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 September 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: 63,667,222 shares of common stock as of October 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)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
527,474
|
|
$
|
160,347
|
|
Short-term
investments
|
|
495
|
|
|
|
Securities
purchased under resale agreements
|
|
50,000
|
|
150,000
|
|
Investment
securities available-for-sale, at fair value (with amortized cost of $2,172,519
in 2008 and $1,954,140 in 2007)
|
|
2,047,244
|
|
1,887,136
|
|
Loans
receivable, net of allowance for loan losses of $177,155 at
September 30, 2008 and $88,407 at December 31, 2007
|
|
8,111,231
|
|
8,750,921
|
|
Investment in
Federal Home Loan Bank stock, at cost
|
|
86,153
|
|
84,976
|
|
Investment in
Federal Reserve Bank stock, at cost
|
|
27,589
|
|
21,685
|
|
Other real
estate owned, net
|
|
17,607
|
|
1,500
|
|
Investment in
affordable housing partnerships
|
|
41,819
|
|
44,206
|
|
Premises and
equipment, net
|
|
61,674
|
|
64,943
|
|
Due from
customers on acceptances
|
|
8,123
|
|
15,941
|
|
Premiums on
deposits acquired, net
|
|
22,314
|
|
28,459
|
|
Goodwill
|
|
337,331
|
|
335,366
|
|
Cash surrender
value of life insurance policies
|
|
93,836
|
|
88,658
|
|
Deferred tax
assets
|
|
175,591
|
|
66,410
|
|
Accrued interest
receivable and other assets
|
|
113,835
|
|
151,664
|
|
TOTAL
|
|
$
|
11,722,316
|
|
$
|
11,852,212
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Customer deposit
accounts:
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
1,393,480
|
|
$
|
1,431,730
|
|
Interest-bearing
|
|
6,142,869
|
|
5,847,184
|
|
Total customer
deposits
|
|
7,536,349
|
|
7,278,914
|
|
|
|
|
|
|
|
Federal funds
purchased
|
|
30,443
|
|
222,275
|
|
Federal Home
Loan Bank advances
|
|
1,538,350
|
|
1,808,419
|
|
Securities sold
under repurchase agreements
|
|
999,467
|
|
1,001,955
|
|
Notes payable
|
|
12,150
|
|
16,242
|
|
Long-term debt
|
|
235,570
|
|
235,570
|
|
Bank acceptances
outstanding
|
|
8,123
|
|
15,941
|
|
Accrued interest
payable, accrued expenses and other liabilities
|
|
96,983
|
|
101,073
|
|
Total
liabilities
|
|
10,457,435
|
|
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 200,000 shares in Series A, convertible preferred stock in 2008
and none in 2007
Outstanding 197,400 shares in 2008 and none in 2007
|
|
|
|
|
|
Common stock
(par value of $0.001 per share)
Authorized 200,000,000 shares
Issued 70,223,189 shares in 2008 and 69,634,811 shares in 2007
Outstanding 63,623,131 shares in 2008 and 63,137,221 shares in 2007
|
|
70
|
|
70
|
|
Additional paid
in capital
|
|
858,020
|
|
652,297
|
|
Retained
earnings
|
|
581,561
|
|
657,183
|
|
Treasury stock,
at cost 6,600,058 shares in 2008 and 6,497,590 shares in 2007
|
|
(102,171
|
)
|
(98,925
|
)
|
Accumulated
other comprehensive loss, net of tax
|
|
(72,599
|
)
|
(38,802
|
)
|
Total
stockholders equity
|
|
1,264,881
|
|
1,171,823
|
|
TOTAL
|
|
$
|
11,722,316
|
|
$
|
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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
INTEREST
AND DIVIDEND INCOME
|
|
|
|
|
|
|
|
|
|
Loans
receivable, including fees
|
|
$
|
131,682
|
|
$
|
167,066
|
|
$
|
425,113
|
|
$
|
484,073
|
|
Investment
securities available-for-sale
|
|
23,143
|
|
26,235
|
|
75,923
|
|
72,505
|
|
Securities
purchased under resale agreements
|
|
1,277
|
|
4,013
|
|
5,094
|
|
11,742
|
|
Investment in
Federal Home Loan Bank stock
|
|
1,390
|
|
828
|
|
4,153
|
|
2,457
|
|
Short-term
investments
|
|
1,957
|
|
347
|
|
3,546
|
|
564
|
|
Investment in
Federal Reserve Bank stock
|
|
413
|
|
279
|
|
1,122
|
|
818
|
|
Total interest
and dividend income
|
|
159,862
|
|
198,768
|
|
514,951
|
|
572,159
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
Customer deposit
accounts
|
|
40,757
|
|
62,058
|
|
136,546
|
|
182,144
|
|
Federal Home
Loan Bank advances
|
|
17,140
|
|
16,175
|
|
54,363
|
|
43,555
|
|
Securities sold
under repurchase agreements
|
|
12,063
|
|
10,263
|
|
33,881
|
|
27,675
|
|
Long-term debt
|
|
2,957
|
|
4,101
|
|
9,675
|
|
11,235
|
|
Federal funds
purchased
|
|
430
|
|
2,317
|
|
2,176
|
|
6,164
|
|
Total interest
expense
|
|
73,347
|
|
94,914
|
|
236,641
|
|
270,773
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME BEFORE PROVISION FOR LOAN LOSSES
|
|
86,515
|
|
103,854
|
|
278,310
|
|
301,386
|
|
PROVISION FOR
LOAN LOSSES
|
|
43,000
|
|
3,000
|
|
183,000
|
|
3,000
|
|
NET INTEREST
INCOME AFTER PROVISION FOR LOAN LOSSES
|
|
43,515
|
|
100,854
|
|
95,310
|
|
298,386
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
(LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
Impairment
writedown on investment securities
|
|
(53,567
|
)
|
(405
|
)
|
(63,512
|
)
|
(405
|
)
|
Branch fees
|
|
4,285
|
|
3,836
|
|
12,725
|
|
10,667
|
|
Net gain on sale
of investment securities available-for-sale
|
|
|
|
2,772
|
|
7,767
|
|
5,218
|
|
Letters of
credit fees and commissions
|
|
2,319
|
|
2,702
|
|
7,472
|
|
7,688
|
|
Ancillary loan
fees
|
|
1,783
|
|
1,397
|
|
3,908
|
|
4,164
|
|
Income from life
insurance policies
|
|
1,029
|
|
1,132
|
|
3,081
|
|
3,164
|
|
Net gain on sale
of loans
|
|
144
|
|
272
|
|
2,272
|
|
1,296
|
|
Net gain on
disposal of fixed assets
|
|
44
|
|
1,261
|
|
221
|
|
1,573
|
|
Other operating
income
|
|
413
|
|
621
|
|
1,867
|
|
2,176
|
|
Total
noninterest (loss) income
|
|
(43,550
|
)
|
13,588
|
|
(24,199
|
)
|
35,541
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
Compensation and
employee benefits
|
|
17,520
|
|
22,081
|
|
66,578
|
|
63,511
|
|
Occupancy and
equipment expense
|
|
6,817
|
|
6,656
|
|
20,364
|
|
18,583
|
|
Amortization and
impairment writedowns of premiums on deposits acquired
|
|
1,581
|
|
1,767
|
|
6,145
|
|
4,824
|
|
Loan related
expense
|
|
2,361
|
|
708
|
|
5,967
|
|
1,937
|
|
Amortization of
investments in affordable housing partnerships
|
|
1,886
|
|
1,017
|
|
5,521
|
|
3,521
|
|
Deposit
insurance premiums and regulatory assessments
|
|
1,678
|
|
350
|
|
5,191
|
|
1,021
|
|
Legal expense
|
|
855
|
|
653
|
|
3,890
|
|
1,258
|
|
Consulting
expense
|
|
1,254
|
|
992
|
|
3,788
|
|
2,337
|
|
Other real
estate owned expense (income)
|
|
2,123
|
|
|
|
3,520
|
|
(1,247
|
)
|
Deposit-related
expenses
|
|
1,231
|
|
1,687
|
|
3,416
|
|
5,236
|
|
Data processing
|
|
1,055
|
|
1,351
|
|
3,386
|
|
3,403
|
|
Impairment
writedown on goodwill
|
|
272
|
|
|
|
858
|
|
|
|
Other operating
expenses
|
|
9,893
|
|
9,476
|
|
28,447
|
|
26,591
|
|
Total
noninterest expense
|
|
48,526
|
|
46,738
|
|
157,071
|
|
130,975
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME
BEFORE (BENEFIT) PROVISION FOR INCOME TAXES
|
|
(48,561
|
)
|
67,704
|
|
(85,960
|
)
|
202,952
|
|
(BENEFIT)
PROVISION FOR INCOME TAXES
|
|
(17,355
|
)
|
26,368
|
|
(33,911
|
)
|
79,030
|
|
NET
(LOSS) INCOME
|
|
(31,206
|
)
|
41,336
|
|
(52,049
|
)
|
123,922
|
|
PREFERRED STOCK
DIVIDENDS
|
|
4,089
|
|
|
|
4,089
|
|
|
|
NET
(LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
(35,295
|
)
|
$
|
41,336
|
|
$
|
(56,138
|
)
|
$
|
123,922
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
(0.56
|
)
|
$
|
0.68
|
|
$
|
(0.90
|
)
|
$
|
2.04
|
|
DILUTED
|
|
$
|
(0.56
|
)
|
$
|
0.67
|
|
$
|
(0.90
|
)
|
$
|
2.01
|
|
DIVIDENDS
DECLARED PER COMMON SHARE
|
|
$
|
0.10
|
|
$
|
0.10
|
|
$
|
0.30
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
62,675
|
|
61,232
|
|
62,586
|
|
60,754
|
|
DILUTED
|
|
62,675
|
|
62,088
|
|
62,586
|
|
61,712
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
Total
|
|
|
|
Preferred
|
|
Common
|
|
Paid In
|
|
Retained
|
|
Treasury
|
|
Loss,
|
|
Comprehensive
|
|
Stockholders
|
|
|
|
Stock
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Net of Tax
|
|
Income (Loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JANUARY 1, 2007
|
|
$
|
|
|
$
|
66
|
|
$
|
544,469
|
|
$
|
525,247
|
|
$
|
(40,305
|
)
|
$
|
(10,087
|
)
|
|
|
$
|
1,019,390
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for
the period
|
|
|
|
|
|
|
|
123,922
|
|
|
|
|
|
$
|
123,922
|
|
123,922
|
|
Net unrealized
loss on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
(895
|
)
|
(895
|
)
|
(895
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123,027
|
|
|
|
Cumulative effect
of change in accounting principle pursuant to adoption of FIN 48
|
|
|
|
|
|
|
|
(4,628
|
)
|
|
|
|
|
|
|
(4,628
|
)
|
Stock compensation
costs
|
|
|
|
|
|
4,891
|
|
|
|
|
|
|
|
|
|
4,891
|
|
Tax benefit from
stock option exercises
|
|
|
|
|
|
7,177
|
|
|
|
|
|
|
|
|
|
7,177
|
|
Tax benefit from
vested restricted stock
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
192
|
|
Issuance of
947,388 shares pursuant to various stock plans and agreements
|
|
|
|
1
|
|
10,056
|
|
|
|
|
|
|
|
|
|
10,057
|
|
Issuance of 5,880
shares pursuant to Director retainer fee
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
219
|
|
Issuance of
2,032,816 shares pursuant to Desert Community Bank acquisition
|
|
|
|
2
|
|
78,484
|
|
|
|
|
|
|
|
|
|
78,486
|
|
Cancellation of
71,001 shares due to forfeitures of issued restricted stock
|
|
|
|
|
|
2,591
|
|
|
|
(2,591
|
)
|
|
|
|
|
|
|
Purchase of
22,267 shares of treasury stock due to the vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
(814
|
)
|
|
|
|
|
(814
|
)
|
Purchase of
1,375,000 shares of treasury stock pursuant to the Stock Repurchase Program
|
|
|
|
|
|
|
|
|
|
(53,142
|
)
|
|
|
|
|
(53,142
|
)
|
Dividends paid on
common stock
|
|
|
|
|
|
|
|
(18,300
|
)
|
|
|
|
|
|
|
(18,300
|
)
|
BALANCE,
SEPTEMBER 30, 2007
|
|
$
|
|
|
$
|
69
|
|
$
|
648,079
|
|
$
|
626,241
|
|
$
|
(96,852
|
)
|
$
|
(10,982
|
)
|
|
|
$
|
1,166,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JANUARY 1, 2008
|
|
$
|
|
|
$
|
70
|
|
$
|
652,297
|
|
$
|
657,183
|
|
$
|
(98,925
|
)
|
$
|
(38,802
|
)
|
|
|
$
|
1,171,823
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the
period
|
|
|
|
|
|
|
|
(52,049
|
)
|
|
|
|
|
$
|
(52,049
|
)
|
(52,049
|
)
|
Net unrealized
loss on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
(33,797
|
)
|
(33,797
|
)
|
(33,797
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(85,846
|
)
|
|
|
Cumulative effect
of change in accounting principle pursuant to adoption of EITF 06-4
|
|
|
|
|
|
|
|
(479
|
)
|
|
|
|
|
|
|
(479
|
)
|
Stock
compensation costs
|
|
|
|
|
|
4,515
|
|
|
|
|
|
|
|
|
|
4,515
|
|
Tax benefit from
stock option exercises
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
159
|
|
Tax provision
from vested restricted stock
|
|
|
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
(397
|
)
|
Issuance of
200,000 shares Series A convertible preferred stock, net of stock
issuance costs
|
|
|
|
|
|
194,068
|
|
|
|
|
|
|
|
|
|
194,068
|
|
Conversion of
2,600 shares of Preferred Stock
|
|
|
|
|
|
(2,523
|
)
|
|
|
|
|
|
|
|
|
(2,523
|
)
|
Issuance of
168,983 shares of Common Stock from converted 2,600 shares of Preferred Stock
|
|
|
|
|
|
2,523
|
|
|
|
|
|
|
|
|
|
2,523
|
|
Issuance of
400,834 shares pursuant to various stock plans and agreements
|
|
|
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
1,623
|
|
Issuance of
18,361 shares pursuant to Director retainer fee
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
219
|
|
Cancellation of
102,058 shares due to forfeitures of issued restricted stock
|
|
|
|
|
|
3,238
|
|
|
|
(3,238
|
)
|
|
|
|
|
|
|
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
preferred stock
|
|
|
|
|
|
|
|
(4,089
|
)
|
|
|
|
|
|
|
(4,089
|
)
|
Dividends paid on
common stock
|
|
|
|
|
|
|
|
(19,005
|
)
|
|
|
|
|
|
|
(19,005
|
)
|
BALANCE,
SEPTEMBER 30, 2008
|
|
$
|
|
|
$
|
70
|
|
$
|
858,020
|
|
$
|
581,561
|
|
$
|
(102,171
|
)
|
$
|
(72,599
|
)
|
|
|
$
|
1,264,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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 $(47,887) in 2008 and $1,544 in 2007
|
|
$
|
(66,129
|
)
|
$
|
2,131
|
|
Less:
Reclassification adjustment for loss (gain) included in net income, net of
tax (benefit) expense of $(23,413) in 2008 and $2,192 in 2007
|
|
32,332
|
|
(3,026
|
)
|
Net unrealized
loss on securities, net of tax benefit of $24,474 in 2008 and $648 in 2007
|
|
$
|
(33,797
|
)
|
$
|
(895
|
)
|
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)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net (loss)
income
|
|
$
|
(52,049
|
)
|
$
|
123,922
|
|
Adjustments to
reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
12,754
|
|
9,915
|
|
Impairment writedown
on goodwill
|
|
858
|
|
|
|
Impairment
writedown of investment securities
|
|
63,512
|
|
405
|
|
Stock
compensation costs
|
|
4,515
|
|
4,891
|
|
Deferred tax
benefit
|
|
(78,929
|
)
|
(15,531
|
)
|
Provision for
loan losses
|
|
183,000
|
|
3,000
|
|
Provision for
loss on other real estate owned
|
|
2,121
|
|
|
|
Net gain on
sales of investment securities, loans and other assets
|
|
(8,570
|
)
|
(8,725
|
)
|
Federal Home
Loan Bank stock dividends
|
|
(3,777
|
)
|
(2,691
|
)
|
Originations of
loans held for sale
|
|
(42,100
|
)
|
(29,796
|
)
|
Proceeds from
sale of loans held for sale
|
|
42,458
|
|
29,806
|
|
Tax benefit from
stock options exercised
|
|
(159
|
)
|
(7,177
|
)
|
Tax provision
(benefit) from vested restricted stock
|
|
397
|
|
(192
|
)
|
Net change in
accrued interest receivable and other assets
|
|
25,755
|
|
32,583
|
|
Net change in
accrued interest payable, accrued expenses and other liabilities
|
|
(5,485
|
)
|
20,319
|
|
Total
adjustments
|
|
196,350
|
|
36,807
|
|
Net cash
provided by operating activities
|
|
144,301
|
|
160,729
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Net loan decrease
(increase)
|
|
265,375
|
|
(964,301
|
)
|
Purchases of:
|
|
|
|
|
|
Short term
investments
|
|
(495
|
)
|
|
|
Securities
purchased under resale agreements
|
|
|
|
(150,000
|
)
|
Investment
securities available-for-sale
|
|
(1,657,219
|
)
|
(646,750
|
)
|
Federal Home
Loan Bank stock
|
|
(9,400
|
)
|
(23,163
|
)
|
Federal Reserve
Bank stock
|
|
(5,904
|
)
|
(600
|
)
|
Premises and
equipment
|
|
(3,173
|
)
|
(10,812
|
)
|
Proceeds from
sale of:
|
|
|
|
|
|
Investment
securities available-for-sale
|
|
376,148
|
|
423,738
|
|
Securities
purchased under resale agreements
|
|
100,000
|
|
100,000
|
|
Loans receivable
|
|
148,254
|
|
19,612
|
|
Real estate
owned
|
|
28,084
|
|
4,130
|
|
Premises and
equipment
|
|
85
|
|
6,710
|
|
Maturity of
interest-bearing deposits in other banks
|
|
|
|
1,205
|
|
Repayments,
maturity and redemption of investment securities available-for-sale
|
|
1,011,854
|
|
971,971
|
|
Redemption of
Federal Home Loan Bank stock
|
|
12,000
|
|
31,767
|
|
Acquisitions,
net of cash acquired
|
|
(1,158
|
)
|
(7,341
|
)
|
Net cash
provided by (used in) investing activities
|
|
264,451
|
|
(243,834
|
)
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net increase
(decrease) in deposits
|
|
257,435
|
|
(263,508
|
)
|
Net (decrease)
increase in federal funds purchased
|
|
(191,832
|
)
|
14,910
|
|
Net (decrease)
increase in Federal Home Loan Bank advances
|
|
(270,000
|
)
|
291,500
|
|
(Repayment)
purchases of of securities sold under repurchase agreements
|
|
(2,488
|
)
|
25,837
|
|
Repayment of
notes payable on affordable housing investments
|
|
(7,091
|
)
|
(6,081
|
)
|
Proceeds from
issuance of long-term debt
|
|
|
|
50,000
|
|
Proceeds from
issuance of common stock pursuant to various stock plans and agreements
|
|
1,623
|
|
10,057
|
|
Proceeds from
issuance of convertible preferred stock, net of stock issuance costs
|
|
194,068
|
|
|
|
Tax benefit from
stock options exercised
|
|
159
|
|
7,177
|
|
Tax (provision)
benefit from vested restricted stock
|
|
(397
|
)
|
192
|
|
Dividends paid
on preferred stock and common stock
|
|
(23,094
|
)
|
(18,300
|
)
|
Purchase of
treasury shares pursuant to stock repurchase program and vesting of
restricted stock
|
|
(8
|
)
|
(53,956
|
)
|
Net cash (used
in) provided by financing activities
|
|
(41,625
|
)
|
57,828
|
|
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
367,127
|
|
(25,277
|
)
|
CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD
|
|
160,347
|
|
192,559
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
|
$
|
527,474
|
|
$
|
167,282
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash paid during
the period for:
|
|
|
|
|
|
Interest
|
|
$
|
231,717
|
|
$
|
273,217
|
|
Income tax
payments, net of refunds
|
|
39,743
|
|
86,605
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
Real estate acquired
through foreclosure
|
|
46,614
|
|
622
|
|
Affordable
housing investment financed through notes payable
|
|
3,000
|
|
9,613
|
|
Purchase
accounting adjustment in connection with acquisition
|
|
2,298
|
|
|
|
Issuance of
common stock in lieu of Board of Director retainer fees
|
|
219
|
|
219
|
|
Guaranteed
mortgage loan securitizations
|
|
|
|
1,067,309
|
|
Issuance of
common stock in connection with acquisition
|
|
|
|
78,486
|
|
Equity interests
in East West Capital Trusts
|
|
|
|
1,547
|
|
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
Nine Months Ended September 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. 46(R),
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 nine months
ended September 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 nine 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) from the caption Noninterest Income to Noninterest
Expense in order to present all OREO activity in a single line item. As a result, $1.3 million for the three and
nine months ended September 30, 2007, previously included under the
caption Noninterest Income was reclassified to OREO expense (income), which is
a component of Noninterest Expense.
Additionally, during the third quarter of 2008, the Company reclassified
impairment writedowns on investment securities from the caption Noninterest
Expense to Noninterest Income. As a
result, $9.9 million and $405 thousand in other-than-temporary impairment (OTTI)
charges recorded during the first six months of 2008 and first nine months
ended 2007, respectively, were reclassified from the caption Noninterest
Expense to Noninterest Income.
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
8
Table of Contents
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.
In
September 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 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. 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 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
9
Table of Contents
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
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
10
Table of Contents
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 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.
In
October 2008, the FASB issued FSP SFAS 157-3,
Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active
. FSP SFAS 157 157-3
clarified the application of SFAS 157 in an inactive market. It demonstrated how the fair value of a
financial asset is determined when the market for that financial asset is
inactive. FSP SFAS 157-3 was effective
upon issuance, including prior periods for which financial statements had not
been issued as of September 30, 2008.
The adoption of this guidance did not have a material effect on the
Companys financial condition, results of operations, or cash flows.
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.
11
Table of Contents
·
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,
U.S. Government sponsored enterprise preferred stock securities, trust
preferred securities, and equity swap agreements.
·
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 includes mortgage servicing assets, impaired loans, private
label mortgage-backed securities, retained residual interests in
securitizations, pooled trust preferred securities, and derivatives payable.
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 balance sheets at their
fair values as of September 30, 2008.
As required by SFAS 157, financial assets and liabilities 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 September 30, 2008
|
|
|
|
Fair Value Measurements
September 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)
|
|
$
|
2,047,244
|
|
$
|
5,083
|
|
$
|
1,349,070
|
|
$
|
693,091
|
|
Equity Swap
Agreements
|
|
14,979
|
|
|
|
14,979
|
|
|
|
Derivatives
Payable
|
|
(15,093
|
)
|
|
|
|
|
(15,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Non-Recurring Basis as of September 30, 2008
|
|
|
|
Fair Value Measurements
September 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
|
|
$
|
18,782
|
|
$
|
|
|
$
|
|
|
$
|
18,782
|
|
Impaired Loans
|
|
174,864
|
|
|
|
|
|
174,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine
months ended September 30, 2008:
12
Table
of Contents
|
|
Investment
Securities
Available for
Sale
|
|
Mortgage
Servicing
Assets
|
|
Impaired
Loans
|
|
Derivatives
Payable
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, July 1, 2008
|
|
$
|
607,484
|
|
$
|
19,391
|
|
$
|
157,461
|
|
$
|
|
|
Total gains or
losses (1)
|
|
|
|
|
|
|
|
|
|
Included in
earnings (realized)
|
|
952
|
|
(667
|
)
|
22,821
|
|
|
|
Included in
other comprehensive loss (unrealized) (2)
|
|
31,340
|
|
|
|
|
|
|
|
Purchases,
issuances, sales, settlements (3)
|
|
(27,469
|
)
|
58
|
|
|
|
|
|
Transfers in
and/or out of Level 3 (4)
|
|
80,784
|
|
|
|
(5,418
|
)
|
(15,093
|
)
|
Ending balance
September 30, 2008
|
|
$
|
693,091
|
|
$
|
18,782
|
|
$
|
174,864
|
|
$
|
(15,093
|
)
|
Changes in
unrealized losses included in earnings relating to assets and liabilities
still held at September 30, 2008 (4)
|
|
$
|
(6,618
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
Investment
Securities
Available for
Sale
|
|
Mortgage
Servicing
Assets
|
|
Impaired
Loans
|
|
Derivatives
Payable
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2008
|
|
$
|
700,434
|
|
$
|
21,558
|
|
$
|
107,544
|
|
$
|
|
|
Total gains or
losses (1)
|
|
|
|
|
|
|
|
|
|
Included in
earnings (realized)
|
|
4,423
|
|
(3,699
|
)
|
(16,587
|
)
|
|
|
Included in
other comprehensive loss (unrealized) (2)
|
|
(4,625
|
)
|
|
|
|
|
|
|
Purchases,
issuances, sales, settlements (3)
|
|
(87,925
|
)
|
923
|
|
|
|
|
|
Transfers in
and/or out of Level 3 (4)
|
|
80,784
|
|
|
|
83,907
|
|
(15,093
|
|
Ending balance
September 30, 2008
|
|
$
|
693,091
|
|
$
|
18,782
|
|
$
|
174,864
|
|
$
|
(15,093
|
|
Changes in
unrealized losses included in earnings relating to assets and liabilities
still held at September 30, 2008 (4)
|
|
$
|
(8,192
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
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 operations.
2)
Unrealized
gains or losses on investment securities are reported in accumulated other
comprehensive 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 obtained from independent external brokers or prices
obtained from independent external pricing service
13
Table
of Contents
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
Companys Level 3 available-for-sale securities include private label
mortgage-backed securities, pooled trust preferred debt and equity securities,
and residual securities that have been retained by the Company in connection
with the private label loan securitization activities. The fair values of private label
mortgage-backed securities and pooled trust preferred securities have
traditionally been based on the average of at least two quoted market prices
obtained from independent external brokers since broker quotes in an active
market are given the highest priority under SFAS 157. However, as a result of the global financial
crisis and illiquidity in the U.S. markets, it is the Companys view that
current broker prices on private label mortgage-backed securities and certain
pooled trust preferred securities are based on forced liquidation or distressed
sale values in very inactive markets that are not representative of the
economic value of these securities. In
light of these circumstances, the Company has amended its approach to obtaining
the current values of these securities. The
Company examines the facts and circumstances of each security to determine
appropriate combination of the market approach reflecting current broker prices
and a discounted cash flow approach. In
order to determine the appropriate discount rate for the calculation of the
fair value derived from the income approach, we have made assumptions related
to the implied rate of return which have been adjusted for general change in
market rates, estimated changes in credit quality and liquidity risk premium,
specific non-performance and default experience in the collateral underlying
the security, as well as broker discount rates.
The values resulting from each approach (i.e. market and income
approaches) are weighted to derive the final fair value on each private label
mortgage-backed and pooled trust preferred security.
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 Companys
consideration of its counterpartys credit risk resulted in a $547 thousand
adjustment to the valuation of the equity swap agreements. 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
consolidated balance sheets. The fair
value of these embedded derivatives is based on the income approach.
The Companys consideration of its own credit risk resulted in a $433
thousand adjustment to the valuation of the derivative liabilities, and a
net loss of $114 thousand was recognized in noninterest expense as the net
difference between the valuation of the equity swap agreements and derivatives
payable for the quarter ended September 30, 2008.
The
14
Table
of Contents
valuation
of the derivatives payable falls within Level 3 of the fair value hierarchy
since the significant inputs used in deriving the fair value of these
derivative contracts are not directly observable.
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 valuation information received, which may be adjusted based on
factors such as the Companys historical knowledge and changes in market
conditions from the time of valuation.
As of September 30, 2008, the impaired loan balance, net of the
specific reserve, was $174.9 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 nine months ended September 30, 2008, total compensation
cost recognized in the consolidated statements of operations related to stock
options and restricted stock awards amounted to $1.5 million and $4.5 million,
respectively, with related tax benefits of $630 thousand and $1.9 million,
respectively. During the three and nine
months ended September 30, 2007, total compensation cost recognized in the
consolidated statements of operations related to stock options and restricted
stock awards amounted to $1.7 million and $4.9 million, respectively, with
related tax benefits of $731 thousand and $2.1 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
15
Table
of Contents
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 nine
months ended September 30, 2008 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
(In thousands) (1)
|
|
Outstanding at
beginning of period
|
|
2,099,120
|
|
$
|
21.71
|
|
|
|
|
|
Granted
|
|
721,499
|
|
18.71
|
|
|
|
|
|
Exercised
|
|
(59,298
|
)
|
10.15
|
|
|
|
|
|
Forfeited
|
|
(106,518
|
)
|
32.39
|
|
|
|
|
|
Outstanding at
end of period
|
|
2,654,803
|
|
$
|
20.73
|
|
3.57 years
|
|
$
|
1,094
|
|
Vested or
expected to vest
|
|
2,581,949
|
|
$
|
20.60
|
|
3.51 years
|
|
$
|
1,091
|
|
Exercisable at
end of period
|
|
1,592,401
|
|
$
|
17.68
|
|
2.03 years
|
|
$
|
1,062
|
|
(1) The
aggregate intrinsic value excludes shares of 1,859,563 weighted average options
outstanding as of and for the nine months ended September 30, 2008, for
which the exercise price exceeded the average market price of the Companys
common stock during these periods.
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
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Expected term
(1)
|
|
|
(5)
|
4 years
|
|
4 years
|
|
4 years
|
|
Expected
volatility (2)
|
|
|
(5)
|
23.8
|
%
|
27.9
|
%
|
24.1
|
%
|
Expected
dividend yield (3)
|
|
|
(5)
|
1.1
|
%
|
1.2
|
%
|
1.1
|
%
|
Risk-free
interest rate (4)
|
|
|
(5)
|
4.0
|
%
|
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.
(5)
The Company did not issue
any stock options during the third quarter of 2008.
During the three and nine months ended September 30,
2008 and 2007, information related to stock options is presented as follows:
16
Table
of Contents
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
fair value of stock options granted during the period
|
|
$
|
|
(1)
|
$
|
8.13
|
|
$
|
4.27
|
|
$
|
9.20
|
|
Total intrinsic
value of options exercised (in thousands)
|
|
$
|
43
|
|
$
|
2,630
|
|
$
|
380
|
|
$
|
17,070
|
|
Total fair value
of options vested (in thousands)
|
|
$
|
103
|
|
$
|
66
|
|
$
|
1,325
|
|
$
|
734
|
|
(1
)
The Company did not issue any stock options
during the third quarter of 2008.
As of September 30, 2008, total unrecognized
compensation cost related to stock options amounted to $4.2 million. The cost is expected to be recognized over a
weighted average period of 3.4 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 September 30, 2008,
including changes during the nine months then ended, is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
Price
|
|
Outstanding at
beginning of period
|
|
683,336
|
|
$
|
34.48
|
|
Granted
|
|
277,608
|
|
19.66
|
|
Vested
|
|
(49,891
|
)
|
36.18
|
|
Forfeited
|
|
(102,058
|
)
|
31.71
|
|
Outstanding at
end of period
|
|
808,995
|
|
$
|
29.64
|
|
The weighted average fair values of restricted stock
awards granted during the nine months ended September 30, 2008 and 2007
were $19.66 and $38.45, respectively.
As of September 30, 2008, total unrecognized
compensation cost related to restricted stock awards amounted to $13.6
million. This cost is expected to be
recognized over a weighted average period of 2.8 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,
17
Table
of Contents
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 140,767 shares as of September 30, 2008.
5.
INVESTMENTS
AVAILABLE-FOR-SALE
In September 2008,
sustained liquidity and credit concerns led the U.S. Federal Government to
assume a conservatorship role in Federal National Mortgage Association (Fannie
Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) and to cease
the payment of dividends on these government-sponsored entities preferred and
common stock. These developments have
further adversely impacted the ratings and fair values of Fannie Mae and
Freddie Mac preferred stock. 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 $47.0 million in other-than-temporary impairment (OTTI)
charges on these preferred stock securities during the third quarter of
2008. Total impairment charges recorded
on Fannie Mae and Freddie Mac preferred stock amounted to $55.3 million for the
nine months ended September 30, 2008.
As of September 30, 2008, the total fair value of Fannie Mae and
Freddie Mac preferred securities have been reduced to $3.3 million.
During the third quarter of
2008, the Company also recorded impairment charges on certain pooled trust
preferred debt and equity securities amounting to $6.6 million in accordance
with the provisions of SFAS 115, FSP FAS 115-1 and FAS 124-1, and EITF 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets
. For the nine months ended September 30,
2008, total impairment charges recorded on pooled trust preferred debt and
equity securities amounted to $8.2 million.
6.
GOODWILL
AND OTHER INTANGIBLE ASSETS
The
carrying amount of goodwill amounted to $337.3 million and $335.4 million at September 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 third quarter of 2008, both the U.S. and global financial markets continued
to experience volatility and the effect of such volatility continued to
unfavorably impact the market prices of banking stocks, including the Companys. As of September 30, 2008, the Companys
market capitalization based on total outstanding common and preferred
shares was $1.05 billion and its total stockholders equity was $1.26
billion. As a result, the Company
performed an impairment analysis as of September 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 there was further
deterioration in the fair value of the Companys insurance agency reporting
unit, East West Insurance Services, Inc.
The Company
18
Table
of Contents
recorded
additional goodwill impairment of $272 thousand as a charge to earnings during
the third quarter of 2008. This amount
represents the remaining goodwill balance for this reporting unit. Total goodwill impairment charges recorded
for East West Insurance Services, Inc. amounted to $858 thousand for the
nine months ended September 30, 2008.
These impairment charges 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 nine months 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 $19.9 million
and $18.5 million, respectively, at September 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.
19
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
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
balance, beginning of period
|
|
$
|
168,413
|
|
$
|
77,280
|
|
$
|
88,407
|
|
$
|
78,201
|
|
Allowance from
acquisition
|
|
|
|
4,125
|
|
|
|
4,125
|
|
Allowance for
unfunded loan commitments and letters of credit
|
|
5,437
|
|
1,013
|
|
5,669
|
|
824
|
|
Provision for
loan losses
|
|
43,000
|
|
3,000
|
|
183,000
|
|
3,000
|
|
Chargeoffs:
|
|
|
|
|
|
|
|
|
|
Single family
real estate
|
|
1,023
|
|
|
|
1,732
|
|
|
|
Multifamily real
estate
|
|
1,006
|
|
|
|
1,442
|
|
|
|
Commercial and
industrial real estate
|
|
21,690
|
|
|
|
43,108
|
|
|
|
Construction
|
|
16,138
|
|
516
|
|
40,429
|
|
516
|
|
Commercial
business
|
|
4,401
|
|
392
|
|
18,136
|
|
1,437
|
|
Automobile
|
|
63
|
|
1
|
|
226
|
|
1
|
|
Other consumer
|
|
34
|
|
|
|
74
|
|
11
|
|
Total chargeoffs
|
|
44,355
|
|
909
|
|
105,147
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Single family
real estate
|
|
1
|
|
|
|
3
|
|
|
|
Commercial and
industrial real estate
|
|
1,899
|
|
18
|
|
1,905
|
|
18
|
|
Construction
|
|
2,581
|
|
|
|
2,581
|
|
|
|
Commercial
business
|
|
177
|
|
25
|
|
714
|
|
348
|
|
Automobile
|
|
2
|
|
13
|
|
23
|
|
14
|
|
Total recoveries
|
|
4,660
|
|
56
|
|
5,226
|
|
380
|
|
Net chargeoffs
|
|
39,695
|
|
853
|
|
99,921
|
|
1,585
|
|
Allowance
balance, end of period
|
|
$
|
177,155
|
|
$
|
84,565
|
|
$
|
177,155
|
|
$
|
84,565
|
|
Average loans
outstanding
|
|
$
|
8,451,517
|
|
$
|
8,433,268
|
|
$
|
8,725,596
|
|
$
|
8,236,948
|
|
Total gross
loans outstanding, end of period
|
|
$
|
8,289,433
|
|
$
|
8,558,314
|
|
$
|
8,289,433
|
|
$
|
8,558,314
|
|
Annualized net
chargeoffs to average loans
|
|
1.88
|
%
|
0.04
|
%
|
1.53
|
%
|
0.03
|
%
|
Allowance for
loan losses to total gross loans, end of period
|
|
2.14
|
%
|
0.99
|
%
|
2.14
|
%
|
0.99
|
%
|
At September 30, 2008, the allowance for loan losses amounted to
$177.2 million, or 2.14% of total loans, compared with $88.4 million, or 1.00%
of total loans, at December 31, 2007, and $84.6 million, or 0.99% of total
loans, at September 30, 2007. The
increase in the allowance for loan losses is primarily due to the $183.0
million in provisions for loan losses recorded during the nine months ended September 30,
2008. In comparison, $3.0 million in
loss provisions were recorded during same period in 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 loan portfolio during the second and third
quarters 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, residential construction, and
commercial 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
loan loss provisions recorded during the first nine months of 2008, relative to
the
20
Table
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same period in 2007, reflects the findings and results from the Companys
comprehensive loan review efforts.
During the nine months ended September 30, 2008, we recorded $99.9
million in net chargeoffs, compared to $1.6 million in net chargeoffs recorded
during the first nine months of 2007. Of
the $99.9 million in net chargeoffs recorded during the first nine months of
2008, 78% or $78.4 million were related to land and residential constructions
loans. Moreover, the volume of
delinquent and nonperforming loans also increased significantly in 2008 relative
to 2007 as a result of the deterioration in the real estate and housing
markets.
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 September 30, 2008 and December 31,
2007, respectively, undisbursed loan commitments amounted to $1.71 billion and
$2.72 billion, respectively. Commercial
and standby letters of credit amounted to $559.3 million and $619.9 million as
of September 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 September 30, 2008, total loans
securitized with recourse amounted to $566.0 million and were comprised of
$63.8 million in single family loans with full recourse and $502.2 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 loan securitizations totaled $1.2 million
and
$3.0 million as of September 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 September 30, 2008 and December 31, 2007, the amount of loans sold
without recourse totaled $790.9 million and $606.5 million, respectively. Total loans securitized without recourse
amounted to $1.06 billion and $1.19 billion, respectively, at September 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.
21
Table
of Contents
Litigation
-
Neither the Company nor the Bank is involved in any material legal proceedings
at September 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.
9.
INCOME
TAXES
Deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year-end, based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable
income. In conjunction with the $47.0
million OTTI charges recorded on the Fannie Mae and Freddie Mac preferred stock
during the third quarter of 2008, the Company concluded that the related deferred
tax asset of $5.7 million will not more likely than not be utilized, and a
$5.7 million valuation allowance was provided against the entire net deferred
tax asset. However, due to the passage
of the Emergency Economic Stabilization Act (EESA) in October 2008, this
legislation provided banks with tax relief by treating OTTI losses on Fannie
Mae and Freddie Mac preferred stock as ordinary losses, instead of capital
losses. As a result of this law change,
the Company anticipates an additional $5.7 million in tax benefit related to
these OTTI charges to be recognized during the fourth quarter of 2008.
The income tax benefit for
the three months ended September 30, 2008 amounted to $17.4 million
representing an effective tax rate of 35.7% for the period. In comparison, the provision for income taxes
of $26.4 million for the three months ended September 30, 2007 represented
an effective tax rate of 38.9% for the quarter.
The income tax benefit for the third quarter of 2008 reflects the
utilization of affordable housing tax credits totaling $2.0 million, compared
to $1.3 million in tax credits utilized during the third quarter of 2007.
For the first nine months of
2008, the income tax benefit totaled $33.9 million representing an effective
tax rate of 39.4%. This compares to
$79.0 million income tax expense, representing a 38.9% effective tax rate,
recorded for the first nine months of 2007.
For the first nine months of 2008, the income tax benefit reflects the
utilization of $5.3 million in tax credits, compared to $3.8 million in tax
credits utilized during the same period in 2007. The $858 thousand goodwill impairment charge
recorded during the first nine months of 2008 is not deductible for tax
purposes. 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.
10.
STOCKHOLDERS
EQUITY
Earnings (Loss) Per Share (EPS)
The actual number of shares outstanding at
September 30, 2008 was 63,623,131.
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
22
Table
of Contents
preferred 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 nine months ended September 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 nine months ended September 30, 2008 and 2007:
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Net (loss) available to
|
|
Number
|
|
Per Share
|
|
Net income available to
|
|
Number
|
|
Per Share
|
|
|
|
common stockholders
|
|
of Shares
|
|
Amounts
|
|
common stockholders
|
|
of Shares
|
|
Amounts
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Net (loss) income
as reported
|
|
$
|
(31,206
|
)
|
|
|
$
|
|
|
$
|
41,336
|
|
|
|
$
|
|
|
Less: Preferred
stock dividends
|
|
(4,089
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)
earnings per share
|
|
$
|
(35,295
|
)
|
62,675
|
|
$
|
(0.56
|
)
|
$
|
41,336
|
|
61,232
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
620
|
|
(0.01
|
)
|
Restricted stock
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
Stock warrants
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
Diluted (loss)
earnings per share
|
|
$
|
(35,295
|
)
|
62,675
|
|
$
|
(0.56
|
)
|
$
|
41,336
|
|
62,088
|
|
$
|
0.67
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
Net (loss) available to
|
|
Number
|
|
Per Share
|
|
Net income available to
|
|
Number
|
|
Per Share
|
|
|
|
common stockholders
|
|
of Shares
|
|
Amounts
|
|
common stockholders
|
|
of Shares
|
|
Amounts
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Net (loss) income
as reported
|
|
$
|
(52,049
|
)
|
|
|
$
|
|
|
$
|
123,922
|
|
|
|
$
|
|
|
Less: Preferred
stock dividends
|
|
(4,089
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)
earnings per share
|
|
$
|
(56,138
|
)
|
62,586
|
|
$
|
(0.90
|
)
|
$
|
123,922
|
|
60,754
|
|
$
|
2.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
720
|
|
(0.03
|
)
|
Restricted stock
|
|
|
|
|
|
|
|
|
|
198
|
|
|
|
Stock warrants
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
Diluted (loss)
earnings per share
|
|
$
|
(56,138
|
)
|
62,586
|
|
$
|
(0.90
|
)
|
$
|
123,922
|
|
61,712
|
|
$
|
2.01
|
|
The following outstanding convertible preferred stock, stock options,
restricted stock and stock warrants for the three and nine months ended September 30,
2008 and 2007, respectively, were excluded from the computation of diluted EPS
because including them would have had an antidilutive effect.
|
|
(In thousands)
|
|
Convertible preferred
stock
|
|
12,955
|
|
|
|
7,617
|
|
|
|
Stock options
|
|
2,435
|
|
539
|
|
1,995
|
|
192
|
|
Restricted stock
|
|
710
|
|
|
|
651
|
|
|
|
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,
23
Table
of Contents
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 nine months ended September 30, 2008 in connection
with this stock repurchase program.
Quarterly Dividends
The Companys Board of Directors declared and paid quarterly
preferred stock cash dividends of $20.00 per share payable on or about August 1,
2008 to shareholders of record on July 15, 2008. Cash dividends totaling $4.1 million were
paid to the Companys preferred stock shareholders during the three and nine
months ended September 30, 2008.
The Companys Board of Directors also declared and paid quarterly
common stock cash dividends of $0.10 per share payable on or about August 19,
2008 to shareholders of record on August 6, 2008. Cash dividends totaling $6.3 million and
$19.0 million were paid to the Companys common shareholders during the three
and nine months ended September 30, 2008, respectively.
11.
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
24
Table
of Contents
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
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 chargeoffs for the
period as well as average loan volume for each segment during the period. The Company evaluates overall performance
based on profit or loss from operations before income taxes excluding
nonrecurring gains and losses.
Commencing
in 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 nine months ended September 30, 2008 and 2007:
25
Table
of Contents
|
|
Three Months Ended September 30, 2008
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
43,484
|
|
$
|
79,833
|
|
$
|
19,359
|
|
$
|
16,808
|
|
$
|
378
|
|
$
|
159,862
|
|
Charge for funds
used
|
|
(20,567
|
)
|
(35,898
|
)
|
(37,888
|
)
|
(7,655
|
)
|
|
|
(102,008
|
)
|
Interest spread
on funds used
|
|
22,917
|
|
43,935
|
|
(18,529
|
)
|
9,153
|
|
378
|
|
57,854
|
|
Interest expense
|
|
(32,494
|
)
|
(3,454
|
)
|
(37,399
|
)
|
|
|
|
|
(73,347
|
)
|
Credit on funds
provided
|
|
49,598
|
|
3,867
|
|
48,543
|
|
|
|
|
|
102,008
|
|
Interest spread
on funds provided
|
|
17,104
|
|
413
|
|
11,144
|
|
|
|
|
|
28,661
|
|
Net interest
income (expense)
|
|
$
|
40,021
|
|
$
|
44,348
|
|
$
|
(7,385
|
)
|
$
|
9,153
|
|
$
|
378
|
|
$
|
86,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
$
|
2,818
|
|
$
|
192
|
|
$
|
(2,987
|
)
|
$
|
(237
|
)
|
$
|
2,867
|
|
$
|
2,653
|
|
Goodwill
|
|
269,865
|
|
16,867
|
|
|
|
50,599
|
|
|
|
337,331
|
|
Segment pretax
profit (loss)
|
|
(8,282
|
)
|
9,622
|
|
(63,518
|
)
|
165
|
|
13,452
|
|
(48,561
|
)
|
Segment assets
|
|
2,949,210
|
|
5,228,985
|
|
1,855,655
|
|
1,077,864
|
|
610,602
|
|
11,722,316
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
71,788
|
|
$
|
88,930
|
|
$
|
17,860
|
|
$
|
19,204
|
|
$
|
986
|
|
$
|
198,768
|
|
Charge for funds
used
|
|
(48,304
|
)
|
(59,277
|
)
|
(21,010
|
)
|
(13,657
|
)
|
|
|
(142,248
|
)
|
Interest spread
on funds used
|
|
23,484
|
|
29,653
|
|
(3,150
|
)
|
5,547
|
|
986
|
|
56,520
|
|
Interest expense
|
|
(47,120
|
)
|
(5,119
|
)
|
(42,675
|
)
|
|
|
|
|
(94,914
|
)
|
Credit on funds
provided
|
|
84,826
|
|
8,683
|
|
48,739
|
|
|
|
|
|
142,248
|
|
Interest spread
on funds provided
|
|
37,706
|
|
3,564
|
|
6,064
|
|
|
|
|
|
47,334
|
|
Net interest
income
|
|
$
|
61,190
|
|
$
|
33,217
|
|
$
|
2,914
|
|
$
|
5,547
|
|
$
|
986
|
|
$
|
103,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
$
|
2,852
|
|
$
|
223
|
|
$
|
(1,030
|
)
|
$
|
(17
|
)
|
$
|
1,300
|
|
$
|
3,328
|
|
Goodwill
|
|
250,507
|
|
16,700
|
|
|
|
66,802
|
|
858
|
|
334,867
|
|
Segment pretax
profit (loss)
|
|
39,646
|
|
25,832
|
|
2,176
|
|
5,575
|
|
(5,525
|
)
|
67,704
|
|
Segment assets
|
|
4,086,396
|
|
4,516,308
|
|
1,335,395
|
|
1,138,951
|
|
563,113
|
|
11,640,163
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
151,658
|
|
$
|
253,950
|
|
$
|
53,546
|
|
$
|
53,593
|
|
$
|
2,204
|
|
$
|
514,951
|
|
Charge for funds
used
|
|
(76,828
|
)
|
(123,884
|
)
|
(79,163
|
)
|
(27,863
|
)
|
|
|
(307,738
|
)
|
Interest spread
on funds used
|
|
74,830
|
|
130,066
|
|
(25,617
|
)
|
25,730
|
|
2,204
|
|
207,213
|
|
Interest expense
|
|
(109,582
|
)
|
(10,813
|
)
|
(116,246
|
)
|
|
|
|
|
(236,641
|
)
|
Credit on funds
provided
|
|
167,118
|
|
13,748
|
|
126,872
|
|
|
|
|
|
307,738
|
|
Interest spread
on funds provided
|
|
57,536
|
|
2,935
|
|
10,626
|
|
|
|
|
|
71,097
|
|
Net interest
income (expense)
|
|
$
|
132,366
|
|
$
|
133,001
|
|
$
|
(14,991
|
)
|
$
|
25,730
|
|
$
|
2,204
|
|
$
|
278,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
$
|
9,906
|
|
$
|
613
|
|
$
|
(4,966
|
)
|
$
|
(255
|
)
|
$
|
7,456
|
|
$
|
12,754
|
|
Goodwill
|
|
269,865
|
|
16,867
|
|
|
|
50,599
|
|
|
|
337,331
|
|
Segment pretax
(loss) profit
|
|
(12,660
|
)
|
(11,995
|
)
|
(83,898
|
)
|
12,898
|
|
9,695
|
|
(85,960
|
)
|
Segment assets
|
|
2,949,210
|
|
5,228,985
|
|
1,855,655
|
|
1,077,864
|
|
610,602
|
|
11,722,316
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Retail
|
|
Commercial
|
|
|
|
Residential
|
|
|
|
|
|
|
|
Banking
|
|
Lending
|
|
Treasury
|
|
Lending
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
206,574
|
|
$
|
251,668
|
|
$
|
50,759
|
|
$
|
59,350
|
|
$
|
3,808
|
|
$
|
572,159
|
|
Charge for funds
used
|
|
(142,159
|
)
|
(170,644
|
)
|
(57,920
|
)
|
(42,632
|
)
|
|
|
(413,355
|
)
|
Interest spread
on funds used
|
|
64,415
|
|
81,024
|
|
(7,161
|
)
|
16,718
|
|
3,808
|
|
158,804
|
|
Interest expense
|
|
(133,382
|
)
|
(16,002
|
)
|
(121,389
|
)
|
|
|
|
|
(270,773
|
)
|
Credit on funds
provided
|
|
243,980
|
|
25,656
|
|
143,719
|
|
|
|
|
|
413,355
|
|
Interest spread
on funds provided
|
|
110,598
|
|
9,654
|
|
22,330
|
|
|
|
|
|
142,582
|
|
Net interest
income
|
|
$
|
175,013
|
|
$
|
90,678
|
|
$
|
15,169
|
|
$
|
16,718
|
|
$
|
3,808
|
|
$
|
301,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
$
|
7,807
|
|
$
|
574
|
|
$
|
(1,979
|
)
|
$
|
(25
|
)
|
$
|
3,538
|
|
$
|
9,915
|
|
Goodwill
|
|
250,507
|
|
16,700
|
|
|
|
66,802
|
|
858
|
|
334,867
|
|
Segment pretax
profit (loss)
|
|
119,611
|
|
77,118
|
|
14,483
|
|
15,880
|
|
(24,140
|
)
|
202,952
|
|
Segment assets
|
|
4,086,396
|
|
4,516,308
|
|
1,335,395
|
|
1,138,951
|
|
563,113
|
|
11,640,163
|
|
26
Table
of Contents
12.
SUBSEQUENT
EVENTS
On October 14, 2008, the U.S. Department of Treasury announced the
Treasury Capital Purchase Program under the EESA, pursuant to which the
Treasury intends to make senior preferred stock investments in participating
financial institutions that will qualify as Tier I capital. The Company
has applied for the maximum amount of additional capital allowed under the
program based on the Companys level of total risk-weighted assets as of June 30,
2008. The Companys application to participate in the program is subject
to approval from the U.S. Department of Treasury.
On October 27, 2008, the Company announced that
its Board of Directors has authorized the payment of dividends on both its
preferred and common stock for the fourth quarter of 2008. The $20.00 per share cash dividend on the
preferred stock is payable on or about November 3, 2008 to shareholders of
record as of October 15, 2008. The
common stock cash dividend of $0.10 per share will be payable on or about November 24,
2008 to shareholders of record on November 10, 2008.
27
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 September 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,
valuation and OTTI review 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.
Recent Developments
There have been significant
disruptions in the U.S. and international financial system during the period
covered by this report. As a result,
available credit has been reduced or ceased to exist. The reduction in availability of credit, loss
of confidence in the financial sector, and volatility in financial markets
adversely affects the Company, the Bank and the performance of the Companys
stock. The U.S. government, the
governments of other countries, and multinational institutions has provided
vast
28
Table of Contents
amounts
of liquidity and capital into the banking system. In addition, as discussed below, the Companys
results of operations have been impacted by the federal governments
conservatorship of Fannie Mae and Freddie Mac, which led to the recording of
significant charges on investment securities during the quarter ended September 30,
2008.
In response to the financial crises affecting the
overall banking system and financial markets in the United States, on October 3,
2008, the Emergency Economic Stabilization Act of 2008 (EESA) was
enacted. Under the EESA, the United
States Treasury Department (Treasury) has authority, among other things, to
purchase mortgages, mortgage backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.
On October 3, 2008, the Troubled Asset Relief
Program (TARP) was signed into law.
TARP gave the Treasury authority to deploy up to $750 billion into the
financial system with an objective of improving liquidity in capital
markets. On October 24, 2008,
Treasury announced plans to direct $250 billion of this authority into
preferred stock investments in banks.
The general terms of this preferred stock program include:
·
dividends on the Treasurys preferred stock
at a rate of 5% for the first five years and 9% dividends thereafter;
·
common stock dividends cannot be increased
for three years while Treasury is an investor unless preferred stock is
redeemed or consent from Treasury is received;
·
the Treasury preferred stock cannot be
redeemed for three years unless the participating bank raises qualifying
private capital;
·
Treasurys must consent to any buy back of
other stock (common or other preferred);
·
Treasury receives warrants equal to 15% of
Treasurys total investment in the participating institution; and participating
institutions executives must agree to certain compensation restrictions, and
·
restrictions on the amount of executive
compensation which is tax deductible.
The term of this Treasury preferred stock program
could reduce investment returns to participating banks shareholders by
restricting dividends to common shareholders, diluting existing shareholders
interests, and restricting capital management practices. Although both the
Company and its banking subsidiary meet all applicable regulatory capital
requirements and remain well capitalized, the Company currently has applied for
the maximum in additional capital as part of the TARP capital purchase program.
Federal and state governments could pass additional
legislation responsive to current credit conditions. As an example, the Company could experience
higher credit losses because of federal or state legislation or regulatory
action that reduces the principal amount or interest rate under existing loan
contracts. Also, the Company could
experience higher credit losses because of federal or state legislation or
regulatory action that limits the Banks ability to foreclose on property or
other collateral or makes foreclosure less economically feasible.
The Federal Deposit Insurance Corporation (FDIC)
insures deposits at FDIC insured financial institutions up to certain
limits. The FDIC charges insured
financial institutions premiums to maintain the Deposit Insurance Fund. Current economic conditions have increased expectations
for bank failures, in which case the FDIC would take control of failed banks
and ensure payment of deposits up to insured limits using the resources of the
Deposit Insurance Fund. In such case,
the FDIC may increase premium assessments to maintain adequate funding of the
Deposit Insurance Fund, including requiring riskier institutions to pay a
larger share of the premiums. An
increase in premium assessments would increase
29
Table of Contents
the
Companys expenses. The EESA included a
provision for an increase in the amount of deposits insured by FDIC to $250,000
until December 2009. On October 14,
2008, the FDIC announced a new program the Temporary Liquidity Guarantee
Program that provides unlimited deposit insurance on funds in
noninterest-bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance limit of $250,000.
All eligible institutions will be covered under the program for the
first 30 days without incurring any costs.
After the initial period, participating institutions will be assessed an
annualized 10 basis point surcharge on the additional insured deposits. The behavior of depositors in regard to the
level of FDIC insurance could cause the Banks existing customers to reduce the
amount of deposits held at the Bank, and or could cause new customers to open
deposit accounts at the Bank. The level
and composition of the Banks deposit portfolio directly impacts the Banks
funding cost and net interest margin. As
a result of these measures, it is likely that the premiums the Bank pays for
FDIC insurance will increase, which would adversely affect net income. The impact of such measures cannot be
assessed at this time.
The actions described above, together with
additional actions announced by the Treasury and other regulatory agencies
continue to develop. It is not clear at
this time what impact EESA, TARP, other liquidity and funding initiatives of
the Treasury and other bank regulatory agencies that have been previously
announced, and any additional programs that may be initiated in the future will
have on the financial markets and the financial services industry. The extreme levels of volatility and limited
credit availability currently being experienced could continue to effect the
U.S. banking industry and the broader U.S. and global economies, which will
have an affect on all financial institutions, including the Company.
Overview
During
the third quarter of 2008, the turbulence and uncertainty in the U.S. financial
markets have adversely impacted credit markets on a global scale. Liquidity concerns and credit issues have
resulted in the U.S. governments conservatorship of Fannie Mae and Freddie Mac
as well as the failure and insolvency of several large financial
companies. Although we continued to face
unprecedented economic challenges, we maintained our focus on strengthening our
balance sheet by stabilizing our problem loans, reducing our credit risk
exposures, and improving both our capital and liquidity positions.
Our
capital position remains strong. As of September 30,
2008, our total risk-based capital ratio was 13.12% or $318.5 million more than
the 10.00% regulatory requirement for well-capitalized banks. Our Tier 1 risk-based capital ratio of 11.12%
and our Tier 1 leverage ratio of 9.84% as of September 30, 2008 also
significantly exceeded regulatory guidelines for well-capitalized banks.
Our
liquidity position remains strong.
During the third quarter of 2008, we further strengthened our liquidity
position by obtaining additional borrowing capacity from the Federal Reserve
discount window of almost $900.0 million.
As of September 30, 2008, we had $527.5 million in cash and cash
equivalents and approximately $2.29 billion in available 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 4% or $257.4 million deposit
growth during the first nine months ended September 30, 2008, with total
deposits increasing to $7.54 billion as of September 30, 2008, compared
with $7.28 billion as of December 31, 2007. Our ongoing efforts to deleverage our balance
sheet have resulted in a lower loan to deposit ratio of 110% at September 30,
2008, compared to 115% at June 30, 2008 and 122% at December 31,
2007. We believe that our liquidity
position is more than sufficient to meet our operating expenses, borrowing
needs and other obligations.
30
Table of Contents
Our
nonperforming asset and delinquency trends have stabilized. Nonperforming assets totaled $200.6 million
representing 1.71% of total assets at September 30, 2008. This compares to $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. Nonperforming
assets as of September 30, 2008 are comprised of nonaccrual loans totaling
$177.3 million, other real estate owned (OREO) totaling $17.6 million, and
loans modified or restructured amounting to $5.7 million. Included in nonaccrual loans as of September 30,
2008 are seventeen loans totaling $27.3 million which were not 90 days past due
as of September 30, 2008, but have been classified as nonaccrual due to
concerns surrounding collateral values and future collectibility. Nonaccrual loans continued to be impacted by
the deterioration in the residential construction and land portfolios, which
comprised $119.1 million or 67% of total nonaccrual loans. Our delinquency trends have improved relative
to the previous quarter, with notable improvements coming from the 30-59 days
and 60-89 days delinquent categories.
Total delinquent loans decreased to $315.7 million as of September 30,
2008 compared to $368.7 million as of June 30, 2008.
At
September 30, 2008, the allowance for loan losses amounted to $177.2
million or 2.14% of total gross loans, compared to $168.4 million or 1.95% as
of June 30, 2008. We recorded $43.0
million in loan loss provisions during the third quarter of 2008, compared to
$85.0 million in the second quarter of 2008 and $55.0 million in the first
quarter of 2008. Total net chargeoffs
amounted to $39.7 million during the third quarter of 2008, compared to $34.8
million during the second quarter of 2008.
Approximately 82%, or $32.7 million, of the total net chargeoffs
recorded during the third quarter of 2008 were related to land and residential
construction loans of which 70% were located in the Inland Empire.
Our core operating earnings
remain profitable. In addition to $43.0
million in loan loss provisions, the $31.2 million, or $(0.56) per share, net
loss that we recorded
during
the third quarter of 2008 includes $53.6 million in other than temporary
impairment (OTTI) charges on investment securities. A large portion of the non-cash OTTI charges,
approximately $47.0 million, was related to preferred stock issued by
Fannie Mae and
Freddie Mac. The fair values of
these preferred stock securities were
adversely impacted by the
federal governments conservatorship of
these entities in September 2008.
The tax benefit recognized from the impairment of these preferred stock
securities was limited during the third quarter of 2008 due to the accounting
treatment of these losses as a capital loss.
The passage of the Emergency Economic Stabilization Act (EESA) in October 2008
provided banks with tax relief by treating OTTI losses on Fannie Mae and
Freddie Mac preferred securities as ordinary losses. As a result of this law change, we will be
able to recognize an additional $5.7 million or $0.09 per share tax benefit in
the fourth quarter of 2008.
The remaining $6.6 million in OTTI
charges recorded during the third quarter of 2008 were related to certain
pooled trust preferred debt and equity securities. Excluding loan loss provisions and non-cash
OTTI charges on investment securities, our core pretax operating income
amounted to $48.0 million, $0.77 per share, during the third quarter of 2008.
Net
interest income decreased to $86.5 million during the quarter ended September 30,
2008, compared with $103.9 million during the same quarter in 2007. Our net interest margin decreased 85 basis
points to 3.10% during the third quarter of 2008. This compares with 3.95% during the same
period in 2007 and 3.33% during the second quarter 2008. Relative to the third quarter of 2007 and the
second quarter of 2008, our net interest margin during the quarter ended September 30,
2008 was adversely impacted by the sharp decline in interest rates prompted by
several recent consecutive Federal Reserve rate cuts, by the reversal of
interest from nonaccrual loans, and by the reinvestment of loan payoffs into
lower yielding Treasury securities and other short-term investments. We anticipate net interest margin pressures
to continue throughout the remainder of 2008.
31
Table of Contents
Excluding the non-cash OTTI charges on investment
securities amounting to $53.6 million, total noninterest income decreased 28%
to $10.0 million during the third quarter of 2008, compared with $14.0 million
for the corresponding quarter in 2007.
This decrease is attributable primarily to higher net gain on sales of
investment securities and higher net gain on disposal of fixed assets in the
third quarter of 2007. These decreases
were partially offset by higher branch-related revenues and loan fees earned
during the third quarter of 2008. Core
noninterest income, which excludes the impact of non-cash OTTI charges, as well
as net gains on sales of investment securities, loans and other assets,
remained stable at $9.8 million during the third quarter of 2008, compared to
$9.7 million during the same period last year.
Total noninterest expense increased 4% to $48.5 million during the
third quarter of 2008, compared with $46.7 million for the same period in 2007,
and decreased 13% relative to second quarter of 2008 total noninterest expenses
of $55.7 million. The increase in total
noninterest expense during the third quarter of 2008, relative to the same
quarter in 2007, can be attributed predominantly to higher deposit insurance
premiums and regulatory assessments, higher other real estate owned (OREO)
expenses and higher other credit cycle related expenses. These increases were partially offset by
lower compensation expenses due to lower staffing levels and a reduction in
related benefits and incentive program expenses which were fully realized in
the third quarter of 2008. Relative to
the second quarter of 2008, total noninterest expense decreased 13% during the
third quarter of 2008 primarily due to lower compensation and related employee
benefits. Our efficiency ratio, which
represents noninterest expense (excluding amortization and impairment
writedowns on intangible assets and amortization of investments in affordable
housing partnerships) divided by the aggregate of net interest income before
provision for loan losses and noninterest income, was 46.40% during the third
quarter of 2008 compared with 48.6% during the second quarter of 2008 and
37.64% for the third quarter in 2007. We
anticipate noninterest expense for the remainder of 2008 to trend favorably as
our expense management efforts continue.
Total consolidated assets at September 30, 2008
slightly decreased to $11.72 billion, compared with $11.85 billion at December 31,
2007. The net decrease in total assets
is comprised predominantly of decreases in net loans receivable of $639.7
million and securities purchased under resale agreements amounting to $100.0
million. These decreases were partially
offset by increases in cash and cash equivalents of $367.1 million,
available-for-sale investment securities totaling $160.1 million, deferred tax
assets totaling $109.2 million, and OREO, net amounting to $16.1 million. Total liabilities decreased 2% to $10.46
billion as of September 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 $270.1 million and federal funds
purchased of $191.8 million, partially offset by an increase in total deposits
of $257.4 million.
Total average assets increased 5% to $11.71 billion
during the third quarter of 2008, compared to $11.20 billion for the same
quarter in 2007, due primarily to growth in average available-for-sale
securities. Total average investment
securities increased 23% to $2.13 billion during the quarter ended September 30,
2008 primarily due to $112.9 million in multifamily loan securitizations since
the third quarter of 2007. Total average
deposits rose 2% during the third quarter of 2008 to $7.47 billion, compared to
$7.35 billion for the same quarter in 2007, with increases coming from time deposits,
noninterest bearing demand deposits, and savings accounts.
As of September 30, 2008, we updated our
goodwill impairment analysis to determine whether and to what extent our
goodwill asset was impaired. As a result
of this updated analysis, we recorded a $272 thousand goodwill impairment
charge, which represents the remaining goodwill balance related to East West
Insurance Services, Inc. This
impairment writedown had no effect on our cash balances, liquidity or
regulatory capital ratios.
32
Table of Contents
Results of Operations
We reported a net loss for the third quarter
of 2008 of ($31.2) million, or ($0.56) per basic and diluted share, compared
with net income of $41.3 million, representing $0.68 per basic and $0.67 per
diluted share, reported during the third quarter of 2007. During the third quarter of 2008, our
operating results were significantly impacted by $53.6 million in non-cash OTTI
charges related predominantly to Fannie Mae and Freddie Mac preferred stock and
$43.0 million in provision for loan losses recorded during the period. In comparison, we recorded only $405 thousand
in OTTI charges and $3.0 million in loan loss provisions during the same period
in 2007. Our annualized return on
average total assets decreased to (1.07%) for the quarter ended September 30,
2008, compared to 1.48% for the same period in 2007. The annualized return on average stockholders
equity decreased to (10.06%) for the third quarter of 2008, compared with
15.19% for the third quarter of 2007.
We incurred a net loss for the nine months
ended September 30, 2008 of ($52.0) million, or $(0.90) per basic and
diluted share, compared with net income of $123.9 million, or $2.04 per basic
and $2.01 per diluted share, reported during the corresponding period in
2007. The net loss reported during the
first nine months of 2008 was primarily due to the $63.5 million in total OTTI
charges and $183.0 million in loan loss provisions recorded during the first
nine months of 2008. In comparison, we
recorded $405 thousand in OTTI charges and $3.0 million in loan loss provisions
during the first nine months in 2007.
Our annualized return on average total assets decreased to (0.59%) for the
nine months ended September 30, 2008, compared to 1.52% for the same
period in 2007. The annualized return on
average stockholders equity decreased to (5.75%) for the first nine months of
2008, compared with 15.71% for the same period in 2007.
Components of Net (Loss)
Income
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
(In millions)
|
|
Net interest
income
|
|
$
|
86.5
|
|
$
|
103.9
|
|
$
|
278.3
|
|
$
|
301.4
|
|
Provision for
loan losses
|
|
(43.0
|
)
|
(3.0
|
)
|
(183.0
|
)
|
(3.0
|
)
|
Noninterest
(loss) income
|
|
(43.6
|
)
|
13.6
|
|
(24.2
|
)
|
35.5
|
|
Noninterest
expense
|
|
(48.5
|
)
|
(46.7
|
)
|
(157.1
|
)
|
(131.0
|
)
|
Benefit
(provision) for income taxes
|
|
17.4
|
|
(26.5
|
)
|
34.0
|
|
(79.0
|
)
|
Net (loss)
income
|
|
$
|
(31.2
|
)
|
$
|
41.3
|
|
$
|
(52.0
|
)
|
$
|
123.9
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
return on average total assets
|
|
-1.07
|
%
|
1.48
|
%
|
-0.59
|
%
|
1.52
|
%
|
Annualized
return on average stockholders equity
|
|
-10.06
|
%
|
15.19
|
%
|
-5.75
|
%
|
15.71
|
%
|
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 third quarter of 2008 totaled $86.5 million,
a 17% decrease over net interest income of $103.9 million recorded for the same
period in 2007. For the first nine
months of 2008, net interest income decreased 8% to $278.3 million, compared to
$301.4 million for the same period in 2007.
33
Table
of Contents
Net interest margin, defined as taxable equivalent
net interest income divided by average earning assets, decreased 85 basis
points to 3.10% during the third quarter of 2008, compared with 3.95% during
the third quarter of 2007. Similarly,
the net interest margin for the first nine months of 2008 decreased 61 basis
points to 3.35%, 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 into 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 September 30, 2008 and 2007:
34
Table of Contents
|
|
Three Months Ended September 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)
|
|
$
|
340,723
|
|
$
|
1,957
|
|
2.28
|
%
|
$
|
27,154
|
|
$
|
347
|
|
5.07
|
%
|
Securities
purchased under resale agreements (term)
|
|
50,000
|
|
1,277
|
|
10.13
|
%
|
188,043
|
|
4,013
|
|
8.47
|
%
|
Investment
securities available-for-sale (3) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
2,077,097
|
|
22,685
|
|
4.33
|
%
|
1,698,017
|
|
25,759
|
|
6.02
|
%
|
Tax-exempt
(5)
|
|
49,797
|
|
630
|
|
5.06
|
%
|
33,419
|
|
657
|
|
7.86
|
%
|
Loans
receivable (3) (6)
|
|
8,451,517
|
|
131,682
|
|
6.18
|
%
|
8,433,268
|
|
167,066
|
|
7.86
|
%
|
FHLB
and FRB stock
|
|
114,281
|
|
1,803
|
|
6.26
|
%
|
81,671
|
|
1,107
|
|
5.38
|
%
|
Total
interest-earning assets
|
|
11,083,415
|
|
160,034
|
|
5.73
|
%
|
10,461,572
|
|
198,949
|
|
7.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
136,018
|
|
|
|
|
|
155,699
|
|
|
|
|
|
Allowance
for loan losses
|
|
(171,025
|
)
|
|
|
|
|
(80,321
|
)
|
|
|
|
|
Other
assets
|
|
660,736
|
|
|
|
|
|
660,279
|
|
|
|
|
|
Total
assets
|
|
$
|
11,709,144
|
|
|
|
|
|
$
|
11,197,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
accounts
|
|
$
|
399,866
|
|
$
|
659
|
|
0.65
|
%
|
$
|
404,418
|
|
$
|
1,615
|
|
1.58
|
%
|
Money
market accounts
|
|
1,046,721
|
|
5,664
|
|
2.15
|
%
|
1,287,573
|
|
13,322
|
|
4.10
|
%
|
Savings
deposits
|
|
449,687
|
|
929
|
|
0.82
|
%
|
424,039
|
|
1,198
|
|
1.12
|
%
|
Time
deposits less than $100,000
|
|
1,151,876
|
|
7,932
|
|
2.73
|
%
|
931,961
|
|
9,688
|
|
4.12
|
%
|
Time
deposits $100,000 or greater
|
|
3,045,325
|
|
25,573
|
|
3.33
|
%
|
2,961,353
|
|
36,235
|
|
4.85
|
%
|
Federal
funds purchased
|
|
87,606
|
|
430
|
|
1.95
|
%
|
172,064
|
|
2,317
|
|
5.34
|
%
|
FHLB
Advances
|
|
1,541,799
|
|
17,140
|
|
4.41
|
%
|
1,257,199
|
|
16,175
|
|
5.10
|
%
|
Securities
sold under repurchase agreements
|
|
1,000,273
|
|
12,063
|
|
4.78
|
%
|
962,458
|
|
10,263
|
|
4.23
|
%
|
Long-term
debt
|
|
235,570
|
|
2,957
|
|
4.98
|
%
|
220,106
|
|
4,101
|
|
7.39
|
%
|
Total
interest-bearing liabilities
|
|
8,958,723
|
|
73,347
|
|
3.25
|
%
|
8,621,171
|
|
94,914
|
|
4.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
1,375,103
|
|
|
|
|
|
1,337,218
|
|
|
|
|
|
Other
liabilities
|
|
134,809
|
|
|
|
|
|
150,048
|
|
|
|
|
|
Stockholders
equity
|
|
1,240,509
|
|
|
|
|
|
1,088,792
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
11,709,144
|
|
|
|
|
|
$
|
11,197,229
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
2.48
|
%
|
|
|
|
|
3.17
|
%
|
Net
interest income and net margin (6)
|
|
|
|
$
|
86,687
|
|
3.10
|
%
|
|
|
$
|
104,035
|
|
3.95
|
%
|
(1) Annualized.
(2) Includes
short-term securities purchased under resale agreements.
(3) Includes
amortization of premium and accretion of discounts on investment securities and
loans receivable totaling $(3.3) million and $(1.1) million for the three months ended September 30,
2008, and 2007, respectively. Also
includes the amortization of deferred loan fees totaling $284 thousand and $1.2
million for the three months ended September 30, 2008 and 2007,
respectively.
(4) Average
balances exclude unrealized gains or losses on available for sales securities.
(5) 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 $458 thousand and 3.68% for three months ended
September 30, 2008,
respectively. Total interest
income and average yield rate on an unadjusted basis for tax-exempt investment
securities available-for-sale is $476 thousand and 5.71% for the three months
ended September 30, 2007, respectively.
(6) Average
balances include nonperforming loans.
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 nine
months ended September 30, 2008 and 2007:
35
Table of Contents
|
|
Nine Months Ended September 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)
|
|
$
|
204,323
|
|
$
|
3,546
|
|
2.31
|
%
|
$
|
14,756
|
|
$
|
564
|
|
5.11
|
%
|
Securities
purchased under resale agreements (term)
|
|
54,745
|
|
5,094
|
|
12.40
|
%
|
192,857
|
|
11,742
|
|
8.14
|
%
|
Investment
securities available-for-sale (3) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,927,526
|
|
73,558
|
|
5.08
|
%
|
1,649,094
|
|
71,476
|
|
5.79
|
%
|
Tax-exempt
(5)
|
|
58,598
|
|
3,256
|
|
7.41
|
%
|
23,241
|
|
1,417
|
|
8.13
|
%
|
Loans
receivable (3) (6)
|
|
8,725,596
|
|
425,113
|
|
6.49
|
%
|
8,236,948
|
|
484,073
|
|
7.86
|
%
|
FHLB
and FRB stock
|
|
115,839
|
|
5,275
|
|
6.07
|
%
|
81,012
|
|
3,275
|
|
5.40
|
%
|
Total
interest-earning assets
|
|
11,086,627
|
|
515,842
|
|
6.20
|
%
|
10,197,908
|
|
572,547
|
|
7.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
136,708
|
|
|
|
|
|
149,007
|
|
|
|
|
|
Allowance
for loan losses
|
|
(132,548
|
)
|
|
|
|
|
(78,212
|
)
|
|
|
|
|
Other
assets
|
|
664,711
|
|
|
|
|
|
602,521
|
|
|
|
|
|
Total
assets
|
|
$
|
11,755,498
|
|
|
|
|
|
$
|
10,871,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
accounts
|
|
$
|
416,636
|
|
$
|
2,707
|
|
0.87
|
%
|
$
|
404,328
|
|
$
|
4,954
|
|
1.64
|
%
|
Money
market accounts
|
|
1,081,520
|
|
20,246
|
|
2.49
|
%
|
1,310,525
|
|
40,879
|
|
4.17
|
%
|
Savings
deposits
|
|
463,172
|
|
3,341
|
|
0.96
|
%
|
379,831
|
|
2,411
|
|
0.85
|
%
|
Time
deposits less than $100,000
|
|
1,018,609
|
|
24,333
|
|
3.18
|
%
|
965,545
|
|
28,569
|
|
3.96
|
%
|
Time
deposits $100,000 or greater
|
|
3,073,775
|
|
85,919
|
|
3.72
|
%
|
2,862,437
|
|
105,331
|
|
4.92
|
%
|
Federal
funds purchased
|
|
115,370
|
|
2,176
|
|
2.51
|
%
|
153,422
|
|
6,164
|
|
5.37
|
%
|
FHLB
Advances
|
|
1,622,429
|
|
54,363
|
|
4.46
|
%
|
1,144,657
|
|
43,555
|
|
5.09
|
%
|
Securities
sold under repurchase agreements
|
|
1,000,750
|
|
33,881
|
|
4.51
|
%
|
970,780
|
|
27,675
|
|
3.81
|
%
|
Long-term
debt
|
|
235,570
|
|
9,675
|
|
5.47
|
%
|
203,207
|
|
11,235
|
|
7.39
|
%
|
Total
interest-bearing liabilities
|
|
9,027,831
|
|
236,641
|
|
3.49
|
%
|
8,394,732
|
|
270,773
|
|
4.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
1,379,975
|
|
|
|
|
|
1,283,699
|
|
|
|
|
|
Other
liabilities
|
|
141,275
|
|
|
|
|
|
141,377
|
|
|
|
|
|
Stockholders
equity
|
|
1,206,417
|
|
|
|
|
|
1,051,416
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
11,755,498
|
|
|
|
|
|
$
|
10,871,224
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
2.71
|
%
|
|
|
|
|
3.20
|
%
|
Net
interest income and net margin (6)
|
|
|
|
$
|
279,201
|
|
3.35
|
%
|
|
|
$
|
301,774
|
|
3.96
|
%
|
(1) Annualized.
(2) Includes short-term securities purchased under
resale agreements.
(3) Includes
amortization of premium and accretion of discounts on investment securities and
loans receivable totaling $(5.4) million and $(2.2) million for the nine months ended September 30,
2008, and 2007, respectively. Also includes
the amortization of deferred loan fees totaling $2.1 million and $4.0 million
for the nine months ended September 30, 2008 and 2007, respectively.
(4) Average balances exclude unrealized gains or losses on
available for sales securities.
(5) 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 $2.4 million and 5.38% for the nine months ended September 30,
2008, respectively. Total interest
income and average yield rate on an unadjusted basis for tax-exempt investment
securities available-for-sale is $1.0 million and 5.90% for the nine months
ended September 30, 2007, respectively.
(6) Average balances include nonperforming
loans.
36
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 September 30,
|
|
Nine Months Ended September 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
|
|
$
|
1,610
|
|
$
|
1,901
|
|
$
|
(291
|
)
|
$
|
2,982
|
|
$
|
3,451
|
|
$
|
(469
|
)
|
Securities
purchased under resale agreements
|
|
(2,736
|
)
|
(3,403
|
)
|
667
|
|
(6,648
|
)
|
(10,965
|
)
|
4,317
|
|
Investment
securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
(3,074
|
)
|
5,036
|
|
(8,110
|
)
|
2,082
|
|
11,223
|
|
(9,141
|
)
|
Tax-exempt (2)
|
|
(27
|
)
|
256
|
|
(283
|
)
|
1,839
|
|
1,975
|
|
(136
|
)
|
Loans receivable
|
|
(35,384
|
)
|
361
|
|
(35,745
|
)
|
(58,960
|
)
|
27,452
|
|
(86,412
|
)
|
FHLB and FRB
stock
|
|
696
|
|
493
|
|
203
|
|
2,000
|
|
1,545
|
|
455
|
|
Total interest
and dividend income
|
|
$
|
(38,915
|
)
|
$
|
4,644
|
|
$
|
(43,559
|
)
|
$
|
(56,705
|
)
|
$
|
34,681
|
|
$
|
(91,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
accounts
|
|
$
|
(956
|
)
|
$
|
(18
|
)
|
$
|
(938
|
)
|
$
|
(2,247
|
)
|
$
|
146
|
|
$
|
(2,393
|
)
|
Money market
accounts
|
|
(7,658
|
)
|
(2,157
|
)
|
(5,501
|
)
|
(20,633
|
)
|
(6,275
|
)
|
(14,358
|
)
|
Savings deposits
|
|
(269
|
)
|
69
|
|
(338
|
)
|
930
|
|
574
|
|
356
|
|
Time deposits
less than $100,000
|
|
(1,756
|
)
|
1,969
|
|
(3,725
|
)
|
(4,236
|
)
|
1,503
|
|
(5,739
|
)
|
Time deposits
$100,000 or greater
|
|
(10,662
|
)
|
1,001
|
|
(11,663
|
)
|
(19,412
|
)
|
7,337
|
|
(26,749
|
)
|
Federal funds
purchased
|
|
(1,887
|
)
|
(822
|
)
|
(1,065
|
)
|
(3,988
|
)
|
(1,270
|
)
|
(2,718
|
)
|
FHLB advances
|
|
965
|
|
3,351
|
|
(2,386
|
)
|
10,808
|
|
16,492
|
|
(5,684
|
)
|
Securities sold
under resale agreements
|
|
1,800
|
|
415
|
|
1,385
|
|
6,206
|
|
877
|
|
5,329
|
|
Long-term debt
|
|
(1,144
|
)
|
271
|
|
(1,415
|
)
|
(1,560
|
)
|
1,613
|
|
(3,173
|
)
|
Total interest
expense
|
|
(21,567
|
)
|
4,079
|
|
(25,646
|
)
|
(34,132
|
)
|
20,997
|
|
(55,129
|
)
|
CHANGE
IN NET INTEREST INCOME
|
|
$
|
(17,348
|
)
|
$
|
565
|
|
$
|
(17,913
|
)
|
$
|
(22,573
|
)
|
$
|
13,684
|
|
$
|
(36,257
|
)
|
(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
$(19) thousand, and total changes due to volume and rates on an unadjusted
basis for tax-exempt investment securities available-for-sale is $186 thousand
and $(205) thousand for the three months ended September 30, 2008,
respectively. Total change on an unadjusted basis for tax-exempt investment
securities available-for-sale is $1.3 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 $(99) thousand for the nine months ended
September 30, 2008, respectively.
Provision for Loan Losses
We recorded $43.0 million and $183.0 million in provisions for loan
losses during the third quarter and first nine months of 2008,
respectively. In comparison, we recorded
$3.0 million in provision for loan losses during the first three quarters of
2007. The significant increase in loan
loss provisions recorded during the first nine months of 2008 reflects our
increased chargeoff levels as well as our higher
37
Table
of Contents
volume of classified and nonperforming loans caused by challenging
conditions in the real estate housing market, turmoil in the financial markets,
as well as recessionary pressures in the overall economic environment. 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 and
third quarters 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, residential construction, and commercial
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. We continued to sustain
higher chargeoff activity and increased loan loss provisions for our land and
residential construction loans during the third quarter of 2008 that were
caused by the continued weakness in the real estate market. The Company recorded $99.9 million in net chargeoffs
during the first nine months of 2008, compared to $1.6 million in net
chargeoffs recorded during the first nine months of 2007. Of the $99.9 million in total net chargeoffs
for the first nine months of 2008, 78% or $78.4 million were related to land
and residential constructions loans. We
continue to aggressively monitor delinquencies and proactively review the
credit risk exposure of our loan portfolio to minimize and mitigate potential
losses. We expect loss provision levels
for the fourth quarter of 2008 to taper down as our level of nonperforming
loans and overall delinquency trends continue to stabilize relative to the
first nine months of the year.
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 (Loss) Income
Components of Noninterest (Loss) Income
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
(In millions)
|
|
Impairment
writedown on investment securities
|
|
$
|
(53.57
|
)
|
$
|
(0.41
|
)
|
$
|
(63.51
|
)
|
$
|
(0.41
|
)
|
Branch fees
|
|
4.29
|
|
3.84
|
|
12.73
|
|
10.67
|
|
Net gain on sale
of investment securities available-for-sale
|
|
|
|
2.77
|
|
7.77
|
|
5.22
|
|
Letters of
credit fees and commissions
|
|
2.32
|
|
2.70
|
|
7.47
|
|
7.69
|
|
Ancillary loan
fees
|
|
1.78
|
|
1.40
|
|
3.91
|
|
4.16
|
|
Income from life
insurance policies
|
|
1.03
|
|
1.13
|
|
3.08
|
|
3.16
|
|
Net gain on sale
of loans
|
|
0.14
|
|
0.27
|
|
2.27
|
|
1.30
|
|
Net gain on
disposal of fixed assets
|
|
0.04
|
|
1.26
|
|
0.22
|
|
1.57
|
|
Other operating
income
|
|
0.42
|
|
0.63
|
|
1.86
|
|
2.18
|
|
Total
|
|
$
|
(43.55
|
)
|
$
|
13.59
|
|
$
|
(24.20
|
)
|
$
|
35.54
|
|
Noninterest (loss) income includes revenues earned from sources other
than interest income. These sources
include: net gain on sale of loans, investment securities available-for-sale,
and other assets, service charges and fees on deposit accounts, fees and
commissions generated from trade finance activities and the issuance of letters
of credit, ancillary fees on loans, income from life insurance policies,
impairment writedowns on investment securities, and other noninterest-related
revenues.
Noninterest (loss) income decreased 421% to ($43.6)
million during the three months ended September 30, 2008 from $13.6
million for the same quarter in 2007.
Excluding the non-cash OTTI charges on investment securities amounting
to $53.6 million, total noninterest income decreased 28% to
38
Table
of Contents
$10.0 million during the third quarter of
2008, compared with $14.0 million for the corresponding quarter in 2007. The decrease in noninterest income for the
quarter ended September 30, 2008, as compared to the same period in 2007,
is primarily attributable to higher net gain on sales of investment securities
and higher net gain on disposal of fixed assets recorded during the third
quarter of 2007, partially offset by higher branch fees and ancillary loan fees
earned during the third quarter of 2008.
There were no gains on sale of investment securities recorded during the
third quarter of 2008. Furthermore, we
recorded only $44 thousand in net gain on disposals on fixed assets during the
third quarter of 2008, compared to $1.3 million recorded during the third
quarter of 2007.
For the first nine months of 2008, noninterest
income decreased 168% to ($24.2) million from $35.5 million for the
corresponding period in 2007. Excluding
non-cash OTTI charges on investment securities totaling $63.5 million for the
first nine months of 2008, total noninterest income increased 9% to $39.3
million, compared to $35.9 million for the first nine months of 2007. The increase in noninterest income during the
nine months ended 2008, excluding OTTI charges, 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, partially
offset by lower net gain on disposal of fixed assets.
During the third quarter of 2008, we recorded $53.6 million in OTTI
writedowns on our available-for-sale securities portfolio. Of this amount, $47.0 million was related to
certain Fannie Mae and Freddie Mac preferred securities, and $6.6 million was
related to certain pooled trust preferred debt and equity securities. In comparison, we recorded a $405 thousand
impairment charge on a pooled trust preferred equity security during the third
quarter and first nine months of 2007.
Also see Note 5 to the Condensed Consolidated Financial Statements
presented elsewhere in this report.
Branch fees, which represent revenues derived from
branch operations, increased 12% to $4.3 million in the third quarter of 2008
from $3.8 million for the same quarter in 2007.
Similarly, branch fee income for the first nine months of 2008 increased
19% to $12.7 million, compared to $10.7 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.
During the third quarter of 2008, net gain on sales
of loans decreased 47% to $144 thousand, compared to $272 thousand during the
same quarter in 2007. During the first
nine months of 2008, net gain on sale of loans increased 75% to $2.3 million,
compared to $1.3 million during the same period in 2007. The increase in net gain on sales of loans
for the first nine months of 2008 is primarily due to bulk sales of commercial
real estate loans to various third parties transacted during the first and
second quarters of 2008. Prior to 2008,
we did not sell commercial real estate loans in bulk sale transactions.
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 increased 28% to $1.8 million during the third quarter
of 2008, compared to $1.4 million recorded during the same period in 2007. The increase in ancillary loan fees is
primarily due to a rise in servicing income related to our loan securitizations
in 2007. For the first nine months of
2008, ancillary loan fees decreased 6% to $3.9 million, compared to $4.2
million for the first nine months of 2007.
The decrease in ancillary loan fees for first nine months 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, lower escrow credit rate
assumptions, as well as increased borrower refinancing and prepayment speed
assumptions on mortgage loans.
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Other noninterest income, which includes insurance commissions and
insurance-related service fees, rental income, and other miscellaneous income,
decreased 33% to $413 thousand during the third quarter of 2008, from $621
thousand recorded during the same quarter of 2007. For the first nine months of 2008, other
noninterest income decreased 14% to $1.9 million, compared to $2.2 million for
the first nine 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.
Noninterest Expense
Components of Noninterest Expense
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
(In millions)
|
|
Compensation and
employee benefits
|
|
$
|
17.52
|
|
$
|
22.08
|
|
$
|
66.58
|
|
$
|
63.51
|
|
Occupancy and
equipment expense
|
|
6.82
|
|
6.66
|
|
20.36
|
|
18.58
|
|
Amortization and
impairment writedowns of premiums on deposits acquired
|
|
1.58
|
|
1.77
|
|
6.15
|
|
4.82
|
|
Loan related
expense
|
|
2.36
|
|
0.71
|
|
5.97
|
|
1.94
|
|
Amortization of
investments in affordable housing partnerships
|
|
1.89
|
|
1.02
|
|
5.52
|
|
3.52
|
|
Deposit
insurance premiums and regulatory assessments
|
|
1.68
|
|
0.35
|
|
5.19
|
|
1.02
|
|
Legal expense
|
|
0.86
|
|
0.65
|
|
3.89
|
|
1.26
|
|
Consulting
expense
|
|
1.25
|
|
0.99
|
|
3.79
|
|
2.34
|
|
Other real
estate owned expense (income)
|
|
2.12
|
|
|
|
3.52
|
|
(1.25
|
)
|
Deposit-related
expenses
|
|
1.23
|
|
1.69
|
|
3.42
|
|
5.24
|
|
Data processing
|
|
1.06
|
|
1.35
|
|
3.39
|
|
3.40
|
|
Impairment
writedown on goodwill
|
|
0.27
|
|
|
|
0.86
|
|
|
|
Other operating
expenses
|
|
9.89
|
|
9.47
|
|
28.43
|
|
26.60
|
|
Total
|
|
$
|
48.53
|
|
$
|
46.74
|
|
$
|
157.07
|
|
$
|
130.98
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency Ratio
(1)
|
|
46
|
%
|
37
|
%
|
46
|
%
|
36
|
%
|
(1) Represents noninterest
expense (exluding the amortization of intangibles, amortization and impairment
writedowns of premiums on deposits acquired, impairment writedown on goodwill,
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 4% to $48.5
million during the third quarter of 2008, from $46.7 million for the same
quarter in 2007. For the first nine
months of 2008, noninterest expense increased 20% to $157.1 million, compared
with $131.0 million during the same period in 2007.
Compensation and employee benefits decreased 21% to $17.5 million
during the third quarter of 2008, compared to $22.1 million for the same
quarter in 2007. For the first nine
months of 2008, compensation and employee benefits increased 5% to $66.6
million, compared with $63.5 million for the first nine months of 2007. The decrease in compensation and employee
benefit expenses during the third quarter of 2008 is due to the impact of
initiatives undertaken by the Company throughout the year to monitor overall
staffing levels and reduce related incentive program expenses. Year to date, higher compensation expense for
the first nine months of 2008 relative to the same period in 2007 can be partly
attributed to the acquisition of Desert Community Bank in August 2007.
Occupancy and equipment expenses slightly increased to $6.8 million
during the quarter ended September 30, 2008, compared with $6.7 million
during the same period in 2007. For the
first nine
40
Table
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months of 2008, occupancy and equipment expenses totaled $20.4 million,
a 10% increase from $18.6 million incurred during the first nine months 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.
Amortization expense and impairment writedowns of premiums on deposits
acquired decreased 11% to $1.6 million during the quarter ended September 30,
2008, compared with $1.8 million during the same period in 2007. For the first nine months of 2008,
amortization expense and impairment writedowns of premiums on deposits totaled
$6.1 million, compared with $4.8 million incurred during the same period in
2007. The 27% increase in amortization
expense for the first nine months ended 2008 is primarily due to additional
deposit premiums of $14.9 million recorded in connection with the acquisition
of DCB in August 2007. During the
second quarter of 2008, we also recorded an $855 thousand impairment writedown
on deposit premiums related to the DCB acquisition due to higher than
anticipated runoffs in certain deposit categories.
Loan related expenses increased to $2.4 million, compared to $708
thousand during the same period in 2007.
For the first nine months of 2008, loan related expenses increased to
$6.0 million, compared to $1.9 million for the same period in 2007. The increase in loan related expenses is
primarily due to new appraisals ordered during the second and third quarters of
2008 to obtain current valuations of collateral securing our land, residential
construction, and commercial construction loan portfolios. This was part of our comprehensive loan
portfolio review process to quantify our credit exposure to sectors of the loan
portfolio that have been especially hard hit by the downturn in the real estate
market. Additionally, loan related expenses
were also impacted by higher FNMA guarantee fees during 2008, relative to the
previous year, as a result of our loan securitization activities during 2007.
Amortization of investments in affordable housing partnerships
increased to $1.9 million during the quarter ended September 30, 2008,
compared with $1.0 million during the same period in 2007. For the first nine months of 2008,
amortization of investments in affordable housing partnerships increased to
$5.5 million compared to $3.5 million for the first nine months of 2007. The increase in amortization expense is
partly due to additional purchases of investments in affordable housing
partnerships since the third quarter of 2007.
Deposit insurance premiums and regulatory assessments increased to $1.7
million during the quarter ended September 30, 2008, compared with $350
thousand during the same period in 2007.
For the first nine months of 2008, deposit insurance premiums and
regulatory assessments increased to $5.2 million, compared to $1.0 million 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 fully utilized during the first quarter of 2008. In addition, the enactment of the EESA in October 2008
will temporarily raise the basic limit of the federal deposit insurance
coverage (FDIC) from $100,000 to $250,000 per depositor and to fully insure
all non-interest bearing deposit accounts until December 31, 2009. As a result, we anticipate deposit insurance
premiums to increase during the remainder of 2008 and in future periods.
Legal expenses increased 31% to $855 thousand during the third quarter
of 2008, compared to $653 thousand for the same period in 2007. For the first nine months of 2008, legal
expenses increased more than twofold to $3.9 million, compared to $1.3 million
during the same period in 2007. The
increase in legal expenses 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.
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Table of Contents
Consulting expenses increased 26% to $1.3 million during the third
quarter of 2008, compared to $992 thousand during the same period in 2007. For the first nine months of 2008, consulting
expenses increased 62% to $3.8 million, compared to $2.3 million for the same
period in 2007. The increase in
consulting expenses is due to fees paid to a third party service provider during
the second and third quarters of 2008 to make an assessment of the financial
strength of borrowers as part of our extensive loan review efforts to quantify
our credit exposure in certain loan segments.
We recorded OREO
expenses, net of OREO revenues and gains, totaling $2.1 million during the
third quarter of 2008. In comparison, we
recorded no OREO expenses during the same period in 2007. For the first nine months of 2008, net OREO
expenses increased to $3.5 million, compared with $1.2 million in net OREO
income during the first nine months of 2007 representing the net gain on sale
of one OREO property sold during the first quarter of 2007. The $3.5 million in total OREO expenses
incurred during the first nine months of 2008 is comprised of $3.2 million in
various operating and maintenance expenses related to our higher volume of OREO
properties and $302 thousand in net losses from the sale of eleven OREO
properties consummated in 2008. As of September 30,
2008, total net OREO amounted to $17.6 million, compared to only $1.5 million
as of December 31, 2007.
Deposit-related expenses decreased 27% to $1.2 million during the third
quarter of 2008, compared to $1.7 million for the same quarter last year. For the first nine months of 2008,
deposit-related expenses decreased 35% to $3.4 million from $5.2 million for
the first nine months 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 2008 relative to the previous year.
This segment of our deposit base has been
adversely impacted by the overall slowing in the housing market both in
production and sale.
As a result of the Companys
goodwill impairment analysis, we recorded an additional goodwill impairment of
$272 thousand and wrote off the remaining goodwill balance related to the
Companys insurance agency reporting unit, East West Insurance Services, Inc.,
during the third quarter of 2008. Total
goodwill impairment charges recorded for this reporting unit amounted to $858
thousand during the nine months ended September 30, 2008. No goodwill impairment writedowns were
recorded during 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 4% to $9.9
million for the third quarter of 2008, compared to the $9.5 million recorded
during the same period in 2007.
Similarly, other operating expenses increased 7% to $28.4 million for
the first nine months of 2008, from $26.6 million for the same period in
2007. The increase in operating expenses
for both periods in 2008 is primarily due to the acquisition of DCB in August 2007.
Our efficiency ratio increased to 46.40% for the quarter ended September 30,
2008, compared with 37.30% for the corresponding quarter in 2007. For the first nine months of 2008, the
efficiency ratio was 45.51% compared with 36.35% for the same period in
2007. Although our overall efficiency
ratios have increased in 2008 relative to 2007, our efficiency ratio during the
third quarter of 2008 decreased relative to our efficiency ratio of 48.62%
during the second quarter of 2008 due to our expense management efforts. We anticipate noninterest expenses to trend
positively during the remainder of 2008 as we continue to vigilantly monitor
all expenditures.
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Table of Contents
Income Taxes
The income tax benefit for the
three months ended September 30, 2008 amounted to $17.4 million
representing an effective tax rate of 35.7% for the period. In comparison, the provision for income taxes
of $26.4 million for the three months ended September 30, 2007 represented
an effective tax rate of 38.9% for the quarter.
The income tax benefit for the third quarter of 2008 reflects the
utilization of affordable housing tax credits totaling $2.0 million, compared
to $1.3 million in tax credits utilized during the third quarter of 2007. The passage of the EESA in October 2008
provided banks with tax relief by treating OTTI losses on Fannie Mae and
Freddie Mac preferred stock as ordinary losses, instead of capital losses. As a result of this law change, the Company
anticipates an additional $5.7 million in tax benefit related to these OTTI
charges to be recognized during the fourth quarter of 2008.
For the first nine months of
2008, the income tax benefit totaled $33.9 million representing an effective
tax rate of 39.4%. This compares to
$79.0 million income tax expense, representing a 38.9% effective tax rate,
recorded for the first nine months of 2007.
For the first nine months of 2008, the income tax benefit reflects the
utilization of $5.3 million in tax credits, compared to $3.8 million in tax
credits utilized during the same period in 2007. The $858 thousand goodwill impairment charge
recorded during the first nine months of 2008 is not deductible for tax
purposes. 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.
Pursuant to the adoption of FIN 48 on January 1,
2007, the Company increased its existing unrecognized tax benefits by $7.1
million by recognizing a one-time cumulative effect adjustment to retaining
earnings on January 1, 2007. During
the second quarter of 2008, the Company determined that the remaining $4.6
million, net of tax benefit, would not more likely than not be sustained upon
examination by tax authorities. As a
result, this charge was recorded against the provision for income taxes during
the second quarter of 2008.
As of September 30, 2008, the Company
does not have any tax positions which dropped below a more likely than not
threshold.
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.
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
43
Table
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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 11 to the Condensed Consolidated Financial Statements presented elsewhere
in this report.
Retail Banking
The retail banking
segment reported an $8.3 million pretax loss, or a 121% decrease, for the three
months ended September 30, 2008, as compared to a $39.7 million pretax
income for the same quarter in 2007. The
decrease in pretax income for this segment during the third quarter of 2008 is
comprised of a 35% decrease in net interest income to $40.0 million, a $14.3
million increase in loan loss provisions, a 3% or $716 thousand increase in
noninterest expense to $22.9 million, and an $8.4 million increase in corporate
overhead expense allocations.
For the nine months ended
September 30, 2008, the pretax loss for the retail banking segment
amounted to $12.7 million, representing a 111% decrease, as compared to the
$119.6 million pretax income recorded for the same period in 2007. The decrease in pretax income for this
segment during the nine months ended September 30, 2008 is comprised of a
24% or $42.7 million decrease in net interest income to $132.4 million, a $57.3
million increase in loan loss provisions, a 14% or $8.7 million increase in
noninterest expense to $72.8 million, and a $21.9 million increase in corporate
overhead expense allocations.
The decrease in net
interest income during the third quarter and first nine months of 2008 is
attributable largely to the 275 basis point decrease in interest rates since September 2007
partially offset by additional 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 third quarter and first
nine months 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. Loan loss provisions are also impacted by
average loan balances for each reporting segment. 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 August 2007 which resulted in a
rise in loan and deposit volume and total number of employees for this segment.
44
Table
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Noninterest income for
this segment decreased 35%, to $5.0 million for the quarter ended September 30,
2008, from $7.7 million recorded during the same period in 2007. For the first nine months of 2008,
noninterest income for the retail banking segment decreased 7%, to $18.3 million,
compared to $19.6 million for the same period in 2007. The decrease in noninterest income for both
periods in 2008 is primarily due to lower loan fee income resulting from a
notable decrease in our consumer loan origination activities, partially offset
by an 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 3% to $22.9 million during the third quarter
of 2008, compared with $22.2 million recorded during the third quarter of
2007. For the first nine months of 2008,
noninterest expense increased 14% to $72.8 million, from $64.1 million for the
same period in 2007. The increase in
noninterest expense is primarily due to higher compensation and employee
benefits, occupancy expenses, and FDIC insurance premiums, 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.
The increase in FDIC insurance premiums is due to the full utilization
of the one-time FDIC assessment credit of $3.4 million, $2.8 million of which
was applied to reduce deposit insurance assessments in 2007 and the remaining
$628 thousand was applied in the first quarter of 2008.
The decrease in commercial deposit-related expenses
can be correlated to lower title and escrow deposit balances during 2008
relative to 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 income of $9.6 million during the quarter ended September 30,
2008, or a 63% decrease, compared with pretax income of $25.8 million for the
same period in 2007. For the first nine
months of 2008, the pretax loss for the commercial lending segment amounted to
$12.0 million, or a 116% decrease from pretax income of $77.1 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 and an increase in corporate allocations, partially offset by
the increase in net interest income.
Net interest income for
this segment increased 34% to $44.4 million during the quarter ended September 30,
2008, compared to $33.2 million for the same period in 2007. For the first nine months of 2008, net
interest income for this segment increased 47% to $133.0 million, from $90.7
million for the corresponding period in 2007.
The increase in net interest income is primarily due to a significant
decrease in the charge for funds applied to the loan portfolio as a result of
the declining interest rate environment.
Although interest income on loans also decreased in response to
declining interest rates, the interest rate floors on variable loans helped to
support the interest income on these loans.
Noninterest income for
this segment decreased 32% to $5.0 million during the third quarter of 2008,
compared with $7.4 million recorded in the same quarter of 2007. For the first nine months of 2008,
noninterest income decreased 21% to $18.1 million, from $22.9 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 remained stable at $10.6 million during the third quarter of 2008
and 2007. For the first nine months of
2008, noninterest expense for this segment increased 18%,
45
Table
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to $35.2 million, from
$29.8 million for the same period in 2007.
The increase in noninterest expense is due to higher credit related
cycle expenses associated with OREO/foreclosure transactions and legal
expenses.
Treasury
The treasury segment
reported a pretax loss of $63.5 million during the third quarter of 2008,
compared to pretax income of $2.2 million for the same quarter in 2007. For the first nine months of 2008, the pretax
loss for the treasury segment was $83.9 million, representing a 679% decrease
from pretax income of $14.5 million recorded during the same period in
2007. The primary driver of the decrease
in pretax income for this segment for both periods in 2008 are OTTI charges
recorded on government-sponsored entities preferred stock and pooled trust
preferred debt and equity securities. OTTI
charges are recorded as a component of noninterest income.
The treasury segment
reported a net interest expense of $7.4 million for the third quarter of 2008,
compared to a net interest income of $2.9 million reported during the same
quarter in 2007. For the first nine
months of 2008, net interest expense for this segment was $15.0 million,
compared to net interest income of $15.2 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 decreased to ($53.7) million during the three months ended September 30,
2008 from $(433) thousand for the same quarter in 2007. For the first nine months of 2008,
noninterest income decreased to ($62.9) million as compared to ($382) thousand
for the same period in 2007. The
decrease in noninterest income is primarily due to the $63.5 million in year to
date OTTI impairment charges which are comprised of the following: $55.3
million on Fannie Mae and Freddie Mac preferred securities, $5.6 million on
pooled trust preferred debt securities, and $2.6 million on pooled trust
preferred equity securities.
Noninterest
expense for this segment increased 84% to $605 thousand during the third
quarter of 2008, from $329 thousand during the same quarter in 2007. For the first nine months of 2008,
noninterest expense for this segment increased 50% to $1.7 million, from $1.1
million during the
same
period in 2007. The increase in
noninterest expense for both periods is primarily due to higher compensation
due to additional personnel, higher FDIC insurance premiums on brokered and
institutional deposits, and higher FHLB letter of credit expenses in
conjunction with our loan securitization activities.
Residential Lending
The residential lending
segments pretax income decreased 97% to $165 thousand during the third quarter
of 2008, from $5.6 million during the same quarter in 2007. For the first nine months of 2008, pretax
income for this segment decreased 19% to $12.9 million, from $15.9 million for
the same period in 2007. Net interest
income for this segment increased 65% to $9.2 million during the third quarter
of 2008, compared with $5.6 million for the corresponding quarter in 2007. During the first nine months of 2008, net
interest income for this segment increased 54% to $25.7 million, compared with $16.7
million during the first nine months of 2007.
The increase in net interest income for this segment was primarily due
to the decrease in the charge for funds on loans allocated to this segment
resulting from the 275 basis point decrease in interest rates since September 2007,
partly offset by the contraction of the housing market.
46
Table of Contents
Noninterest income for
this segment decreased 38% to $2.4 million during the third quarter of 2008,
compared to $3.9 million recorded during the third quarter of 2007. For the first nine months of 2008,
noninterest income for this segment increased 23% to $11.5 million, compared to
$9.4 million during the first nine months of 2007. The net increase in noninterest income during
2008 year to date is primarily due to higher servicing income received as a
result of the Banks securitization of its residential and multifamily loan
portfolios in 2007.
Noninterest expense for this
segment increased 4% to $2.6 million during the three months ended September 30,
2008, from $2.5 million during the same period in 2007. For the first nine months of 2008,
noninterest expense increased 25% to $9.1 million, from $7.3 million for the first
nine months of 2007. The increase in
noninterest expense during 2008 is due to an increase in credit cycle related
costs, as well as compensation and other operating expenses 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.
Balance Sheet Analysis
Our total assets decreased $
129.9
million, or
1
%, to $
11.72
billion, as of September 30,
2008, compared 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 $
639.7
million, and securities
purchased under resale agreements amounting to $100.0 million. These decreases were partially offset by
increases in cash and cash equivalents of $367.1 million, available-for-sale
investment securities totaling $
160.1
million, deferred tax assets
of $109.2 million, and OREO, net of $
16.1
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 September 30,
2008, compared with $150.0 million as of December 31, 2007, all of which
are long-term agreements. The decrease
as of September 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
47
Table
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fair market value of the
securities decreases below the carrying amount of the related repurchase
agreement, our counterparty is required to pledge as collateral 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 increased
8
% to $2.05 billion as of September 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 $
1.01 b
illion and $
376.1
million, respectively,
during the nine months ended September 30, 2008. Proceeds from repayments, maturities, sales,
and redemptions were applied towards additional investment securities
purchases, funding loan originations, and paying down borrowings. For the first nine months of 2008, we
recorded net gains on sales of available-for-sale securities totaling $
7.8
million, compared with $5.2
million during the first nine months 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
factors including 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.
The Company performs a monthly analysis on the broker quotes received
from third parties to ensure that the prices represent a reasonable estimate of
the fair value. The procedures include,
but are not limited to, initial and on-going review of third party pricing
methodologies, review of pricing trends, and monitoring of trading
volumes. The Company ensures whether
prices received from independent brokers represent a reasonable estimate of
fair value through the use of internal and external cash flow models developed
based on spreads, and when available, market indices. As a result of this
analysis, if the Company determines there is a more appropriate fair value
based upon the available market data, the price received from the third party
is adjusted accordingly.
Prices
from third party pricing services are often unavailable for securities that are
rarely traded or are traded only in privately negotiated transactions. As a
result, certain securities are priced via independent broker quotations which
utilize inputs that may be difficult to corroborate with observable market
based data. Additionally, the majority of these independent broker quotations
are non-binding.
As
a result of the global financial crisis and illiquidity in the U.S. markets, we
believe the current broker prices that we have obtained on our private label
mortgage-backed securities and pooled trust preferred debt and equity
securities are based on forced liquidation or distressed sale values in very
inactive markets that are not representative of the economic value of these
securities. The fair values of private
label mortgage-backed securities and pooled trust preferred securities have
traditionally been based on the average of at least two quoted market prices
obtained from independent external brokers since broker quotes in an active
market are given the highest priority under SFAS 157. However, in light of these circumstances, we
have modified our approach in determining the fair values of these
securities. We have determined that each
of these securities will be individually examined for the appropriate valuation
methodology based on a combination of the market approach reflecting current
broker prices
48
Table of Contents
and
a discounted cash flow approach. In
calculating the fair value derived from the income approach, procedures
include, but are not limited to, assumptions related to the implied rate of
return, general change in market rates, estimated changes in credit quality and
liquidity risk premium, specific non-performance and default experience in the
collateral underlying the security, as well as broker discount rates are taken
into consideration in determining the discount rate. The values resulting from each approach (i.e.
market and income approaches) are weighted to derive the final fair value on
each private label mortgage-backed and pooled trust preferred security.
The majority of
unrealized losses in the available-for-sale portfolio at September 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 September 30, 2008, the fair value
of these securities totaled $562.2 million, representing 27% of our total
investment portfolio. Gross unrealized
losses related to these securities amounted to $72.4 million, or 11% of the
aggregate
amortized cost basis of these securities as of September 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 September 30, 2008. Additionally, these securities are insured by
a monoline insurance company whose AAA credit rating has been affirmed by a
major rating agency.
As of September 30, 2008, we had $
68.7
million in trust preferred debt securities, representing
3% of our total investment
portfolio. These debt instruments had
gross unrealized losses amounting to $54.2 million, or 44% of the
total amortized cost basis of these securities as of September 30,
2008. Almost all of the pooled trust
preferred securities held by the Company have underlying collateral issued by
banks and insurance companies
.
Of the 15 different trust
preferred securities that we have purchased, only four securities have
underlying collateral issued by a combination of bank, insurance, real estate
investment trusts or homebuilder companies.
Furthermore, most of the trust preferred securities are
overcollateralized and have subordination structures that management believes
will afford sufficient principal and interest protection. One pooled trust preferred security was
downgraded to a B+ rating, from a BBB rating, by one rating agency shortly
before year-end 2007. During the third
quarter of 2008, we recorded a combined $5.6 million in impairment writedowns
on this downgraded security and another trust preferred security in accordance
with SFAS 115, FSP FAS 115-1 and SFAS 124-1 and EITF 99-20,
Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets
. We believe that the recent bailout program
passed by the U.S. government to purchase problem assets from banks and provide
for an injection of capital reduces the risk default by bank issuers and
increases the probability that the liquidity in this market and the prices of
our securities will improve in the near term future. We will continue to review such factors,
including but not limited to, the estimated cash flows, liquidity and credit
risk, for these securities on a quarterly basis.
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 September 30, 2008, the fair values
of the residual securities totaled $37.4 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 16%. 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%.
49
Table
of Contents
In September 2008, the
liquidity and credit concerns led the U.S. Federal Government to assume a
conservatorship role in Fannie Mae and Freddie Mac. The rating on Fannie Mae and Freddie Mac
preferred securities was downgraded from BBB- to C reflecting the cessation of
dividend payments on these securities.
These securities are non-cumulative perpetual preferred stock in which
unpaid dividends do not accumulate. The
purchase agreement between the U.S. Treasury and these government-sponsored
entities contains a covenant prohibiting the payment of dividends on existing
preferred stock. It is currently
difficult to assess the status of any resumption in dividend payments on these
securities. Therefore, in accordance
with SFAS 115, FSP FAS 115-1 and SFAS
124-1, we recorded $47.0
million in OTTI charges on Fannie Mae and Freddie Mac preferred stock
securities. As of September 30,
2008, the fair value of these preferred securities was reduced to $3.3 million
as a result of the impairment charge.
We
also have pooled trust preferred equity securities with fair values totaling $
1.2
million as of September 30,
2008. As a result of our periodic
reviews for impairment in accordance with SFAS 115, FSP FAS 115-1 and FAS
124-1, and EITF 99-20,
we recorded $
1.0
million in impairment
charges related to pooled trust preferred equity securities. The cost bases of these securities were less
than their fair values and there were adverse changes in expected cash flows.
We
have seventeen individual securities that have been in a continuous unrealized
loss position for twelve months or longer as of September 30, 2008. These securities are comprised of eleven
pooled trust preferred securities with a total fair value of $58.7 million,
five mortgage-backed securities with a total fair value of $578.2 million and
one agency debt security with a fair value of $48.5 million. 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 or
maturity. 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 September 30, 2008 and December 31, 2007:
50
Table
of Contents
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
As of
September 30, 2008
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
2,505
|
|
$
|
5
|
|
$
|
|
|
$
|
2,510
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
1,212,599
|
|
782
|
|
(8,275
|
)
|
1,205,106
|
|
U.S. Government
sponsored enterprise mortgage-backed securities
|
|
122,410
|
|
1,488
|
|
(147
|
)
|
123,751
|
|
Other
mortgage-backed securities
|
|
679,691
|
|
|
|
(76,991
|
)
|
602,700
|
|
Trust preferred
securities (1)
|
|
122,867
|
|
|
|
(54,159
|
)
|
68,708
|
|
U.S. Government
sponsored enterprise equity securities (2)
|
|
3,340
|
|
|
|
|
|
3,340
|
|
Residual
securities
|
|
24,886
|
|
12,502
|
|
|
|
37,388
|
|
Other securities
(3)
|
|
4,221
|
|
17
|
|
(497
|
)
|
3,741
|
|
Total investment
securities available-for-sale
|
|
$
|
2,172,519
|
|
$
|
14,794
|
|
$
|
(140,069
|
)
|
$
|
2,047,244
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Trust preferred
securities (1)
|
|
127,420
|
|
1,708
|
|
(9,501
|
)
|
119,627
|
|
U.S. Government
sponsored enterprise equity securities
|
|
83,744
|
|
500
|
|
(9,189
|
)
|
75,055
|
|
Residual
securities
|
|
32,778
|
|
12,623
|
|
(287
|
)
|
45,114
|
|
Other securities
|
|
2,470
|
|
14
|
|
|
|
2,484
|
|
Total investment
securities available-for-sale
|
|
$
|
1,954,140
|
|
$
|
24,138
|
|
$
|
(91,142
|
)
|
$
|
1,887,136
|
|
(1) Reflects net of OTTI
charge of $5.6 million and $405 thousand as of September 30, 2008 and December
31, 2007, respectively.
(2) Reflects net of OTTI
charge of $55.3 million as of September 30, 2008.
(3) Reflects net of OTTI
charge of $1.0 million as of September 30, 2008.
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 $
555.7
million, or
6
% to $
8.29
billion at September 30,
2008, relative to December 31, 2007.
51
Table
of Contents
The following table sets
forth the composition of the loan portfolio as of the dates indicated:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
|
Residential,
single family
|
|
$
|
488,026
|
|
5.9
|
%
|
$
|
433,337
|
|
4.9
|
%
|
Residential,
multifamily
|
|
689,806
|
|
8.3
|
%
|
690,941
|
|
7.8
|
%
|
Commercial and
industrial real estate
|
|
3,969,813
|
|
47.9
|
%
|
4,183,473
|
|
47.3
|
%
|
Construction
|
|
1,356,668
|
|
16.4
|
%
|
1,547,082
|
|
17.5
|
%
|
Total real
estate loans
|
|
6,504,313
|
|
78.5
|
%
|
6,854,833
|
|
77.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
1,190,848
|
|
14.4
|
%
|
1,314,068
|
|
14.8
|
%
|
Trade finance
|
|
389,288
|
|
4.7
|
%
|
491,690
|
|
5.6
|
%
|
Automobile
|
|
10,795
|
|
0.1
|
%
|
23,946
|
|
0.3
|
%
|
Other consumer
|
|
194,189
|
|
2.3
|
%
|
160,572
|
|
1.8
|
%
|
Total other
loans
|
|
1,785,120
|
|
21.5
|
%
|
1,990,276
|
|
22.5
|
%
|
Total gross
loans
|
|
8,289,433
|
|
100.0
|
%
|
8,845,109
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Unearned fees,
premiums and discounts, net
|
|
(1,047
|
)
|
|
|
(5,781
|
)
|
|
|
Allowance for
loan losses
|
|
(177,155
|
)
|
|
|
(88,407
|
)
|
|
|
Loan receivable,
net
|
|
$
|
8,111,231
|
|
|
|
$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 $
200.6
million or
1.71
% of total assets at September 30,
2008 and $67.5 million or 0.57% of total assets at December 31, 2007. Nonaccrual loans amounted to $
177.3
million at September 30,
2008, compared with $63.9 million at year-end 2007. Loans totaling $
204.2
million were placed on
nonaccrual status during the third quarter of 2008. As a part of our comprehensive loan review,
loans totaling $
27.3
million which
were not 90 days past due as of September 30, 2008, were placed on
nonaccrual status due to concerns regarding collateral values and future
collectibility. Additions to nonaccrual
loans were offset by $
35.7
million in chargeoffs, $
57.6 million
in payoffs and principal
paydowns, $
19.9
million in
loans that were transferred to other real estate owned, and $
84.5
million in loans brought
current. The additions to nonaccrual
loans during the third quarter of 2008 were comprised of $3.2 million in single
family loans, $5.2 million in multifamily loans, $44.3 million in commercial
real estate loans, $134.4 million in construction loans, $15.8 million in
commercial business loans including SBA loans, $523 thousand in trade finance
loans, and $820 thousand in automobile and other consumer loans.
Loans that were past due 90
days or more were on nonaccrual status as of September 30, 2008 and December 31,
2007.
Restructured loans represent
loans that have had their original terms modified. There were $5.7 million in restructured loans
as of September 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 23 OREO
properties at September 30, 2008 with a combined aggregate carrying value
of $17.6 million. Of this amount, 61% is
located in the Inland Empire region of Southern California, 34% in the Greater
Los Angeles area, and the remaining 5% in Northern California.
52
Table
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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. For the first nine months of 2008, we
foreclosed on 33 properties with an aggregate carrying value of $46.6 million
as of the foreclosure date. During this
period, we also sold eleven OREO properties with a carrying value of $28.4
million resulting in a total net loss on sale of $302 thousand. In comparison, we sold one OREO property with
a carrying value of $2.8 million for a net gain on sale of $1.3 million during
the first nine months of 2007.
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:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
177,303
|
|
$
|
63,882
|
|
Loans past due
90 days or more but not on nonaccrual
|
|
|
|
|
|
Total
nonperforming loans
|
|
177,303
|
|
63,882
|
|
|
|
|
|
|
|
Restructured
loans
|
|
5,664
|
|
2,081
|
|
Other real
estate owned, net
|
|
17,607
|
|
1,500
|
|
Total
nonperforming assets
|
|
$
|
200,574
|
|
$
|
67,463
|
|
|
|
|
|
|
|
Total
nonperforming assets to total assets
|
|
1.71
|
%
|
0.57
|
%
|
Allowance for
loan losses to nonperforming loans
|
|
99.92
|
%
|
138.39
|
%
|
Nonperforming
loans to total gross loans
|
|
2.14
|
%
|
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 September 30, 2008, we classified
$207.7
million of our loans as impaired, compared with $123.8 million at December 31,
2007. Specific reserves on impaired
loans amounted to $32.9 million and $16.3 million at September 30, 2008
and December 31, 2007, respectively.
Our average recorded investment in impaired loans for the nine months
ended September 30, 2008 and 2007 were $233.1 million and $71.3 million,
respectively. During the nine months
ended September 30, 2008 and 2007, gross interest income that would have
been recorded on impaired loans, had they performed in accordance with their
original terms, totaled $12.7 million and $4.6 million, respectively. Of this amount, actual interest recognized on
impaired loans, on a cash basis, was $7.6 million and $3.0 million,
respectively.
53
Table of Contents
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 ultimate 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 September 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 September 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 September 30,
2008, the allowance for loan losses amounted to $177.2 million, or 2.14% of
total loans, compared with $88.4 million, or 1.00% of total loans, at December 31,
2007, and $84.6 million, or 0.99% of total loans, at September 30,
2007. The allowance for unfunded loan
commitments, off-balance sheet credit exposures, and recourse provisions are
included in accrued expenses and other liabilities and amounted to $5.7 million
at September 30, 2008, compared to $11.4 million at December 31,
2007. The decrease in the off-balance
sheet allowance amount was due, in part, by a 37% decline in unfunded loan
commitments at September 30, 2008 relative to year-end 2007.
We recorded $43.0 million in loan loss provisions during the third
quarter of 2008 and $183.0 million during the first nine months of 2008. In comparison, we recorded $3.0 million in
loan loss provisions for the same periods in 2007. Although loss provisions recorded during the
third quarter of 2008 were significant in relation to the amount recorded
during the same period last year, it represents a sharp reduction from the
$85.0 million in loss provisions recorded during the second quarter of 2008.
54
Table of Contents
While
the elevated provision levels in 2008 are deemed prudent by management to
proactively and aggressively address asset quality issues brought on by the
downturn in the real estate market and instability in the overall economy, we
have noted a stabilization in overall nonperforming asset and delinquency
trends during the third quarter of 2008 relative to the first half of the year. We expect continued stability in our asset
quality trends during the fourth quarter of 2008. As such, we anticipate our loss provision
level in the fourth quarter and future periods to taper down as we continue to
manage down our problem assets and overall credit exposures.
During the third quarter of 2008, net loan chargeoffs amounted to $39.7
million, or an annualized 1.88% of average loans outstanding during the
quarter. This compares to net loan
chargeoffs of $853 thousand, or an annualized 0.04% of average loans outstanding
for the same quarter in 2007. Of the
$44.4 million in total gross chargeoffs recorded for the quarter, 47% or $21.0
million were land loans and 36% or $16.1 million were residential construction
loans. During the first nine months of
2008, net chargeoffs amounted to $99.9 million, or 1.53% of average loans
outstanding during the period. This
compares to net chargeoffs of $1.6 million, representing 0.03% 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 nine
months ended September 30, 2008 and 2007:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
balance, beginning of period
|
|
$
|
168,413
|
|
$
|
77,280
|
|
$
|
88,407
|
|
$
|
78,201
|
|
Allowance from
acquisition
|
|
|
|
4,125
|
|
|
|
4,125
|
|
Allowance for
unfunded loan commitments and letters of credit
|
|
5,437
|
|
1,013
|
|
5,669
|
|
824
|
|
Provision for
loan losses
|
|
43,000
|
|
3,000
|
|
183,000
|
|
3,000
|
|
Chargeoffs:
|
|
|
|
|
|
|
|
|
|
Single family
real estate
|
|
1,023
|
|
|
|
1,732
|
|
|
|
Multifamily real
estate
|
|
1,006
|
|
|
|
1,442
|
|
|
|
Commercial and
industrial real estate
|
|
21,690
|
|
|
|
43,108
|
|
|
|
Construction
|
|
16,138
|
|
516
|
|
40,429
|
|
516
|
|
Commercial
business
|
|
4,401
|
|
392
|
|
18,136
|
|
1,437
|
|
Automobile
|
|
63
|
|
1
|
|
226
|
|
1
|
|
Other consumer
|
|
34
|
|
|
|
74
|
|
11
|
|
Total chargeoffs
|
|
44,355
|
|
909
|
|
105,147
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Single family
real estate
|
|
1
|
|
|
|
3
|
|
|
|
Commercial and
industrial real estate
|
|
1,899
|
|
18
|
|
1,905
|
|
18
|
|
Construction
|
|
2,581
|
|
|
|
2,581
|
|
|
|
Commercial
business
|
|
177
|
|
25
|
|
714
|
|
348
|
|
Automobile
|
|
2
|
|
13
|
|
23
|
|
14
|
|
Total recoveries
|
|
4,660
|
|
56
|
|
5,226
|
|
380
|
|
Net chargeoffs
|
|
39,695
|
|
853
|
|
99,921
|
|
1,585
|
|
Allowance
balance, end of period
|
|
$
|
177,155
|
|
$
|
84,565
|
|
$
|
177,155
|
|
$
|
84,565
|
|
Average loans
outstanding
|
|
$
|
8,451,517
|
|
$
|
8,433,268
|
|
$
|
8,725,596
|
|
$
|
8,236,948
|
|
Total gross
loans outstanding, end of period
|
|
$
|
8,289,433
|
|
$
|
8,558,314
|
|
$
|
8,289,433
|
|
$
|
8,558,314
|
|
Annualized net
chargeoffs to average loans
|
|
1.88
|
%
|
0.04
|
%
|
1.53
|
%
|
0.03
|
%
|
Allowance for
loan losses to total gross loans, end of period
|
|
2.14
|
%
|
0.99
|
%
|
2.14
|
%
|
0.99
|
%
|
55
Table
of Contents
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 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:
56
Table of Contents
|
|
September 30,
|
|
December 31, 2007
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
Residential,
single family
|
|
$
|
5,113
|
|
5.9
|
%
|
$
|
2,475
|
|
4.9
|
%
|
Residential,
multifamily
|
|
7,171
|
|
8.3
|
%
|
4,216
|
|
7.8
|
%
|
Commercial and
industrial real estate
|
|
39,894
|
|
47.9
|
%
|
21,072
|
|
47.3
|
%
|
Construction
|
|
71,822
|
|
16.4
|
%
|
19,132
|
|
17.5
|
%
|
Commercial
business
|
|
40,583
|
|
14.4
|
%
|
24,188
|
|
14.9
|
%
|
Trade finance
|
|
11,509
|
|
4.7
|
%
|
16,487
|
|
5.5
|
%
|
Automobile
|
|
196
|
|
0.1
|
%
|
242
|
|
0.3
|
%
|
Other consumer
|
|
867
|
|
2.3
|
%
|
595
|
|
1.8
|
%
|
Total
|
|
$
|
177,155
|
|
100.0
|
%
|
$
|
88,407
|
|
100.0
|
%
|
Deposits
Deposits remained stable
during the first nine months of 2008, increasing 4% to $7.54 billion at September 30,
2008, from $7.28 billion at December 31, 2007. The net increase in deposits came from time
deposits which rose $522.4 million or 14%.
These were offset by decreases in money market accounts of 7% or $76.1
million, interest-bearing checking accounts of $98.8 million or 21%, savings
accounts of $51.8 million or 11%, and noninterest-bearing demand deposits of
$38.3 million or 3%.
As a result of the
turbulence in the banking sector, we experienced a notable growth in deposit
products that afford greater deposit insurance coverage to deposit customers
during the third quarter of 2008. As of September 30,
2008, time deposits within the Certificate of Deposit Account Registry Service
(CDARS) program increased to $189.6 million, compared to only $11.7 million
at December 31, 2007. The CDARS
program allows customers with deposits in excess of FDIC-insured limits to
obtain full coverage on time deposits through a network of banks within the
CDARS program. Additionally, during the
third quarter, we partnered with another financial institution to implement a
new retail sweep product for non-time deposit accounts to provide added deposit
insurance coverage for deposits in excess of FDIC-insured limits.
The
following table sets forth the composition of the deposit portfolio as of the
dates indicated:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$
|
1,393,480
|
|
$
|
1,431,730
|
|
Interest-bearing
checking
|
|
374,187
|
|
472,943
|
|
Money market
|
|
1,014,849
|
|
1,090,949
|
|
Savings
|
|
425,966
|
|
477,779
|
|
Total core
deposits
|
|
3,208,482
|
|
3,473,401
|
|
Time deposits:
|
|
|
|
|
|
Less than
$100,000
|
|
1,295,585
|
|
926,459
|
|
$100,000 or
greater
|
|
3,032,282
|
|
2,879,054
|
|
Total time
deposits
|
|
4,327,867
|
|
3,805,513
|
|
Total deposits
|
|
$
|
7,536,349
|
|
$
|
7,278,914
|
|
57
Table of Contents
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 September 30,
2008, federal funds purchased declined 86% to $30.4 million, as compared to
$222.3 million at December 31, 2007. FHLB advances declined 15% to $1.54
billion as of September 30, 2008, compared to $1.81 billion at
December 31, 2007. The decrease in federal funds purchased and FHLB
advances is consistent with our overall strategy to deleverage our balance
sheet. During the first nine months of 2008, a portion of the proceeds from the
maturities and sales of investment securities, as well as proceeds from our
preferred stock issuance in April 2008, were used to pay down our
borrowings. During the first quarter of 2008, we paid off an FHLB advance
totaling $50.0 million prior to its contractual maturity date. 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 September 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 nine months 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 $120.0 million matured during the first nine
months of 2008.
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 September 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 an original term of ten years. The rates were
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.
With the exception of one repurchase agreement, the rates have been switched to
fixed rates 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 September 30, 2008, the Company also had $4.5 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 September 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 September 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.
58
Table of Contents
|
|
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
|
|
$
|
4,244,375
|
|
$
|
151,989
|
|
$
|
39,428
|
|
$
|
11,078
|
|
$
|
3,325,816
|
|
$
|
7,772,686
|
|
Federal funds purchased
|
|
30,513
|
|
|
|
|
|
|
|
|
|
30,513
|
|
FHLB advances
|
|
669,408
|
|
938,347
|
|
5,414
|
|
3,223
|
|
|
|
1,616,392
|
|
Securities sold under repurchase agreements
|
|
52,424
|
|
95,913
|
|
95,913
|
|
1,128,658
|
|
|
|
1,372,908
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
12,150
|
|
12,150
|
|
Long-term debt obligations
|
|
11,626
|
|
23,251
|
|
23,251
|
|
422,894
|
|
|
|
481,022
|
|
Operating lease obligations
|
|
11,455
|
|
22,384
|
|
22,999
|
|
67,386
|
|
|
|
124,224
|
|
Unrecognized tax benefits
|
|
|
|
|
|
|
|
|
|
768
|
|
768
|
|
Postretirement benefit payments
|
|
|
|
11,156
|
|
1,732
|
|
2,316
|
|
|
|
15,204
|
|
Total contractual obligations
|
|
$
|
5,019,801
|
|
$
|
1,243,040
|
|
$
|
188,737
|
|
$
|
1,635,555
|
|
$
|
3,338,734
|
|
$
|
11,425,867
|
|
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
in extending loan facilities to customers. A schedule of significant
commitments to extend credit to customers as of September 30, 2008 is as
follows:
|
|
Commitments
|
|
|
|
Outstanding
|
|
|
|
(In thousands)
|
|
Undisbursed loan commitments
|
|
$
|
1,705,920
|
|
Standby letters of credit
|
|
509,105
|
|
Commercial letters of credit
|
|
50,237
|
|
|
|
|
|
|
Capital Resources
One of our primary sources of capital is the
retention of net after tax earnings. At September 30, 2008, stockholders
equity totaled $1.26 billion, an 8% 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 $4.5 million related to grants of restricted
stock and stock options; (3) tax benefits of $159 thousand resulting from
the exercise of nonqualified stock options; (4) net issuance of common
stock totaling $1.8 million, representing 419,195 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 $52.0 million recorded during the first nine months of
2008; (2) $33.8 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 $397
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 on
common and preferred stock totaling $23.1 million for the first nine months of
2008.
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
59
Table of Contents
and total capital ratios meet or exceed 6% and 10%, respectively, are
deemed to be well-capitalized.
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.
For a further discussion on this preferred
stock offering, see Note 10 to the Companys condensed consolidated financial
statements presented elsewhere in this report. As of September 30, 2008,
our total risk-based capital ratio is 13.12% or $318.5 million more than the
10.00% regulatory requirement for well-capitalized banks. Our Tier 1 risk-based
capital ratio of 11.12% and our Tier 1 leverage ratio of 9.84% as of
September 30, 2008 exceeded the regulatory guidelines for well-capitalized
banks. At September 30, 2008, the Banks Tier 1 and total capital ratios
were 10.92% and 12.91%, respectively, compared to 8.75% and 10.33%,
respectively, at December 31, 2007.
The following table compares
East West Bancorp, Inc.s and East West Banks actual capital ratios at
September 30, 2008, to those required by regulatory agencies for capital
adequacy and well-capitalized classification purposes:
|
|
|
|
|
|
Minimum
|
|
Well
|
|
|
|
East West
|
|
East West
|
|
Regulatory
|
|
Capitalized
|
|
|
|
Bancorp
|
|
Bank
|
|
Requirements
|
|
Requirements
|
|
Total Capital (to Risk-Weighted Assets)
|
|
13.1
|
%
|
12.9
|
%
|
8.0
|
%
|
10.0
|
%
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
11.1
|
%
|
10.9
|
%
|
4.0
|
%
|
6.0
|
%
|
Tier 1 Capital (to Average Assets)
|
|
9.8
|
%
|
9.7
|
%
|
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 nine months of 2008, we experienced net cash inflows from operating
activities of $144.3 million, compared to net cash inflows of $160.7 million
for the first nine months of 2007. For the first nine months of 2007, net cash
inflows from operating activities are due primarily to net income earned during
the period.
60
Table of Contents
Net cash inflows from investing activities totaled $264.5 million for
the first nine months of 2008 compared with net outflows from investing
activities of $243.8 million for the first nine months of 2007. Net cash inflows from investing activities
for the first nine months of 2008 were due primarily to proceeds from the sale
of investment securities and loans, repayments on loans, the early termination
of a resale agreement, as well as repayments, maturities and redemptions of
investment securities. These factors
were partially offset by purchases of investment securities. For the nine months ended September 30,
2007, net cash outflows from investing activities can be attributed primarily
to net loan growth and purchases of investment securities, resale agreements
and FHLB stock repayments. These factors
were partially offset by maturities, redemptions, and sales of investment
securities.
We
experienced net cash outflows from financing activities of $41.6 million for
the first nine months of 2008, primarily due to the repayment of federal funds
purchased, FHLB advances and dividends paid on our preferred and common stock
during the first nine months of 2008. These
factors were partially offset by a net increase in deposits as well as net
proceeds received from the issuance of convertible preferred stock. During the same period in 2007, we
experienced net cash inflows from financing activities of $57.8 million primarily
due to the net proceeds received from FHLB advances, securities sold under
repurchase agreements, federal funds purchased, and long-term debt. These factors were partially offset by a net
decrease in deposits, purchases of treasury shares in connection with our Board
authorized stock repurchase program, and dividends paid on our common stock.
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 September 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 nine months ended September 30,
2008 and 2007, total dividends paid by East West Bank to East West Bancorp, Inc.
amounted to $23.1 million and $65.3 million, respectively. The large dividend payment by the Bank to the
Company during the first nine months of 2007 was primarily due to the purchase
of treasury shares totaling $53.1 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 nine months ended September 30, 2008.
As of September 30, 2008, approximately $168.9 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
61
Table of Contents
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 September 30, 2008 and December 31,
2007, assuming a parallel shift of 100 to 200 basis points in both directions:
|
|
Net Interest Income
|
|
Net Portfolio Value
|
|
|
|
Volatility (1)
|
|
Volatility (2)
|
|
Change in Interest Rates
|
|
September 30,
|
|
December 31,
|
|
September 30,
|
|
December 31,
|
|
(Basis Points)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
+200
|
|
11.3
|
%
|
9.1
|
%
|
2.6
|
%
|
5.3
|
%
|
+100
|
|
6.5
|
%
|
5.8
|
%
|
1.7
|
%
|
5.4
|
%
|
-100
|
|
(6.2
|
)%
|
(5.7
|
)%
|
(3.9
|
)%
|
(6.2
|
)%
|
-200
|
|
(10.3
|
)%
|
(11.0
|
)%
|
(8.6
|
)%
|
(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 September 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
September 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.
62
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
Expected Maturity or Repricing Date by Year
|
|
|
|
September 30,
|
|
|
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Thereafter
|
|
Total
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CD investments
|
|
$
|
495
|
|
|
|
|
|
|
|
|
|
|
|
$
|
495
|
|
$
|
497
|
|
Weighted average
rate
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term
investments
|
|
$
|
405,745
|
|
|
|
|
|
|
|
|
|
|
|
$
|
405,745
|
|
$
|
405,745
|
|
Weighted average
rate
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
purchased under resale agreements
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
$
|
37,274
|
|
Weighted average
rate
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale (fixed rate)
|
|
$
|
695,784
|
|
|
|
$
|
80,373
|
|
$
|
1,276
|
|
$
|
75,000
|
|
$
|
475,794
|
|
$
|
1,328,227
|
|
$
|
1,319,333
|
|
Weighted average
rate
|
|
2.58
|
%
|
|
|
4.02
|
%
|
6.75
|
%
|
4.32
|
%
|
6.40
|
%
|
4.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale (variable rate) (1)
|
|
$
|
826,933
|
|
$
|
2,398
|
|
$
|
1,928
|
|
$
|
6,625
|
|
$
|
1,459
|
|
$
|
4,951
|
|
$
|
844,294
|
|
$
|
727,911
|
|
Weighted average
rate
|
|
4.50
|
%
|
5.16
|
%
|
5.23
|
%
|
7.07
|
%
|
5.19
|
%
|
5.19
|
%
|
4.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
$
|
6,310,528
|
|
$
|
920,231
|
|
$
|
518,259
|
|
$
|
192,964
|
|
$
|
133,925
|
|
$
|
213,526
|
|
$
|
8,289,433
|
|
$
|
8,349,741
|
|
Weighted average
rate
|
|
5.92
|
%
|
6.80
|
%
|
7.10
|
%
|
7.13
|
%
|
6.99
|
%
|
5.82
|
%
|
6.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
374,187
|
|
|
|
|
|
|
|
|
|
|
|
$
|
374,187
|
|
$
|
296,732
|
|
Weighted average
rate
|
|
0.65
|
%
|
|
|
|
|
|
|
|
|
|
|
0.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
accounts
|
|
$
|
1,014,849
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,014,849
|
|
$
|
970,125
|
|
Weighted average
rate
|
|
2.21
|
%
|
|
|
|
|
|
|
|
|
|
|
2.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
425,966
|
|
|
|
|
|
|
|
|
|
|
|
$
|
425,966
|
|
$
|
341,861
|
|
Weighted average
rate
|
|
0.81
|
%
|
|
|
|
|
|
|
|
|
|
|
0.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
4,153,790
|
|
$
|
134,207
|
|
$
|
7,292
|
|
$
|
7,698
|
|
$
|
24,823
|
|
$
|
57
|
|
$
|
4,327,867
|
|
$
|
4,339,347
|
|
Weighted average
rate
|
|
3.14
|
%
|
3.07
|
%
|
4.26
|
%
|
4.99
|
%
|
4.02
|
%
|
2.20
|
%
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds
purchased
|
|
$
|
30,443
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,443
|
|
$
|
30,443
|
|
Weighted average
rate
|
|
1.62
|
%
|
|
|
|
|
|
|
|
|
|
|
1.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB term
advances (fixed rate)
|
|
$
|
615,350
|
|
$
|
760,000
|
|
$
|
155,000
|
|
$
|
5,000
|
|
|
|
$
|
3,000
|
|
$
|
1,538,350
|
|
$
|
1,557,759
|
|
Weighted average
rate
|
|
4.86
|
%
|
4.03
|
%
|
4.59
|
%
|
4.46
|
%
|
|
|
4.44
|
%
|
4.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold
under repurchase agreements (fixed rate)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
945,000
|
|
$
|
945,000
|
|
$
|
1,099,407
|
|
Weighted average
rate
|
|
|
|
|
|
|
|
|
|
|
|
4.86
|
%
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold
under repurchase agreements (variable rate)
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
$
|
48,836
|
|
Weighted average
rate
|
|
4.15
|
%
|
|
|
|
|
|
|
|
|
|
|
4.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
repurchase agreements
|
|
$
|
4,467
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,467
|
|
$
|
4,467
|
|
Weighted average
rate
|
|
1.68
|
%
|
|
|
|
|
|
|
|
|
|
|
1.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,000
|
|
$
|
70,336
|
|
Weighted average
rate (variable rate)
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated debt (fixed rate)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,392
|
|
$
|
21,392
|
|
$
|
22,602
|
|
Weighted average
rate
|
|
|
|
|
|
|
|
|
|
|
|
10.91
|
%
|
10.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated debt (variable rate)
|
|
$
|
139,178
|
|
|
|
|
|
|
|
|
|
|
|
$
|
139,178
|
|
$
|
119,983
|
|
Weighted average
rate
|
|
4.57
|
%
|
|
|
|
|
|
|
|
|
|
|
4.57
|
%
|
|
|
(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
63
Table of Contents
prepayment projections for
amortizing securities. The actual
maturities of these instruments could vary 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. For private label mortgage-backed securities
and pooled trust preferred securities, fair values are derived based on a
combination of broker prices and discounted cash flow analyses that are
weighted as deemed appropriate for each security. 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
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Table of Contents
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
.
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 the equity swap agreements and embedded derivatives for these
six derivative contracts amounted to $15.0 million and $15.1 million as of
September 30, 2008, respectively, 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 44% decline in the index value as of
September 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. The Company has also
considered the counterpartys as well as its own credit risk in determining the
valuation.
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 September 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
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Table of Contents
September 30,
2008. There have been no changes in our
internal control over financial reporting during the quarter ended
September 30, 2008 that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
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.
U.S. and international financial markets and economic conditions could
adversely affect our liquidity, results of operations and financial
condition.
As described in Managements Discussion and
Analysis of Financial Condition and Results of Operations Recent
Developments, global capital markets and economic conditions continue to be
adversely affected and the resulting disruption has been particularly acute in
the financial sector. Although the
Company remains well capitalized and has not suffered any significant liquidity
issues as a result of these recent events, the cost and availability of funds
may be adversely affected by illiquid credit markets and the demand for our
products and services may decline as our borrowers and customers realize the
impact of an economic slowdown and recession.
In addition, the severity and duration of these adverse conditions is
unknown and may exacerbate the Companys exposure to credit risk and adversely
affect the ability of borrowers to perform under the terms of their lending
arrangements with us. Accordingly,
continued turbulence in the U.S. and international markets and economy may
adversely affect our liquidity, financial condition, results of operations and
profitability.
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 nine months of 2008, we recorded a $183.0 million
provision for loan losses and charged off $105.1 million, net of
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Table of Contents
$5.2
million in recoveries. Of the total chargeoff amount recorded during the nine
months ended September 30, 2008, $10.0 million was related to a single
commercial loan and $82.9 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 September 30, 2008,
we had $5.33 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
There
were no unregistered sales of equity securities during the three months ended
September 30, 2008. The following summarizes share repurchase activities
during the third 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)
|
|
July 31, 2008
|
|
|
|
$
|
|
|
|
|
|
|
August 31, 2008
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
|
|
|
|
$
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Excludes
102,468 in repurchased shares
totaling $3.2 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
Not applicable.
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Table of Contents
ITEM 5. OTHER INFORMATION
Not
applicable.
ITEM 6. EXHIBITS
(i) Exhibit 31.1
|
|
Chief
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
(ii) Exhibit 31.2
|
|
Chief
Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
(iii) 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
|
|
|
|
(iv) 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.
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Table of Contents
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: November 10, 2008
|
EAST WEST BANCORP, INC.
|
|
|
|
|
|
By:
|
/s/
Thomas J. Tolda
|
|
THOMAS
J. TOLDA
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
69
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