following table summarizes activity in the allowance for loan losses for the
three and six months ended June 30, 2008 and 2007:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance balance, beginning of period
|
|
$
|
117,120
|
|
$
|
75,970
|
|
$
|
88,407
|
|
$
|
78,201
|
|
Allowance for unfunded loan commitments and
letters of credit
|
|
1,136
|
|
1,886
|
|
232
|
|
(189
|
)
|
Provision for loan losses
|
|
85,000
|
|
|
|
140,000
|
|
|
|
Chargeoffs:
|
|
|
|
|
|
|
|
|
|
Single family real estate
|
|
634
|
|
|
|
709
|
|
|
|
Multifamily real estate
|
|
436
|
|
|
|
436
|
|
|
|
Commercial and industrial real estate
|
|
16,337
|
|
|
|
21,418
|
|
|
|
Construction
|
|
15,726
|
|
|
|
24,291
|
|
|
|
Commercial business
|
|
1,919
|
|
865
|
|
13,735
|
|
1,045
|
|
Automobile
|
|
134
|
|
|
|
163
|
|
|
|
Other consumer
|
|
23
|
|
|
|
40
|
|
11
|
|
Total chargeoffs
|
|
35,209
|
|
865
|
|
60,792
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Single family real estate
|
|
2
|
|
|
|
2
|
|
|
|
Commercial and industrial real estate
|
|
3
|
|
|
|
6
|
|
|
|
Commercial business
|
|
357
|
|
289
|
|
537
|
|
323
|
|
Automobile
|
|
4
|
|
|
|
21
|
|
1
|
|
Total recoveries
|
|
366
|
|
289
|
|
566
|
|
324
|
|
Net chargeoffs
|
|
34,843
|
|
576
|
|
60,226
|
|
732
|
|
Allowance balance, end of period
|
|
$
|
168,413
|
|
$
|
77,280
|
|
$
|
168,413
|
|
$
|
77,280
|
|
Average loans outstanding
|
|
$
|
8,773,028
|
|
$
|
8,097,386
|
|
$
|
8,864,142
|
|
$
|
8,137,161
|
|
Total gross loans outstanding, end of
period
|
|
$
|
8,656,427
|
|
$
|
8,030,111
|
|
$
|
8,656,427
|
|
$
|
8,030,111
|
|
Annualized net chargeoffs to average loans
|
|
1.59
|
%
|
0.03
|
%
|
1.36
|
%
|
0.02
|
%
|
Allowance for loan losses to total gross
loans, end of period
|
|
1.95
|
%
|
0.96
|
%
|
1.95
|
%
|
0.96
|
%
|
Our methodology to determine
the overall appropriateness of the allowance is based on a classification migration
model and qualitative considerations.
The technique of migration analysis essentially looks at pools of loans
having similar characteristics and analyzes their loss rates over a historical
period. We utilize a loss horizon of
sixteen years to better capture the Banks historical loss trends. This loss horizon represents the timeframe
when the Bank started to monitor and track losses incurred in the loan
portfolio. Since loss rates derived by
the migration model are based predominantly on historical loss trends, they may
not be indicative of the actual or inherent loss potential for loan categories
that have little or no historical losses.
As such, we utilize qualitative and environmental
51
Table of Contents
factors as adjusting mechanisms to supplement
the historical results of the classification migration model.
Qualitative considerations
include, but are not limited to, prevailing economic or market conditions,
relative risk profiles of various loan segments, the strength or deficiency of
the internal control environment, volume concentrations, growth trends,
delinquency and nonaccrual status, problem loan trends, and geographic
concentrations. Qualitative and
environmental factors are reflected as percent adjustments and are added to the
historical loss rates derived from the classified asset migration model to
determine the appropriate allowance amount for each loan category.
In consideration of the
significant growth and increasing diversity and credit risk profiles of loans
in our portfolio over the past several years, our classification migration
model utilizes sixteen risk-rated or heterogeneous loan pool categories and
three homogeneous loan categories. The
loan sectors included in the heterogeneous loan pools are residential single
family, residential multifamily, commercial real estate, construction,
commercial business, trade finance, and automobile loans. With the exception of automobile loans, all
other heterogeneous loan categories have been broken down into additional
subcategories. For example, the
commercial real estate loan category is further segmented into six subcategories
based on industry sector. These
subcategories include retail, office, industrial, land, hotel/motel, and other
special purpose or miscellaneous. By
sectionalizing these broad loan categories into smaller subgroups, we are
better able to isolate and identify the risks associated with each subgroup
based on historical loss trends.
In addition to the sixteen
heterogeneous loan categories, our classification migration model also utilizes
three homogeneous loan categories which encompass predominantly
consumer-related credits. Specifically,
these homogeneous loan categories are home equity lines, overdraft protection
lines, and credit card loans.
The following table reflects
managements allocation of the allowance for loan losses by loan category and
the ratio of each loan category to total loans as of the dates indicated:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
Residential, single family
|
|
$
|
2,247
|
|
5.5
|
%
|
$
|
2,475
|
|
4.9
|
%
|
Residential, multifamily
|
|
4,332
|
|
8.6
|
%
|
4,216
|
|
7.8
|
%
|
Commercial and industrial real estate
|
|
53,173
|
|
47.1
|
%
|
21,072
|
|
47.3
|
%
|
Construction
|
|
57,072
|
|
18.0
|
%
|
19,132
|
|
17.5
|
%
|
Commercial business
|
|
37,825
|
|
13.5
|
%
|
24,188
|
|
14.9
|
%
|
Trade finance
|
|
13,084
|
|
5.0
|
%
|
16,487
|
|
5.5
|
%
|
Automobile
|
|
170
|
|
0.1
|
%
|
242
|
|
0.3
|
%
|
Other consumer
|
|
510
|
|
2.2
|
%
|
595
|
|
1.8
|
%
|
Total
|
|
$
|
168,413
|
|
100.0
|
%
|
$
|
88,407
|
|
100.0
|
%
|
52
Table of Contents
Deposits
Deposits
remained stable during the first half of 2008 increasing 3% to $7.52 billion at
June 30, 2008, from $7.28 billion at December 31, 2007. The net increase in deposits came from time
deposits which rose $316.3 million or 8% and money market accounts which
increased $26.3 million or 2%. These
were offset by decreases in interest-bearing checking accounts of $72.8 million
or 15%, savings accounts of $17.1 million or 4%, and noninterest-bearing demand
deposits of $12.5 million or 1%. Core
deposits, or non-time deposit accounts, amounted to $3.40 billion at
June 30, 2008, representing 45% of total deposits, with time deposits
representing the remaining 55%. In
comparison, our core deposit ratio at year-end 2007 was 48%. Brokered time deposits increased 173% to
$333.2 million at June 30, 2008, compared to $122.0 million at
December 31, 2007.
The
following table sets forth the composition of the deposit portfolio as of the
dates indicated:
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
1,419,183
|
|
$
|
1,431,730
|
|
Interest-bearing checking
|
|
400,174
|
|
472,943
|
|
Money market
|
|
1,117,229
|
|
1,090,949
|
|
Savings
|
|
460,651
|
|
477,779
|
|
Total core deposits
|
|
3,397,237
|
|
3,473,401
|
|
Time deposits:
|
|
|
|
|
|
Less than $100,000
|
|
979,810
|
|
926,459
|
|
$100,000 or greater
|
|
3,141,955
|
|
2,879,054
|
|
Total time deposits
|
|
4,121,765
|
|
3,805,513
|
|
Total deposits
|
|
$
|
7,519,002
|
|
$
|
7,278,914
|
|
Borrowings
We utilize a combination of short-term and long-term borrowings to
manage our liquidity position. Federal
funds purchased generally mature within one business day to six months from the
transaction date. At June 30, 2008,
federal funds purchased declined 61% to $86.1 million, as compared to $222.3
million at December 31, 2007. FHLB
advances declined 15% to $1.54 billion as of June 30, 2008, compared to
$1.81 billion at December 31, 2007.
The decrease in federal funds purchased and FHLB advances is part of our
overall strategy to deleverage our balance sheet. During the first half of 2008, a portion of
the proceeds from the maturities and sales of investment securities were used
to pay down our borrowings. On
March 12, 2008, we paid off an FHLB advance totaling $50.0 million which
had an original maturity date of April 21, 2008. In accordance with Accounting Principles
Bulletin No. 18,
Early Extinguishment of
Debt
, we recorded the penalty amount of $149 thousand as an adjustment
to interest expense. As of June 30,
2008, we had no overnight FHLB advances, compared to $350.0 million as of
December 31, 2007. We entered into
three new FHLB advances totaling $250.0 million during the first half of
2008. The maturity terms of these
advances are less than 3 years with fixed interest rates ranging from 3.11% to
3.68%. FHLB advances totaling $115.0
million matured during the first half of 2008.
53
Table
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In
addition to federal funds purchased and FHLB advances, we also utilize
securities sold under repurchase agreements (repurchase agreements) to manage
our liquidity position. Long-term repurchase
agreements remained at $995.0 million at June 30, 2008 and
December 31, 2007. Repurchase
agreements are accounted for as collateralized financing transactions and
recorded at the amounts at which the securities were sold. The collateral for these agreements consist
of U.S. Government agency and U.S. Government sponsored enterprise debt and
mortgage-backed securities. All of these
repurchase agreements have a term of ten years.
The rates are generally initially floating rate for a period of time
ranging from six months to three years, with the floating interest rates
ranging from the three-month Libor minus 80 basis points to the three-month
Libor minus 340 basis points.
Thereafter, the rates are fixed for the remainder of the term, with
fixed interest rates ranging from 4.29% to 5.13%. The counterparty has the right to either a
one-time call or a quarterly call when the rates change from floating to fixed,
for each of the repurchase agreements.
As
of June 30, 2008, the Company also had $5.8 million in overnight
repurchase agreements with customers with interest rates ranging from 1.50% to
1.75%.
Long-term Debt
Long-term debt
remained at $235.6 million at June 30, 2008 and December 31,
2007. Long-term debt is comprised of
subordinated debt which qualifies as Tier II capital and junior subordinated
debt issued in connection with our various trust preferred securities offerings
which qualify as Tier I capital for regulatory reporting purposes.
Off-Balance Sheet Arrangements and
Aggregate Contractual Obligations
The following table
presents, as of June 30, 2008, our significant fixed and determinable
contractual obligations, within the categories described below, by payment
date. The payment amounts represent the
amounts and interest contractually due to the recipient.
|
|
Payment Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
After
|
|
Indeterminate
|
|
|
|
Contractual Obligations
|
|
1 year
|
|
1-3 years
|
|
3-5 years
|
|
5 years
|
|
Maturity
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,074,552
|
|
$
|
116,105
|
|
$
|
40,514
|
|
$
|
13,445
|
|
$
|
3,523,467
|
|
$
|
7,768,083
|
|
Federal funds purchased
|
|
86,264
|
|
|
|
|
|
|
|
|
|
86,264
|
|
FHLB advances
|
|
430,396
|
|
1,149,209
|
|
55,724
|
|
3,257
|
|
|
|
1,638,586
|
|
Securities sold under repurchase agreements
|
|
51,989
|
|
92,354
|
|
92,354
|
|
1,136,997
|
|
|
|
1,373,694
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
13,533
|
|
13,533
|
|
Long-term debt obligations
|
|
11,640
|
|
23,280
|
|
23,280
|
|
424,190
|
|
|
|
482,390
|
|
Operating lease obligations
|
|
11,297
|
|
21,556
|
|
21,603
|
|
70,910
|
|
|
|
125,366
|
|
Unrecognized tax benefits
|
|
|
|
|
|
|
|
|
|
768
|
|
768
|
|
Postretirement benefit payments
|
|
|
|
4,144
|
|
12,888
|
|
2,316
|
|
|
|
19,348
|
|
Total contractual obligations
|
|
$
|
4,666,138
|
|
$
|
1,406,648
|
|
$
|
246,363
|
|
$
|
1,651,115
|
|
$
|
3,537,768
|
|
$
|
11,508,032
|
|
As
a financial service provider, we routinely enter into commitments to extend
credit to customers, such as loan commitments, commercial letters of credit for
foreign and domestic trade, standby letters of credit, and financial
guarantees. Many of these commitments to
extend credit may expire without being drawn upon. The same credit policies are used in
extending these commitments as
54
Table of Contents
in
extending loan facilities to customers.
A schedule of significant commitments to extend credit to customers as
of June 30, 2008 is as follows:
|
|
Commitments
|
|
|
|
Outstanding
|
|
|
|
(In thousands)
|
|
Undisbursed loan commitments
|
|
$
|
2,127,512
|
|
Standby letters of credit
|
|
533,287
|
|
Commercial letters of credit
|
|
68,913
|
|
|
|
|
|
|
Capital Resources
One
of our primary sources of capital is the retention of net after tax
earnings. At June 30, 2008,
stockholders equity totaled $1.27 billion, a 9% increase from $1.17 billion as
of December 31, 2007. The increase
is comprised of the following: (1) issuance of Series A convertible
preferred stock, net of stock issuance costs, totaling $194.1 million,
representing 200,000 shares; (2) stock compensation costs amounting to $3.0
million related to grants of restricted stock and stock options; (3) tax
benefits of $141 thousand resulting from the exercise of nonqualified stock
options; (4) net issuance of common stock totaling $1.5 million,
representing 367,146 shares, pursuant to various stock plans and agreements;
and (5) a purchase accounting adjustment pursuant to the DCB acquisition
of $2.3 million. These transactions were
offset by (1) net loss of $20.8 million recorded during the first half of
2008; (2) $66.3 million in net unrealized losses on available-for-sale
securities; (3) a change in accounting principle pursuant to the adoption
of EITF 06-4 amounting to $479 thousand; (4) tax provision of $370
thousand resulting from the vesting of restricted stock; (5) purchase of treasury
shares related to vested restricted stock amounting to $8 thousand,
representing 410 shares; and (6) payment of quarterly cash dividends
totaling $12.7 million for the first half of 2008.
We raised $194.1 million in additional capital, net of underwriting
discounts, commissions and offering expenses, during April 2008 through
the issuance of 200,000 shares of non-cumulative, perpetual convertible
preferred stock. The proceeds from this
offering were used to reduce our borrowings, enhance our liquidity position,
and boost our already strong capital levels.
As of June 30, 2008, our total risk-based capital ratio is 13.01%
or $317.4 million more than the 10.00% regulatory requirement for
well-capitalized banks. Our Tier 1
risk-based capital ratio of 11.04% and our Tier 1 leverage ratio of 10.01% as
of June 30, 2008 exceeded the regulatory guidelines for well-capitalized
banks.
For a further discussion on this preferred
stock offering, see Note 9 to the Companys condensed consolidated financial
statements presented elsewhere in this report.
We
are subject to risk-based capital regulations adopted by the federal banking
regulators in January 1990. These
guidelines are used to evaluate capital adequacy and are based on an
institutions asset risk profile and off-balance sheet exposures. According to the regulations, institutions
whose Tier 1 and total capital ratios meet or exceed 6% and 10%, respectively,
are deemed to be well-capitalized. At
June 30, 2008, the Banks Tier 1 and total capital ratios were 10.8% and
12.8%, respectively, compared to 8.8% and 10.3%, respectively, at
December 31, 2007.
The following table compares East West
Bancorp, Inc.s and East West Banks actual capital ratios at
June 30, 2008, to those required by regulatory agencies for capital
adequacy and well-capitalized classification purposes:
55
Table of Contents
|
|
|
|
|
|
Minimum
|
|
Well
|
|
|
|
East West
|
|
East West
|
|
Regulatory
|
|
Capitalized
|
|
|
|
Bancorp
|
|
Bank
|
|
Requirements
|
|
Requirements
|
|
Total Capital (to Risk-Weighted Assets)
|
|
13.0
|
%
|
12.8
|
%
|
8.0
|
%
|
10.0
|
%
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
11.0
|
%
|
10.8
|
%
|
4.0
|
%
|
6.0
|
%
|
Tier 1 Capital (to Average Assets)
|
|
10.0
|
%
|
9.8
|
%
|
4.0
|
%
|
5.0
|
%
|
ASSET
LIABILITY AND MARKET RISK MANAGEMENT
Liquidity
Liquidity
management involves our ability to meet cash flow requirements arising from
fluctuations in deposit levels and demands of daily operations, which include
funding of securities purchases, providing for customers credit needs and
ongoing repayment of borrowings. Our
liquidity is actively managed on a daily basis and reviewed periodically by the
Asset/Liability Committee and the Board of Directors. This process is intended to ensure the
maintenance of sufficient funds to meet our liquidity needs, including adequate
cash flow for off-balance sheet instruments.
Our
primary sources of liquidity are derived from financing activities which
include the acceptance of customer and broker deposits, federal funds
facilities, repurchase agreement facilities, advances from the Federal Home
Loan Bank of San Francisco, and issuances of long-term debt. These funding sources are augmented by payments
of principal and interest on loans, the routine liquidation of securities from
the available-for-sale portfolio and sales of eligible loans. Primary uses of funds include withdrawal of
and interest payments on deposits, originations and purchases of loans,
purchases of investment securities, and payment of operating expenses.
During
the first half of 2008, we experienced net cash inflows from operating
activities of $102.7 million, compared to net cash inflows of $60.9 million for
the first six months of 2007. For the
first six months of 2007, net cash inflows from operating activities are due
primarily to net income earned during the period.
Net
cash inflows from investing activities totaled $146.2 million for the first
half of 2008 compared with net inflows from investing activities of $21.0
million for the first half 2007. Net
cash inflows from investing activities for the first half of 2008 were due
primarily to proceeds from the sale of investment securities and loans, the
early termination of a resale agreement, and repayments, maturities and
redemptions of investment securities.
These factors were partially offset by the growth in our loan portfolio
and purchases of investment securities and other assets. For the six months ended June 30, 2007,
net cash inflows from investing activities can be attributed primarily to
repayments, maturities, redemptions and net sale proceeds from
available-for-sale securities partially offset by net loan growth and purchases
of investment securities and resale agreements.
We
experienced net cash inflows from financing activities of $14.8 million for the
first half of 2008, primarily due to the net increase in deposits as well as
net proceeds received from the issuance of convertible preferred stock. These factors were partially offset by
repayment of federal funds purchased, FHLB advances and dividends paid on our
common stock for the first half of 2008.
During the same period in 2007, we experienced net cash outflows from
financing activities of $83.9 million primarily due to the net decrease in
deposits, purchased of treasury shares in connection with our Board authorized
stock repurchase program, and dividends paid on our common stock for the first
half of 2007.
56
Table
of Contents
As
a means of augmenting our liquidity sources, we have available a combination of
borrowing sources comprised of the Federal Reserve Banks discount window, FHLB
advances, federal funds lines with various correspondent banks, and several
master repurchase agreements with major brokerage companies. We believe our liquidity sources to be stable
and adequate to meet our day-to-day cash flow requirements. At June 30, 2008, we are not aware of
any information that was reasonably likely to have a material adverse effect on
our liquidity position.
The
liquidity of East West Bancorp, Inc. is primarily dependent on the payment
of cash dividends by its subsidiary, East West Bank, subject to limitations
imposed by the Financial Code of the State of California. For the six months ended June 30, 2008
and 2007, total dividends paid by East West Bank to East West
Bancorp, Inc. amounted to $12.7 million and $44.2 million
respectively. The large dividend payment
by the Bank to the Company during the first half of 2007 was primarily due to
the purchase of treasury shares totaling $45.8 million in connection with the
Board authorized stock repurchase program announced during the first quarter of
2007. There were no treasury share
repurchases pursuant to the Board authorized stock repurchase program during
the six months ended June 30, 2008.
As of June 30, 2008, approximately $208.3 million of undivided
profits of East West Bank were available for dividends to East West
Bancorp, Inc.
Interest Rate Sensitivity Management
Our
success is largely dependent upon our ability to manage interest rate risk,
which is the impact of adverse fluctuations in interest rates on our net
interest income and net portfolio value.
Although in the normal course of business we manage other risks, such as
credit and liquidity risk, we consider interest rate risk to be our most
significant market risk and could potentially have the largest material effect
on our financial condition and results of operations.
The fundamental objective of
the asset liability management process is to manage our exposure to interest
rate fluctuations on earnings while maintaining adequate levels of liquidity
and capital. Our strategy is formulated
by the Asset/Liability Committee, which coordinates with the Board of Directors
to monitor our overall asset and liability composition. The Committee meets regularly to evaluate,
among other things, the sensitivity of our assets and liabilities to interest
rate changes, the book and market values of assets and liabilities, unrealized
gains and losses on the available-for-sale portfolio (including those
attributable to hedging transactions, if any), purchase and securitization
activity, and maturities of investment securities and borrowings.
Our overall strategy is to
minimize the adverse impact of immediate incremental changes in market interest
rates (rate shock) on net interest income and net portfolio value. Net portfolio value is defined as the present
value of assets minus the present value of liabilities. The attainment of this goal requires a
balance between profitability, liquidity and interest rate risk exposure. To minimize the adverse impact of changes in
market interest rates, we simulate the effect of instantaneous interest rate
changes on net interest income and net portfolio value on a quarterly
basis. The table below shows the
estimated impact of changes in interest rates on our net interest income and market
value of equity as of June 30, 2008 and December 31, 2007, assuming a
parallel shift of 100 to 200 basis points in both directions:
57
Table
of Contents
|
|
Net Interest Income
|
|
Net Portfolio Value
|
|
|
|
Volatility (1)
|
|
Volatility (2)
|
|
Change in Interest Rates
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
|
(Basis Points)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
+200
|
|
14.3
|
%
|
9.1
|
%
|
5.4
|
%
|
5.3
|
%
|
+100
|
|
7.5
|
%
|
5.8
|
%
|
2.7
|
%
|
5.4
|
%
|
-100
|
|
(7.8
|
)%
|
(5.7
|
)%
|
(3.1
|
)%
|
(6.2
|
)%
|
-200
|
|
(15.4
|
)%
|
(11.0
|
)%
|
(7.4
|
)%
|
(11.9
|
)%
|
(1)
|
|
The percentage change represents net interest income for twelve
months in a stable interest rate environment versus net interest income in
the various rate scenarios.
|
(2)
|
|
The percentage change represents net portfolio value of the Bank in a
stable interest rate environment versus net portfolio value in the various
rate scenarios.
|
All interest-earning assets, interest-bearing
liabilities and related derivative contracts are included in the interest rate
sensitivity analysis at June 30, 2008 and December 31, 2007.
Our primary
analytical tool to gauge interest rate sensitivity is a simulation model used
by many major banks and bank regulators, and is based on the actual maturity
and repricing characteristics of interest-rate sensitive assets and
liabilities. The model attempts to
predict changes in the yields earned on assets and the rates paid on
liabilities in relation to changes in market interest rates. As an enhancement to the primary simulation
model, prepayment assumptions and market rates of interest provided by
independent broker/dealer quotations, an independent pricing model and other
available public sources are incorporated into the model. Adjustments are made to reflect the shift in
the Treasury and other appropriate yield curves. The model also factors in projections of
anticipated activity levels by product line and takes into account our
increased ability to control rates offered on deposit products in comparison to
our ability to control rates on adjustable-rate loans tied to the published
indices.
The following table provides the outstanding principal balances and the
weighted average interest rates of our financial instruments as of
June 30, 2008. The information
presented below is based on the repricing date for variable rate instruments
and the expected maturity date for fixed rate instruments.
58
Table of Contents
Expected Maturity or Repricing Date by Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Thereafter
|
|
Total
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CD investments
|
|
$
|
495
|
|
|
|
|
|
|
|
|
|
|
|
$
|
495
|
|
$
|
498
|
|
Weighted average
rate
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term
investments
|
|
$
|
273,837
|
|
|
|
|
|
|
|
|
|
|
|
$
|
273,837
|
|
$
|
273,837
|
|
Weighted average
rate
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
purchased under resale agreements
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
$
|
52,940
|
|
Weighted average
rate
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale (fixed rate)
|
|
$
|
477,806
|
|
|
|
$
|
375
|
|
|
|
$
|
76,279
|
|
$
|
572,360
|
|
$
|
1,126,820
|
|
$
|
1,108,094
|
|
Weighted average
rate
|
|
2.18
|
%
|
|
|
8.54
|
%
|
|
|
4.36
|
%
|
6.55
|
%
|
4.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale (variable rate) (1)
|
|
$
|
867,717
|
|
$
|
4,749
|
|
$
|
1,914
|
|
$
|
1,640
|
|
$
|
1,496
|
|
$
|
5,237
|
|
$
|
882,753
|
|
$
|
720,087
|
|
Weighted average
rate
|
|
4.00
|
%
|
5.07
|
%
|
5.23
|
%
|
5.18
|
%
|
5.18
|
%
|
5.18
|
%
|
4.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
$
|
6,518,178
|
|
$
|
1,015,248
|
|
$
|
559,407
|
|
$
|
222,856
|
|
$
|
139,492
|
|
$
|
201,246
|
|
$
|
8,656,427
|
|
$
|
8,692,312
|
|
Weighted average
rate
|
|
5.92
|
%
|
6.75
|
%
|
6.99
|
%
|
7.15
|
%
|
6.97
|
%
|
5.88
|
%
|
6.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
400,174
|
|
|
|
|
|
|
|
|
|
|
|
$
|
400,174
|
|
$
|
307,126
|
|
Weighted average
rate
|
|
0.65
|
%
|
|
|
|
|
|
|
|
|
|
|
0.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
accounts
|
|
$
|
1,117,229
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,117,229
|
|
$
|
1,048,289
|
|
Weighted average
rate
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
460,651
|
|
|
|
|
|
|
|
|
|
|
|
$
|
460,651
|
|
$
|
357,681
|
|
Weighted average
rate
|
|
0.80
|
%
|
|
|
|
|
|
|
|
|
|
|
0.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
3,982,638
|
|
$
|
94,918
|
|
$
|
10,741
|
|
$
|
7,505
|
|
$
|
25,908
|
|
$
|
55
|
|
$
|
4,121,765
|
|
$
|
4,129,476
|
|
Weighted average
rate
|
|
3.27
|
%
|
3.70
|
%
|
4.51
|
%
|
5.00
|
%
|
4.06
|
%
|
2.17
|
%
|
3.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds
purchased
|
|
$
|
86,149
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86,149
|
|
$
|
86,149
|
|
Weighted average
rate
|
|
2.01
|
%
|
|
|
|
|
|
|
|
|
|
|
2.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB term advances
(fixed rate)
|
|
$
|
370,389
|
|
$
|
905,000
|
|
$
|
210,000
|
|
$
|
55,000
|
|
|
|
$
|
3,000
|
|
$
|
1,543,389
|
|
$
|
1,564,973
|
|
Weighted average
rate
|
|
4.68
|
%
|
4.34
|
%
|
4.15
|
%
|
5.21
|
%
|
|
|
4.44
|
%
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold
under repurchase agreements
|
|
$
|
70,000
|
|
|
|
|
|
|
|
|
|
$
|
925,000
|
|
$
|
995,000
|
|
$
|
1,146,558
|
|
Weighted average
rate
|
|
2.01
|
%
|
|
|
|
|
|
|
|
|
4.84
|
%
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
repurchase agreements
|
|
$
|
5,812
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,812
|
|
$
|
5,812
|
|
Weighted average
rate
|
|
1.67
|
%
|
|
|
|
|
|
|
|
|
|
|
1.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,000
|
|
$
|
59,894
|
|
Weighted average
rate (variable rate)
|
|
4.04
|
%
|
|
|
|
|
|
|
|
|
|
|
4.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated debt (fixed rate)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,392
|
|
$
|
21,392
|
|
$
|
21,938
|
|
Weighted average
rate
|
|
|
|
|
|
|
|
|
|
|
|
10.91
|
%
|
10.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated debt (variable rate)
|
|
$
|
139,178
|
|
|
|
|
|
|
|
|
|
|
|
$
|
139,178
|
|
$
|
82,166
|
|
Weighted average
rate
|
|
4.51
|
%
|
|
|
|
|
|
|
|
|
|
|
4.51
|
%
|
|
|
(1) Includes
hybrid securities that have fixed interest rates for the first three or five
years. Thereafter, interest rates become
adjustable based on a predetermined index.
Expected maturities of assets are contractual maturities adjusted for
projected payment based on contractual amortization and unscheduled prepayments
of principal as well as repricing frequency.
Expected maturities for deposits are based on contractual maturities
adjusted for projected rollover rates and changes in pricing for deposits with
no stated
maturity
dates. We utilize assumptions supported by
documented analyses for the expected maturities of our loans and repricing of
our deposits. We also use prepayment
projections for amortizing securities.
The actual maturities of these instruments could vary
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significantly if future prepayments and repricing frequencies differ
from our expectations based on historical experience.
The fair values of short-term investments
approximate their book values due to their short maturities. For securities purchased under resale
agreements, fair values are calculated by discounting future cash flows based
on expected maturities or repricing dates utilizing estimated market discount
rates. The fair values of the investment
securities are generally determined by reference to the average of at least two
quoted market prices obtained from independent external brokers or prices
obtained from independent external pricing service providers who have
experience in valuing these securities.
In obtaining such valuation information from third parties, the Company
has reviewed the methodologies used to develop the resulting fair values. The fair value of loans is determined based
on the discounted cash flow approach.
The discount rate is derived from the associated yield curve plus
spreads, and reflects the offering rates in the market for loans with similar
financial characteristics.
The fair value of deposits
is determined based on the discounted cash flow approach. The discount rate is derived from the
associated yield curve, plus spread, if any.
For core deposits, the cash outflows are projected by the decay rate based
on the Banks core deposit premium study.
Cash flows for all non-time deposits are discounted using the LIBOR
yield curve. For time deposits, the cash
flows are based on the contractual runoff and are discounted by the Banks
current offering rates, plus spread. For
federal funds purchased, fair value approximates book value due to their short
maturities. The fair value of FHLB term
advances is estimated by discounting the cash flows through maturity or the
next repricing date based on current rates offered by the FHLB for borrowings
with similar maturities. Customer
repurchase agreements, which have maturities ranging from one to three days,
are presumed to have equal book and fair values because the interests rates
paid on these instruments are based on prevailing market rates. The fair values of securities sold under
repurchase agreements are calculated by discounting future cash flows based on
expected maturities or repricing dates, utilizing estimated market discount
rates and taking into consideration the call features of each instrument. For both subordinated and junior subordinated
debt instruments, fair values are estimated by discounting cash flows through
maturity based on current market rates the Bank would pay for new issuances.
The
Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist in the management of interest
rate risk. We sometimes use derivative
financial instruments as part of our asset and liability management strategy,
with the overall goal of minimizing the impact of interest rate fluctuations on
our net interest margin and stockholders equity. The use of derivatives has not had a material
effect on our operating results or financial position.
In August and
November 2004, we entered into four equity swap agreements to hedge
against market fluctuations in a promotional equity index certificate of
deposit product that we offered to Bank customers for a limited time during the
latter half of 2004. This product, which
has a term of 5 1/2 years, pays interest based on the performance of the
HSCEI. The combined notional amounts of
the equity swap agreements total $24.6 million with termination dates similar
to the stated maturity date on the underlying certificate of deposit host
contracts. For the equity swap
agreements, we agreed to pay interest based on the one-month Libor minus a
spread on a monthly basis and receive any increase in the HSCEI at swap
termination date. Under SFAS
No. 133,
Accounting for Derivative Instruments and
Hedging Activities
, a certificate of deposit that pays interest
based on changes in an equity index is a hybrid instrument with an embedded
derivative (i.e. equity call option) that must be accounted for separately from
the host contract (i.e. the certificate of deposit). In accordance with SFAS No. 133, both
the embedded equity call options on the certificates of deposit and the
freestanding equity swap agreements are marked-to-market every month with
resulting changes in fair value recorded in the consolidated statements of
income
.
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On April 1, 2005, the
Company amended the four equity swap agreements entered into in 2004
effectively removing the swap payable leg.
The amendments to the swap agreements changed the terms of the
agreements such that instead of paying interest based on the one-month Libor
minus a spread on a monthly basis for the remaining terms of the agreements, we
prepaid this amount based on the current market value of the cash streams. The total amount paid in conjunction with
these swap agreement amendments was $4.2 million on April 1, 2005.
In
December 2007, the Company entered into two additional equity swap
agreements to hedge against market fluctuations in a promotional equity index
certificate of deposit product offered to bank customers. This product, which has a term of 5 years,
also pays interest based on the performance of the HSCEI similar to the
previous index certificate offering in 2004.
The combined notional amounts of these new equity swap agreements
totaled $24.1 million and have termination dates similar to the stated
maturities of the underlying certificate of deposit host contracts. On December 3, 2007, we prepaid $4.5
million for the option cost based on the current market value of the cash
streams.
The
fair values of both the embedded derivatives and equity swap agreements for
these six derivative contracts amounted to $17.8 million as of June 30,
2008, compared to $28.3 million as of December 31, 2007. The decrease in the fair value of the
derivative contracts since December 31, 2007 can be attributed primarily
to a 26% decline in the index value as of June 30, 2008 relative to
year-end 2007.
The
embedded derivatives are included in interest-bearing deposits and the equity
swap agreements are included in other assets on the consolidated balance
sheets. The fair value of the derivative
contracts is determined based on the change in value of the HSCEI and the volatility
of the call option over the life of the individual swap agreement. The option value is derived based on the
volatility, the interest rate and the time remaining to maturity of the call
option.
ITEM 3: QUANTITATIVE AND
QUALITATIVE DISCLOSURES OF MARKET RISKS
For quantitative and qualitative
disclosures regarding market risks in our portfolio, see, Managements
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations Asset Liability and Market Risk Management.
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures
As of June 30, 2008, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e) and
15d-15(e). Based upon that evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective as of June 30, 2008. There have been no changes in our internal
control over financial reporting during the quarter ended June 30, 2008
that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
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Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. Our
disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us
in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We
are not involved in any material legal proceedings. Our subsidiary, East West Bank, from time to
time is party to litigation that arises in the ordinary course of business,
such as claims to enforce liens, claims involving the origination and servicing
of loans, and other issues related to the business of the Bank. In the opinion of our management, in
consultation with legal counsel, the resolution of any such issues would not
have a material adverse impact on our financial position, results of
operations, or liquidity.
ITEM 1A. RISK FACTORS
The
Companys 2007 Form 10-K contains disclosure regarding the risks and
uncertainties related to the Companys business under the heading Item A. Risk
Factors. The information presented below updates and should be read in
conjunction with the risk factors and information disclosed in the 2007
Form 10-K. Other than as set forth
below, there are no material changes to our risk factors as presented
in the Companys 2007 Form 10-K.
We may be required to make
additional provisions for loan losses and charge off additional loans in the
future, which could adversely affect our results of operations.
During the first half of 2008, we recorded a $140.0 million provision
for loan losses and charged off $60.2 million, net of $566 thousand in
recoveries. Of the total chargeoff amount recorded during the six months ended
June 30, 2008, $10.0 million was related to a single commercial loan and
$45.7 million were related to residential construction and land loans. There has been a general slowdown in the
housing market in portions of Los Angeles, Riverside, San Bernardino and Orange
counties where a majority of our loan customers are based. This slowdown reflects declining prices and
excess inventories of homes to be sold, which has contributed to financial
strain on homebuilders and suppliers. As of June 30, 2008, we had $5.63
billion in commercial real estate, land and construction loans. Continuing deterioration in the real estate
market generally and in the residential building segment in particular could
result in additional loan charge offs and provisions for loan losses in the
future, which could have an adverse effect on our net income and capital.
We may experience additional
goodwill impairment.
If our estimates of goodwill fair value
change due to changes in our businesses or other factors, we may determine that
additional impairment charges are necessary.
Estimates of fair value are determined based on a complex model using
cash flows and company comparisons. If
managements estimates of future cash flows are inaccurate, the fair value
determined could be inaccurate and impairment may not be recognized in a timely
manner.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
There
were no unregistered sales of equity securities during the three months ended
June 30, 2008. The following summarizes share repurchase activities during
the second quarter of 2008:
|
|
|
|
|
|
Total Number
|
|
Approximate Dollar
|
|
|
|
Total
|
|
|
|
of Shares
|
|
Value in Millions of Shares
|
|
|
|
Number
|
|
Average
|
|
Purchased as
|
|
that May Yet Be
|
|
|
|
of Shares
|
|
Price Paid
|
|
Part of Publicly
|
|
Purchased Under
|
|
Month Ended
|
|
Purchased (1)
|
|
per Share
|
|
Announced Programs
|
|
the Programs (2)
|
|
April 30, 2008
|
|
|
|
$
|
|
|
|
|
|
|
May 31, 2008
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
|
|
|
|
$
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes 65,971 in repurchased shares
totaling $2.1 million due to forfeitures and vesting of restricted stock awards
pursuant to the Companys 1998 Stock Incentive Plan.
(2) During the first quarter of 2007, the
Companys Board of Directors announced a repurchase program authorizing the
repurchase of up to $80.0 million of its common stock. This repurchase program has no expiration
date and, to date, 1,392,176 shares totaling $53.8 million have been purchased
under this program.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
Not
applicable.
ITEM 4. SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders of East West
Bancorp, Inc. was held on May 29, 2008 for the purpose of
(1) electing three directors to serve until the 2011 Annual Meeting,
provided that, if proposal No. 2 was adopted, to elect three directors for
terms expiring in 2009, (2) approving the proposal to amend the Companys
Certificate of Incorporation to eliminate the provisions for the classification
of the Companys Board of Directors and thereby provide that each person
elected a Director at the Meeting and subsequent annual Stockholders meeting
will be elected a term of one year, (3) approving the Companys 1998 Stock
Incentive Plan, as amended, and (4) ratifying the appointment of
Deloitte & Touche LLP as the Companys independent auditors. Holders of 53,050,198 of the 64,032,378
outstanding shares as of the record date voted in the annual meeting in person
or by proxy.
The
combined votes cast to approve Dominic Ng, Rudolph Estrada, and Herman Li as
the three directors elected to serve until the next Annual Meeting are as
follows:
|
|
Number of Votes Cast
|
|
In Favor
|
|
52,552,393
|
|
Oppose
|
|
497,805
|
|
Abstain
|
|
|
|
Broker Non-Votes
|
|
10,982,180
|
|
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Other
directors whose terms of office continued after the meeting were Peggy Cherng,
Julia Gouw, Andrew Kane, John Lee, Jack Liu, and Keith Renken. As a result of declassification of the Board,
all directors are now serving for terms that expire at the 2009 Annual Meeting.
The
votes cast to approve the Companys Performance-Based Bonus Plan, as amended
are as follows:
|
|
Number of Votes Cast
|
|
In Favor
|
|
51,012,259
|
|
Oppose
|
|
1,704,131
|
|
Abstain
|
|
333,808
|
|
Broker Non-Votes
|
|
10,982,180
|
|
The
votes cast to approve Section 6, as amended, of the Companys 1998 Stock
Incentive Plan are as follows:
|
|
Number of Votes Cast
|
|
In Favor
|
|
40,513,111
|
|
Oppose
|
|
5,641,677
|
|
Abstain
|
|
291,401
|
|
Broker Non-Votes
|
|
17,586,189
|
|
The
votes cast to ratify Deloitte & Touche LLP as the Companys
independent auditors are as follows:
|
|
Number of Votes Cast
|
|
In Favor
|
|
52,114,660
|
|
Oppose
|
|
882,508
|
|
Abstain
|
|
53,030
|
|
Broker Non-Votes
|
|
10,982,180
|
|
ITEM 5. OTHER INFORMATION
Not
applicable.
ITEM 6. EXHIBITS
(i)
Exhibit 3.1
|
|
Amendment
to Certificate of Incorporation
|
|
|
|
(ii)
Exhibit 3.2
|
|
Certificate
of Designations with respect to the Companys 8.0% Non-Cumulative Perpetual
Convertible Preferred Stock, Series A
|
|
|
|
(iii)
Exhibit 10.7
|
|
1998
Stock Incentive Plan (As Amended) (Incorporated by reference to Exhibit C to
the Companys definitive proxy statement filed on April 24, 2008).
|
|
|
|
(iv) Exhibit 31.1
|
|
Chief
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
(v) Exhibit 31.2
|
|
Chief
Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
(vi) Exhibit 32.1
|
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(vii) Exhibit 32.2
|
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
All other material referenced in this report which is required to be
filed as an exhibit hereto has previously been submitted.
64
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated: August 8, 2008
|
EAST WEST BANCORP, INC.
|
|
|
|
|
|
By:
|
/s/
Thomas J. Tolda
|
|
THOMAS
J. TOLDA
Executive Vice President and
Chief Financial Officer
|
65
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