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 March 31, 2009
|
|
|
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 has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
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
o
|
|
Accelerated filer
x
|
|
|
|
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: 64,036,512 shares of common stock as of April 30,
2009.
Table of Contents
Forward-Looking Statements
Certain matters discussed in this Quarterly
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 and financial condition. The Companys actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expected or implied in such forward-looking statements.
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 critical accounting policies
and judgments;
·
changes in accounting policies or
procedures as may be required by the Financial Accounting Standards Board or
other regulatory agencies;
·
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 of our stock price;
·
success and timing of our business
strategies;
·
impact of reputational risk created by
these developments on such matters as business generation and retention,
funding and liquidity;
·
changes in our ability to receive
dividends from our subsidiaries; and
·
political developments, wars or other
hostilities that may disrupt or increase volatility in securities or otherwise
affect economic conditions.
For a more detailed discussion of some of the factors
that might cause such differences, see the Companys 2008 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)
|
|
March 31,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
541,066
|
|
$
|
878,853
|
|
Short-term
investments
|
|
329,288
|
|
228,441
|
|
Securities
purchased under resale agreements
|
|
50,000
|
|
50,000
|
|
Investment
securities held-to-maturity, at amortized cost (with fair value of $717,666
at March 31, 2009 and $123,105 at December 31, 2008)
|
|
734,799
|
|
122,317
|
|
Investment
securities available-for-sale, at fair value (with amortized cost of
$2,132,686 at March 31, 2009 and $2,189,570 at December 31, 2008)
|
|
1,994,403
|
|
2,040,194
|
|
Loans
receivable, net of allowance for loan losses of $195,450 at March 31,
2009 and $178,027 at December 31, 2008
|
|
7,865,925
|
|
8,069,377
|
|
Investment in
Federal Home Loan Bank stock, at cost
|
|
86,729
|
|
86,729
|
|
Investment in
Federal Reserve Bank stock, at cost
|
|
36,785
|
|
27,589
|
|
Other real
estate owned, net
|
|
38,634
|
|
38,302
|
|
Investment in
affordable housing partnerships
|
|
49,684
|
|
48,141
|
|
Premises and
equipment, net
|
|
58,479
|
|
60,184
|
|
Due from
customers on acceptances
|
|
3,887
|
|
5,538
|
|
Premiums on
deposits acquired, net
|
|
20,065
|
|
21,190
|
|
Goodwill
|
|
337,438
|
|
337,438
|
|
Cash surrender
value of life insurance policies
|
|
95,665
|
|
94,745
|
|
Deferred tax
assets
|
|
182,484
|
|
184,588
|
|
Accrued interest
receivable and other assets
|
|
139,193
|
|
129,190
|
|
TOTAL
|
|
$
|
12,564,524
|
|
$
|
12,422,816
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Customer deposit
accounts:
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
1,297,151
|
|
$
|
1,292,997
|
|
Interest-bearing
|
|
7,156,908
|
|
6,848,962
|
|
Total customer
deposits
|
|
8,454,059
|
|
8,141,959
|
|
Federal funds
purchased
|
|
22
|
|
28,022
|
|
Federal Home
Loan Bank advances
|
|
1,233,269
|
|
1,353,307
|
|
Securities sold
under repurchase agreements
|
|
998,061
|
|
998,430
|
|
Notes payable
|
|
14,597
|
|
16,506
|
|
Bank acceptances
outstanding
|
|
3,887
|
|
5,538
|
|
Long-term debt
|
|
235,570
|
|
235,570
|
|
Accrued interest
payable, accrued expenses and other liabilities
|
|
89,866
|
|
92,718
|
|
Total
liabilities
|
|
11,029,331
|
|
10,872,050
|
|
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock,
$0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative
convertible, 200,000 shares issued and 196,505 shares outstanding in 2009 and
2008; Series B, cumulative, 306,546 shares issued and outstanding in
2009 and 2008.
|
|
473,340
|
|
472,311
|
|
|
|
|
|
|
|
Common stock,
$0.001 par value, 200,000,000 shares authorized; 70,668,285 and 70,377,989
shares issued in 2009 and 2008, respectively; 63,957,813 and 63,745,624
shares outstanding in 2009 and 2008, respectively
|
|
70
|
|
70
|
|
Additional paid
in capital
|
|
697,138
|
|
695,521
|
|
Retained
earnings
|
|
548,144
|
|
572,172
|
|
Treasury stock,
at cost 6,710,472 shares in 2009 and 6,632,365 shares in 2008
|
|
(103,429
|
)
|
(102,817
|
)
|
Accumulated
other comprehensive loss, net of tax
|
|
(80,070
|
)
|
(86,491
|
)
|
Total stockholders
equity
|
|
1,535,193
|
|
1,550,766
|
|
TOTAL
|
|
$
|
12,564,524
|
|
$
|
12,422,816
|
|
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 March 31,
|
|
|
|
2009
|
|
2008
|
|
INTEREST
AND DIVIDEND INCOME
|
|
|
|
|
|
Loans
receivable, including fees
|
|
$
|
110,816
|
|
$
|
155,434
|
|
Investment
securities held-to-maturity
|
|
6,882
|
|
|
|
Investment
securities available-for-sale
|
|
22,493
|
|
27,050
|
|
Securities
purchased under resale agreements
|
|
1,250
|
|
2,553
|
|
Investment in Federal
Home Loan Bank stock
|
|
|
|
1,284
|
|
Investment in
Federal Reserve Bank stock
|
|
506
|
|
325
|
|
Short-term
investments
|
|
2,976
|
|
538
|
|
Total interest
and dividend income
|
|
144,923
|
|
187,184
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
Customer deposit
accounts
|
|
37,073
|
|
52,253
|
|
Federal Home
Loan Bank advances
|
|
13,877
|
|
19,682
|
|
Securities sold
under repurchase agreements
|
|
11,872
|
|
10,529
|
|
Long-term debt
|
|
2,417
|
|
3,723
|
|
Federal funds
purchased
|
|
3
|
|
1,378
|
|
Total interest
expense
|
|
65,242
|
|
87,565
|
|
|
|
|
|
|
|
NET INTEREST
INCOME BEFORE PROVISION FOR LOAN LOSSES
|
|
79,681
|
|
99,619
|
|
PROVISION FOR
LOAN LOSSES
|
|
78,000
|
|
55,000
|
|
NET INTEREST
INCOME AFTER PROVISION FOR LOAN LOSSES
|
|
1,681
|
|
44,619
|
|
|
|
|
|
|
|
NONINTEREST
INCOME
|
|
|
|
|
|
Impairment loss
on investment securities
|
|
(13,380
|
)
|
|
|
Less: Noncredit-related
impairment loss recorded in other comprehensive income
|
|
13,180
|
|
|
|
Net impairment
loss on investment securities recognized in earnings
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
Branch fees
|
|
4,793
|
|
4,101
|
|
Net gain on sale
of investment securities available-for-sale
|
|
3,521
|
|
4,334
|
|
Ancillary loan
fees
|
|
2,229
|
|
1,141
|
|
Letters of
credit fees and commissions
|
|
1,854
|
|
2,677
|
|
Income from life
insurance policies
|
|
1,083
|
|
1,028
|
|
Net gain on sale
of loans
|
|
8
|
|
1,855
|
|
Other operating
income
|
|
506
|
|
777
|
|
Total
noninterest income
|
|
13,794
|
|
15,913
|
|
|
|
|
|
|
|
NONINTEREST
EXPENSE
|
|
|
|
|
|
Compensation and
employee benefits
|
|
17,108
|
|
23,268
|
|
Occupancy and
equipment expense
|
|
7,391
|
|
7,008
|
|
Other real
estate owned expense
|
|
7,031
|
|
889
|
|
Deposit
insurance premiums and regulatory assessments
|
|
3,325
|
|
1,192
|
|
Legal expense
|
|
1,778
|
|
1,900
|
|
Amortization of
investments in affordable housing partnerships
|
|
1,760
|
|
1,715
|
|
Loan-related
expense
|
|
1,435
|
|
1,372
|
|
Data processing
|
|
1,142
|
|
1,196
|
|
Amortization and
impairment writedown of premiums on deposits acquired
|
|
1,125
|
|
2,737
|
|
Deposit-related
expenses
|
|
901
|
|
948
|
|
Other operating
expenses
|
|
8,410
|
|
10,665
|
|
Total
noninterest expense
|
|
51,406
|
|
52,890
|
|
|
|
|
|
|
|
(LOSS) INCOME
BEFORE (BENEFIT) PROVISION FOR INCOME TAXES
|
|
(35,931
|
)
|
7,642
|
|
(BENEFIT)
PROVISION FOR INCOME TAXES
|
|
(13,465
|
)
|
2,598
|
|
NET
(LOSS) INCOME
|
|
(22,466
|
)
|
5,044
|
|
PREFERRED STOCK
DIVIDENDS & AMORTIZATION OF PREFERRED STOCK DISCOUNT
|
|
8,743
|
|
|
|
NET
(LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
(31,209
|
)
|
$
|
5,044
|
|
|
|
|
|
|
|
(LOSS)
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
|
|
|
|
|
|
BASIC
|
|
$
|
(0.50
|
)
|
$
|
0.08
|
|
DILUTED
|
|
$
|
(0.50
|
)
|
$
|
0.08
|
|
DIVIDENDS
DECLARED PER COMMON SHARE
|
|
$
|
0.02
|
|
$
|
0.10
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
|
|
|
|
|
BASIC
|
|
62,998
|
|
62,485
|
|
DILUTED
|
|
62,998
|
|
62,949
|
|
See accompanying
notes to condensed consolidated financial statements.
5
Table of Contents
EAST WEST BANCORP,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In
thousands, except share data)
(Unaudited)
|
|
Preferred
Stock
|
|
Additional
Paid In
Capital
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Loss,
Net of Tax
|
|
Comprehensive
Income (Loss)
|
|
Total
Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JANUARY 1, 2008
|
|
$
|
|
|
$
|
|
|
$
|
70
|
|
$
|
652,297
|
|
$
|
657,183
|
|
$
|
(98,925
|
)
|
$
|
(38,802
|
)
|
|
|
$
|
1,171,823
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for
the period
|
|
|
|
|
|
|
|
|
|
5,044
|
|
|
|
|
|
$
|
5,044
|
|
5,044
|
|
Net unrealized
loss on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,230
|
)
|
(70,230
|
)
|
(70,230
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(65,186
|
)
|
|
|
Cumulative effect
of change in accounting principle pursuant to adoption of EITF 06-4
|
|
|
|
|
|
|
|
|
|
(479
|
)
|
|
|
|
|
|
|
(479
|
)
|
Stock
compensation costs
|
|
|
|
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
1,557
|
|
Tax provision
from stock plans
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
(299
|
)
|
Issuance of
254,727 shares pursuant to various stock plans and agreements
|
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
393
|
|
Cancellation of
35,453 shares due to forfeitures of issued restricted stock
|
|
|
|
|
|
|
|
1,192
|
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
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
|
)
|
Common stock
dividends
|
|
|
|
|
|
|
|
|
|
(6,315
|
)
|
|
|
|
|
|
|
(6,315
|
)
|
BALANCE,
MARCH 31, 2008
|
|
$
|
|
|
$
|
|
|
$
|
70
|
|
$
|
657,438
|
|
$
|
655,433
|
|
$
|
(100,125
|
)
|
$
|
(109,032
|
)
|
|
|
$
|
1,103,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JANUARY 1, 2009
|
|
$
|
|
|
$
|
472,311
|
|
$
|
70
|
|
$
|
695,521
|
|
$
|
572,172
|
|
$
|
(102,817
|
)
|
$
|
(86,491
|
)
|
|
|
$
|
1,550,766
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the
year
|
|
|
|
|
|
|
|
|
|
(22,466
|
)
|
|
|
|
|
$
|
(22,466
|
)
|
(22,466
|
)
|
Net unrealized
gain on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,175
|
|
22,175
|
|
22,175
|
|
Noncredit-related
impairment loss on investment securities recorded in the current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,644
|
)
|
(7,644
|
)
|
(7,644
|
)
|
Cumulative effect
adjustment for reclassification of the previously recognized
noncredit-related impairment writedowns
|
|
|
|
|
|
|
|
|
|
8,110
|
|
|
|
(8,110
|
)
|
$
|
(8,110
|
)
|
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(16,045
|
)
|
|
|
Stock
compensation costs
|
|
|
|
|
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
1,428
|
|
Tax provision
from stock plans
|
|
|
|
|
|
|
|
(403
|
)
|
|
|
|
|
|
|
|
|
(403
|
)
|
Series B
preferred stock issuance cost
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
Issuance of
290,296 shares pursuant to various stock plans and agreements
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
15
|
|
Cancellation of
24,134 shares due to forfeitures of issued restricted stock
|
|
|
|
|
|
|
|
577
|
|
|
|
(577
|
)
|
|
|
|
|
|
|
Purchase of 8,882
shares of treasury stock due to the vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
(35
|
)
|
Amortization of
Series B preferred stock discount
|
|
|
|
1,070
|
|
|
|
|
|
(1,070
|
)
|
|
|
|
|
|
|
|
|
Preferred stock
dividends
|
|
|
|
|
|
|
|
|
|
(7,673
|
)
|
|
|
|
|
|
|
(7,673
|
)
|
Common stock
dividends
|
|
|
|
|
|
|
|
|
|
(929
|
)
|
|
|
|
|
|
|
(929
|
)
|
BALANCE,
MARCH 31, 2009
|
|
$
|
|
|
$
|
473,340
|
|
$
|
70
|
|
$
|
697,138
|
|
$
|
548,144
|
|
$
|
(103,429
|
)
|
$
|
(80,070
|
)
|
|
|
$
|
1,535,193
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In
thousands)
|
|
Disclosure
of reclassification amounts:
|
|
|
|
|
|
Unrealized
holding gain(loss) on securities arising during the period, net of tax
(expense) benefit of $(17,453) in 2009 and $49,036 in 2008
|
|
$
|
24,101
|
|
$
|
(67,716
|
)
|
Less:
Reclassification adjustment for (gain) included in net income, net of tax
expense of $ 1,395 in 2009 and $1,820 in 2008
|
|
(1,926
|
)
|
(2,514
|
)
|
Net unrealized
gain (loss) on securities, net of tax (expense) benefit of $(16,058) in 2009
and $50,856 in 2008
|
|
$
|
22,175
|
|
$
|
(70,230
|
)
|
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)
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net (loss)
income
|
|
$
|
(22,466
|
)
|
$
|
5,044
|
|
Adjustments to
reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
5,807
|
|
6,136
|
|
Credit-related
impairment writedown on investment securities available-for-sale
|
|
200
|
|
|
|
Stock
compensation costs
|
|
1,428
|
|
1,557
|
|
Deferred tax
benefit
|
|
(2,033
|
)
|
(13,940
|
)
|
Provision for
loan losses
|
|
78,000
|
|
55,000
|
|
Provision for
loss on other real estate owned
|
|
3,184
|
|
690
|
|
Net gain on
sales of investment securities, loans and other assets
|
|
(600
|
)
|
(5,718
|
)
|
Federal Home
Loan Bank stock dividends
|
|
|
|
(1,023
|
)
|
Originations of
loans held for sale
|
|
(12,078
|
)
|
(23,733
|
)
|
Proceeds from
sale of loans held for sale
|
|
12,111
|
|
24,025
|
|
Tax provision
from stock plans
|
|
403
|
|
299
|
|
Net change in
accrued interest receivable and other assets
|
|
(1,408
|
)
|
17,742
|
|
Net change in
accrued interest payable, accrued expenses and other liabilities
|
|
(22,022
|
)
|
6,911
|
|
Total
adjustments
|
|
62,992
|
|
67,946
|
|
Net cash
provided by operating activities
|
|
40,526
|
|
72,990
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Net decrease
(increase) loans
|
|
100,111
|
|
(178,179
|
)
|
Purchases of:
|
|
|
|
|
|
Short-term
investments
|
|
(100,847
|
)
|
|
|
Investment
securities held-to-maturity
|
|
(466,018
|
)
|
|
|
Investment
securities available-for-sale
|
|
(867,221
|
)
|
(243,942
|
)
|
Loans receivable
|
|
(4,511
|
)
|
|
|
Federal Home
Loan Bank stock
|
|
|
|
(9,400
|
)
|
Federal Reserve
Bank stock
|
|
(9,196
|
)
|
|
|
Premises and
equipment
|
|
(194
|
)
|
(1,522
|
)
|
Proceeds from:
|
|
|
|
|
|
Sale of
investment securities available-for-sale
|
|
185,775
|
|
138,595
|
|
Sale of
securities purchased under resale agreements
|
|
|
|
100,000
|
|
Sale of loans
receivable
|
|
9,396
|
|
135,167
|
|
Sale of other
real estate owned
|
|
9,799
|
|
|
|
Repayments,
maturity and redemption of investment securities available-for-sale
|
|
610,984
|
|
127,715
|
|
Acquisitions,
net of cash paid
|
|
|
|
84
|
|
Net cash (used
in) provided by investing activities
|
|
(531,922
|
)
|
68,518
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net proceeds
from (payment for):
|
|
|
|
|
|
Deposits
|
|
312,100
|
|
272,923
|
|
Short-term
borrowings
|
|
(28,369
|
)
|
(496,816
|
)
|
Proceeds from:
|
|
|
|
|
|
Issuance of
long-term borrowings
|
|
|
|
250,000
|
|
Issuance of
common stock pursuant to various stock plans and agreements
|
|
15
|
|
393
|
|
Payment for:
|
|
|
|
|
|
Repayment of
long-term borrowings
|
|
(119,999
|
)
|
(55,000
|
)
|
Repayment of
notes payable on affordable housing investments
|
|
(1,909
|
)
|
(1,714
|
)
|
Repurchase of
treasury shares pursuant to stock repurchase program and vesting of
restricted stock
|
|
(35
|
)
|
(8
|
)
|
Issuance cost of
Series B preferred stock
|
|
(41
|
)
|
|
|
Cash dividends
on preferred stocks
|
|
(6,822
|
)
|
|
|
Cash dividends
on common stocks
|
|
(929
|
)
|
(6,315
|
)
|
Tax provision
from stock plans
|
|
(403
|
)
|
(299
|
)
|
Net cash
provided by (used in) financing activities
|
|
153,608
|
|
(36,836
|
)
|
|
|
|
|
|
|
NET (DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
(337,788
|
)
|
104,672
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
|
|
878,853
|
|
160,347
|
|
CASH AND CASH
EQUIVALENTS, END OF PERIOD
|
|
$
|
541,066
|
|
$
|
265,019
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash paid during
the period for:
|
|
|
|
|
|
Interest
|
|
$
|
71,370
|
|
$
|
87,624
|
|
Income tax
payments, net of refunds
|
|
50
|
|
19
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
Real estate
acquired through foreclosure
|
|
30,561
|
|
13,393
|
|
Loans to
facilitate sales of real estate owned
|
|
11,067
|
|
|
|
Affordable
housing investment financed through notes payable
|
|
|
|
3,000
|
|
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
Three Months Ended March 31, 2009 and 2008
(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 three months
ended March 31, 2009 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,
2008.
Certain prior year balances
have been reclassified to conform to current year presentation.
2.
SIGNIFICANT
ACCOUNTING POLICIES
Recent Accounting Standards
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.
The adoption of this additional guidance did not have a material effect
on the Companys financial condition, results of operations, or cash flows.
In December 2007,
the FASB issued SFAS No. 141(R),
Business
Combinations
(SFAS 141(R)), which replaces FASB Statement No. 141,
Business Combinations
. SFAS 141(R) establishes principles
and requirements for how an acquiring company (1) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree, (2) recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (3) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.
SFAS 141(R) is effective for business combinations occurring
on or after the beginning of the fiscal year beginning on or after December 15, 2008.
SFAS 141(R),
effective for the Company on January 1, 2009, applies to all
8
Table of Contents
transactions or other events
in which the Company obtains control of 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
. 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 No. 160 is effective for fiscal
years beginning on or after December 15, 2008. The adoption of this guidance did not have a
material effect on the Companys 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
adoption of this guidance did not have a material effect on the Companys
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 adoption of
this guidance did not have a material effect on the Companys 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 adoption of this guidance did not have a material effect on the
Companys 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 15, 2008, and interim periods within those
fiscal years. Early adoption is
prohibited. The adoption of this
guidance did not have a material effect on the Companys basic and diluted
earnings per share calculation.
9
Table of
Contents
In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities (Enterprises) About Transfers of
Financial Assets and Interests in Variable Interest Entities
. This disclosure-only FSP improves the
transparency of transfers of financial assets and an enterprises involvement
with variable interest entities (VIEs), including qualifying special-purpose
entities (QSPEs). The disclosures required
by this FSP are intended to provide greater transparency to financial statement
users about a transferors continuing involvement with transferred financial
assets and an enterprises involvement with variable interest entities and
qualifying SPEs. This FSP shall be
effective for the first reporting period ending after December 15, 2008,
with earlier application encouraged, and shall be applied for each annual and
interim reporting period thereafter.
The disclosure requirements
related to the adoption of this guidance are presented in Note 3 and Note 8
of the Companys condensed consolidated financial
statements.
In
January 2009, the FASB issued FSP EITF 99-20-1 (EITF 99-20-1),
Amendments to the Impairment Guidance of EITF Issue No. 99-20
,
which revises the other-than-temporary-impairment (OTTI) guidance on
beneficial interests in securitized financial assets that are within the scope
of EITF Issue 99-20,
Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets
.
EITF 99-20-1 amends Issue 99-20, to more closely align its OTTI guidance
with paragraph 16 of FASB Statement No. 115,
Accounting
for Certain Investments in Debt and Equity Securities
, by (1) removing
the notion of a market participant and (2) inserting a probable
concept related to the estimation of a beneficial interests cash flows. EITF 99-20-1 is effective prospectively for
interim and annual periods ending after December 15, 2008. Retrospective application of this FSP is
prohibited. The adoption of this
guidance did not have a material effect on the Companys financial condition,
results of operations, or cash flows.
In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124,
Recognition and Presentation of Other-Than-Temporary Impairments
,
which makes changes to the timing of loss recognition and earnings for debt
and similar investment securities classified as either available-for-sale or held-to-maturity. The FSP provides that if an entity intends to
sell an impaired debt security prior to recovery of its amortized cost basis,
or if it is more likely than not that it will have to sell the security prior
to recovery, then the full amount of the impairment is to be classified as
other than temporary and recognized in earnings. Otherwise, the portion of the impairment loss
deemed to constitute a credit loss is considered an OTTI loss to be reported in
earnings. The non-credit loss portion is recognized in other comprehensive
income. This FSP also requires entities
to initially apply the provisions of the standard to the noncredit portion of
previously recorded OTTI impaired securities, existing as of the date of
initial adoption, by making a cumulative-effect adjustment from the opening
balance of retained earnings to other comprehensive income in the period of
adjustment.
Upon adoption of FSP FAS
115-2 and FAS 124, the Company reclassified the noncredit portion of previously
recognized OTTI totaling $8.1 million, net of tax, from the opening balance of
retained earnings to other comprehensive income. Additionally, upon implementation of this
FSP, the Company recorded $200 thousand, on a pre-tax basis, of the credit
portion of OTTI through earnings and $7.6 million, net of tax, of the
non-credit portion of OTTI in other comprehensive income.
In
April 2009, the FASB issued FSP FAS 157-4,
Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly
,
which provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased. FSP FAS 157-4
also requires additional disclosures relating to fair value measurement inputs
and valuation techniques, as well as providing disclosures for all debt and
equity investment securities by major security types rather than by major
security categories that should be based on the nature and risks of the
security during both interim and annual periods.
The
adoption of this FSP resulted in additional disclosures which are presented in
Note 3 of the Companys condensed consolidated financial statements.
10
Table of Contents
In
April, the FASB issued FSP FAS 107-1 and APB 28-1,
Interim
Disclosures about Fair Value of Financial Instruments
, which
increases the frequency of fair value disclosures from an annual basis only to
a quarterly basis. The FSP will require
public entities to disclose in their interim financial statements the fair
value of all financial instruments within the scope of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
, as
well as the methods and significant assumptions used to estimate the fair value
of those instruments. The FSP shall be
effective for interim reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it
also elects to early adopt FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2. This FSP does not require disclosures for
earlier periods presented for comparative periods at initial adoption. In periods after initial adoption, this FSP
requires comparative disclosures only for periods ending after the initial
adoption. The Company will adopt this
FSP for the period ending June 30, 2009 and does not expect the adoption
of this guidance to have a material effect on the Companys consolidated
financial statements.
3.
FAIR VALUE MEASUREMENT
The
Company adopted SFAS 157 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
.
The
Company adopted FSP SFAS 157-2 effective January 1, 2009. FSP SFAS 157-2 provided for a one-year
deferral of the implementation of SFAS 157 for other nonfinanical assets and
liabilities, effective for fiscal years beginning after November 15,
2008. For the Company, this includes
other real estate owned (OREO).
Upon
adoption of FSP SFAS 157-4 effective March 31, 2009, the Company has
provided additional disclosures relating to fair value measurement inputs and
valuation techniques as well as providing SFAS 157 disclosures for all debt and
equity investment securities by major security types rather than by major
security categories that should be based on the nature and risks of the
security during both interim and annual periods.
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 debt and agency mortgage-backed
securities, U.S. Government sponsored enterprise preferred stock securities,
trust preferred securities, equity swap agreements, and OREO.
·
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 securities in
securitizations, pooled trust preferred securities, and derivatives payable.
In
determining the appropriate hierarchy levels, the Company performs a detailed
analysis of assets and liabilities that are subject to SFAS 157. The following table presents both financial
and non-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 consolidated balance sheets at their
fair values as of March 31, 2009.
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
March 31, 2009
|
|
|
|
Fair
Value
Measurements
March 31, 2009
|
|
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)
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
2,513
|
|
$
|
2,513
|
|
$
|
|
|
$
|
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
473,334
|
|
|
|
473,334
|
|
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise mortgage-backed
securities
|
|
873,620
|
|
|
|
873,620
|
|
|
|
Other
mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
546,520
|
|
|
|
|
|
546,520
|
|
Non-investment
grade
|
|
11,325
|
|
|
|
|
|
11,325
|
|
Corporate debt
securities
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
7,658
|
|
|
|
6,352
|
|
1,306
|
|
Non-investment
grade (1)
|
|
21,930
|
|
|
|
|
|
21,930
|
|
U.S. Government
sponsored enterprise equity securities
|
|
995
|
|
|
|
995
|
|
|
|
Residual
securities
|
|
53,928
|
|
|
|
|
|
53,928
|
|
Other securities
|
|
2,580
|
|
2,580
|
|
|
|
|
|
Total Investment
Securities (AFS)
|
|
1,994,403
|
|
5,093
|
|
1,354,301
|
|
635,009
|
|
|
|
|
|
|
|
|
|
|
|
Equity Swap
Agreements
|
|
11,374
|
|
|
|
11,374
|
|
|
|
Derivatives
Payable
|
|
(11,509
|
)
|
|
|
|
|
(11,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
pooled trust preferred securities with a fair value of $14.9 million that were
downgraded from investment grade to non-investment grade in April 2009.
12
Table of Contents
|
|
Assets Measured at Fair Value on a Non-Recurring Basis as of
March 31, 2009
|
|
|
|
|
|
Fair Value
Measurements
March 31, 2009
|
|
Quoted Prices in
Active Markets for
Identifical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Gains
(Losses)
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Servicing Assets
|
|
$
|
16,664
|
|
|
|
|
|
$
|
16,664
|
|
$
|
766
|
|
Impaired Loans
|
|
106,645
|
|
|
|
|
|
106,645
|
|
(389
|
)
|
OREO
|
|
11,333
|
|
|
|
11,333
|
|
|
|
(2,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 available-for-sale
investment securities by major security type and for major asset and liability
categories measured at fair value using significant unobservable inputs (Level
3) for the three months ended March 31, 2009:
|
|
Investment
Securities Available-for-Sale
|
|
|
|
|
|
|
|
Mortgage-Backed
Securities
|
|
Corporate
Debt
Securities
|
|
|
|
|
|
|
|
Total
|
|
Investment
Grade
|
|
Non-
Investment
Grade
|
|
Investment
Grade
|
|
Non-
Investment
Grade
|
|
Residual
Securities
|
|
Derivatives
Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2009
|
|
$
|
624,351
|
|
$
|
527,109
|
|
$
|
10,216
|
|
$
|
1,294
|
|
$
|
35,670
|
|
$
|
50,062
|
|
$
|
(14,142
|
)
|
Total gains or
(losses) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
earnings
|
|
2,903
|
|
168
|
|
1
|
|
4
|
|
(198
|
)
|
2,928
|
|
2,633
|
|
Included in other
comprehensive loss (unrealized) (2)
|
|
22,452
|
|
30,240
|
|
1,108
|
|
20
|
|
(14,794
|
)
|
5,878
|
|
|
|
Purchases,
issuances, sales, settlements (3)
|
|
(14,697
|
)
|
(10,997
|
)
|
|
|
(12
|
)
|
1,252
|
|
(4,940
|
)
|
|
|
Transfers in
and/or out of Level 3 (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance,
March 31, 2009
|
|
635,009
|
|
546,520
|
|
11,325
|
|
1,306
|
|
21,930
|
|
53,928
|
|
|
(11,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
unrealized losses included in earnings relating to assets and liabilities
still held at March 31, 2009
|
|
$
|
(2,833
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(200
|
)
|
$
|
|
|
$
|
(2,633
|
)
|
(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 consolidated statements of operations.
(2)
Unrealized gains or losses as well as the
noncredit portion of OTTI on investment securities are reported in accumulated
other comprehensive loss, net of tax, in the 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
13
Table of Contents
obtained from independent external pricing service
providers who have experience in valuing these securities. In obtaining such valuation information from
third parties, the Company has reviewed the methodologies used to develop the
resulting fair values.
The
Companys Level 3 available-for-sale securities include private label
mortgage-backed securities, pooled trust preferred 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, the market for these
securities has become increasingly inactive since mid-2007. 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. As such, the fair
value of the private label mortgage-backed securities and pooled trust
preferred securities have been below cost since the advent of the financial
crisis. Additionally, most, if not all,
of these broker quotes are nonbinding.
Commencing in the third quarter of 2008, the Company amended its
valuation approach by examining the facts and circumstances of each security to
determine the appropriate combination of the market approach reflecting current
broker prices and a discounted cash flow approach. The values resulting from each approach (i.e.
market and income approaches) were weighted to derive the final fair value on
each private label mortgage-backed and pooled trust preferred security.
During
the first quarter of 2009, the Company continued to receive broker prices that
were based on forced liquidation or distressed sales values in very inactive
markets. In accordance with FSP SFAS
157-4, the Company considered whether to place little, if any, weight on
transactions that are not orderly when estimating fair value. Although length of time and severity of
impairment are among the factors to consider when determining whether a
security that is other than temporarily impaired, the private label mortgage
backed securities and pooled trust preferred securities have only exhibited
deep declines in value since the credit crisis began. The Company therefore believes that this is
an indicator that the decline in price is solely a result of the lack of
liquidity in the market for these securities and the broker quotes received
stem from distressed sale transactions.
In addition, FSP EITF 99-20-1 states that the objective of an OTTI
analysis is to determine whether it is probable that the Company will realize
some portion of the unrealized loss. The
Company may ultimately realize an unrealized loss if it is probable that it
cannot collect all contractual or estimated cash flows or if the Company will
be unable to recover the entire amortized cost basis of the security.
The
Company believes that the cash flow analyses which demonstrate that the
realizable value of these securities are equal to their carrying values should
be the primary factor considered when making a judgment about other than
temporary impairment. During the first
quarter of 2009, in light of the continued illiquidity and inactivity in the
markets for these types of securities, the Company again deemed it prudent to
amend its valuation methodology in deriving the current values of these
securities by disregarding broker prices and instead focusing solely on a
discounted cash flow or income approach. In order to determine the appropriate
discount rate used in calculating fair values derived from the income method
for private label mortgage-backed securities and pooled trust preferred
securities, the Company has made assumptions using an exit pricing approach
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 securities.
For
residual securities, the valuation methodology used by the Company is based on
a discounted cash flow approach utilizing several assumption factors. Assumptions related to prepayment speeds,
14
Table of Contents
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 $245 thousand
adjustment to the valuation of the equity swap agreements for the quarter ended
March 31, 2009. 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 $109 thousand adjustment to
the valuation of the derivative liabilities, and a net gain of $154
thousand was recognized in noninterest income as the net difference between the
valuation of the equity swap agreements and derivatives payable for the quarter
ended March 31, 2009.
The 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. 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. Impaired loans fall within Level 3 of the
fair value hierarchy since they are measured at fair value based on the most
recent valuation information received of the underlying collateral.
Other Real Estate Owned (OREO)
The Companys OREO
represents properties acquired through foreclosure or through full or partial
satisfaction of loans, are considered held-for-sale, and are recorded at the
lower of cost or estimated fair value at the time of foreclosure. The fair values of OREO
15
Table of Contents
properties
are based on third-party appraisals, broker price opinions or accepted written
offers. These valuations are reviewed
and approved by the Companys appraisal department, credit review, or OREO
department. OREO properties are
classified as Level 2 assets in the fair value hierarchy. The OREO balance of $38.6 million included in
the condensed consolidated balance sheets as of March 31, 2009 is recorded
net of estimated disposal costs.
4.
STOCK-BASED
COMPENSATION
The
Company issues stock-based compensation to certain employees, officers and
directors under share-based compensation plans.
The adoption of SFAS No. 123(R),
Share-Based
Payment,
on January 1, 2006 has resulted in incremental
stock-based compensation expense. Since
the Company has previously recognized compensation expense on restricted stock
awards, the incremental stock-based compensation expense recognized pursuant to
SFAS No. 123R relates only to issued and unvested stock option grants.
During
the three months ended March 31, 2009 and 2008, total compensation cost
recognized in the consolidated statements of operations related to stock
options and restricted stock awards amounted to $1.4 million and $1.6 million,
respectively, with related tax benefits of $600 thousand and $654 thousand,
respectively.
Stock
Options
The
Company issues fixed stock options to certain employees, officers, and
directors. Stock options are issued at
the current market price on the date of grant with a three-year or four-year
vesting period and contractual terms of 7 years. Stock options issued prior to July 2002
had contractual terms of 10 years. The
Company issues new shares upon the exercise of stock options.
A
summary of activity for the Companys stock options as of and for the three
months ended March 31, 2009 is presented below:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(In thousands) (1)
|
|
Outstanding at
beginning of period
|
|
2,588,968
|
|
$
|
20.67
|
|
|
|
|
|
Granted
|
|
43,942
|
|
6.83
|
|
|
|
|
|
Exercised
|
|
(2,200
|
)
|
6.34
|
|
|
|
|
|
Forfeited
|
|
(9,142
|
)
|
16.52
|
|
|
|
|
|
Outstanding at
end of period
|
|
2,621,568
|
|
$
|
20.47
|
|
3.22 years
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
Vested or
expected to vest
|
|
2,553,321
|
|
$
|
20.41
|
|
3.15 years
|
|
$
|
7
|
|
Exercisable at
end of period
|
|
1,665,027
|
|
$
|
19.38
|
|
1.80 years
|
|
$
|
|
|
(1) Includes
in-the-money options only.
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:
16
Table of Contents
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Expected term
(1)
|
|
4 years
|
|
4 years
|
|
Expected
volatility (2)
|
|
60.5
|
%
|
27.3
|
%
|
Expected
dividend yield (3)
|
|
0.6
|
%
|
1.2
|
%
|
Risk-free
interest rate (4)
|
|
1.8
|
%
|
2.3
|
%
|
(1)
The expected term (estimated period of time
outstanding) of stock options granted was estimated using the historical
exercise behavior of employees.
(2)
The expected volatility was based on historical
volatility for a period equal to the stock options expected term.
(3)
The expected dividend yield is based on the Companys
prevailing dividend rate at the time of grant.
(4)
The risk-free rate is based on the U.S. Treasury
strips in effect at the time of grant equal to the stock options expected
term.
During the three months ended
March 31, 2009 and 2008
, information
related to stock options is presented as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Weighted average
fair value of stock options granted during the period
|
|
$
|
3.00
|
|
$
|
4.69
|
|
Total intrinsic
value of options exercised (in thousands)
|
|
$
|
1
|
|
$
|
167
|
|
Total fair value
of options vested (in thousands)
|
|
$
|
1,351
|
|
$
|
1,106
|
|
As of March 31, 2009, total unrecognized
compensation cost related to stock options amounted to $3.4 million. The cost is expected to be recognized over a
weighted average period of 2.6 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 March 31, 2009,
including changes during the three months then ended, is presented below:
17
Table of Contents
|
|
Shares
|
|
Average
Price
|
|
Outstanding at
beginning of period
|
|
753,165
|
|
$
|
29.35
|
|
Granted
|
|
288,096
|
|
7.12
|
|
Vested
|
|
(28,439
|
)
|
37.63
|
|
Forfeited
|
|
(69,225
|
)
|
33.62
|
|
Outstanding at end
of period
|
|
943,597
|
|
$
|
22.00
|
|
The weighted average fair values of restricted stock
awards granted during the three months ended
March 31, 2009 and 2008
were $7.12 and
$20.99, respectively.
As of
March 31, 2009
, total unrecognized
compensation cost related to restricted stock awards amounted to $12.0
million. This cost is expected to be
recognized over a weighted average period of 2.9 years.
18
Table
of Contents
5.
INVESTMENT
SECURITIES
An
analysis of the held-to-maturity and available-for-sale investment securities
portfolio is presented as follows:
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
(In thousands)
|
|
As of
March 31, 2009
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
$
|
190,345
|
|
$
|
207
|
|
$
|
(795
|
)
|
$
|
189,757
|
|
Municipal
securities
|
|
31,065
|
|
489
|
|
(445
|
)
|
31,109
|
|
Corporate debt
securities
|
|
402,483
|
|
3,050
|
|
(10,625
|
)
|
394,908
|
|
Other
mortgage-backed securities
|
|
110,906
|
|
277
|
|
(9,291
|
)
|
101,892
|
|
Total
investment securities held-to-maturity
|
|
$
|
734,799
|
|
$
|
4,023
|
|
$
|
(21,156
|
)
|
$
|
717,666
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
2,509
|
|
$
|
4
|
|
$
|
|
|
$
|
2,513
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
467,439
|
|
6,299
|
|
(404
|
)
|
473,334
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise mortgage-backed
securities
|
|
865,499
|
|
9,501
|
|
(1,380
|
)
|
873,620
|
|
Other
mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
621,450
|
|
|
|
(74,930
|
)
|
546,520
|
|
Non-investment
grade
|
|
13,661
|
|
|
|
(2,336
|
)
|
11,325
|
|
Corporate debt
securities
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
14,316
|
|
35
|
|
(6,693
|
)
|
7,658
|
|
Non-investment
grade (1)(2)
|
|
118,863
|
|
|
|
(96,933
|
)
|
21,930
|
|
U.S. Government
sponsored enterprise equity securities
|
|
3,340
|
|
|
|
(2,345
|
)
|
995
|
|
Residual
securities
|
|
23,031
|
|
30,897
|
|
|
|
53,928
|
|
Other securities
|
|
2,578
|
|
2
|
|
|
|
2,580
|
|
Total
investment securities available-for-sale
|
|
$
|
2,132,686
|
|
$
|
46,738
|
|
$
|
(185,021
|
)
|
$
|
1,994,403
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
|
$
|
2,867,485
|
|
$
|
50,761
|
|
$
|
(206,177
|
)
|
$
|
2,712,069
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
5,772
|
|
$
|
118
|
|
$
|
|
|
$
|
5,890
|
|
Corporate debt
securities
|
|
116,545
|
|
904
|
|
(234
|
)
|
117,215
|
|
Total
investment securities held-to-maturity
|
|
$
|
122,317
|
|
$
|
1,022
|
|
$
|
(234
|
)
|
$
|
123,105
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
2,505
|
|
$
|
8
|
|
$
|
|
|
$
|
2,513
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
1,020,355
|
|
4,762
|
|
(1,183
|
)
|
1,023,934
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise mortgage-backed
securities
|
|
373,690
|
|
6,758
|
|
(397
|
)
|
380,051
|
|
Other
mortgage-backed securities
|
|
645,940
|
|
|
|
(108,614
|
)
|
537,326
|
|
Corporate debt
securities (1)
|
|
116,127
|
|
266
|
|
(73,849
|
)
|
42,544
|
|
U.S. Government
sponsored enterprise equity securities
|
|
3,340
|
|
|
|
(2,156
|
)
|
1,184
|
|
Residual
securities
|
|
25,043
|
|
25,019
|
|
|
|
50,062
|
|
Other securities
|
|
2,570
|
|
10
|
|
|
|
2,580
|
|
Total
investment securities available-for-sale
|
|
$
|
2,189,570
|
|
$
|
36,823
|
|
$
|
(186,199
|
)
|
$
|
2,040,194
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
|
$
|
2,311,887
|
|
$
|
37,845
|
|
$
|
(186,433
|
)
|
$
|
2,163,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) As of December 31, 2008, the Company
recorded an OTTI charge of $13.6 million for corporate debt securities, $55.3
million for U.S. Government sponsored enterprise equity securities, and $4.3 million
for Other securities. Upon adoption of
FSP FAS 115-2 and FAS 124-2, the Company reclassified the noncredit portion of
previously recognized OTTI for pooled trust preferred securities totaling $14.0
million, on a pre-tax basis, from the opening balance of retained earnings to
other comprehensive income as of March 31, 2009. Additionally, upon implementation of this
FSP, the Company recorded $200 thousand, on a pre-tax basis, of the credit
portion of OTTI through earnings and $7.6 million, net of tax, of the
non-credit portion of OTTI for pooled trust preferred securities in other
comprehensive income as of March 31, 2009.
(2) Includes pooled trust preferred securities
with a fair value of $14.9 million that were downgraded from investment grade
to non-investment grade in April 2009.
19
Table of Contents
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 ongoing review of third party pricing methodologies, review of
pricing trends, and monitoring of trading volumes. The Company assesses that 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,
the Company believes the current broker prices obtained on the private label
mortgage-backed securities and 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. 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, the Company has modified its
approach in determining the fair values of these securities. Each of these securities will be individually
examined for the appropriate valuation methodology based on a discounted cash
flow approach. In calculating the fair
value derived from the income approach, the Company made 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.
The following table shows the Companys
rollforward of the amount related to credit losses:
|
|
Three Months Ended
March 31, 2009
|
|
|
|
(In thousands)
|
|
Beginning
balance, January 1, 2009
|
|
$
|
|
|
Addition of OTTI
that was not previously recognized
|
|
(200
|
)
|
Reduction for
securities sold during the period
|
|
|
|
Reduction for
securities with OTTI recognized in earnings because the security might be
sold before recovery of its amortized cost basis
|
|
|
|
Addition of OTTI
that was previously recognized because the security might not be sold before
recovery of its amortized cost basis
|
|
|
|
Reduction for increases
in cash flows expected to be collected that are recognized over the remaining
life of the security
|
|
|
|
Ending balance,
March 31, 2009
|
|
$
|
(200
|
)
|
20
Table of Contents
The following
table shows the Companys investment portfolios gross unrealized losses and
related fair values, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, as of
March 31, 2009 and December 31, 2008:
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
(In
thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
As of
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
$
|
104,205
|
|
$
|
(795
|
)
|
$
|
|
|
$
|
|
|
$
|
104,205
|
|
$
|
(795
|
)
|
Municipal
securities
|
|
12,312
|
|
(445
|
)
|
|
|
|
|
12,312
|
|
(445
|
)
|
Corporate debt
securities
|
|
235,313
|
|
(10,625
|
)
|
|
|
|
|
235,313
|
|
(10,625
|
)
|
Other
mortgage-backed securities
|
|
69,048
|
|
(9,291
|
)
|
|
|
|
|
69,048
|
|
(9,291
|
)
|
Total temporarily
impaired securities held-to-maturity
|
|
$
|
420,878
|
|
$
|
(21,156
|
)
|
$
|
|
|
$
|
|
|
$
|
420,878
|
|
$
|
(21,156
|
)
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
91,148
|
|
(404
|
)
|
|
|
|
|
91,148
|
|
(404
|
)
|
U.S. Government
agency securities and U.S. Government sponsored enterprise mortgage-backed
securities
|
|
254,214
|
|
(1,380
|
)
|
|
|
|
|
254,214
|
|
(1,380
|
)
|
Other
mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
|
|
|
|
546,520
|
|
(74,930
|
)
|
546,520
|
|
(74,930
|
)
|
Non-investment
grade
|
|
|
|
|
|
11,325
|
|
(2,336
|
)
|
11,325
|
|
(2,336
|
)
|
Corporate debt
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
|
|
|
|
5,608
|
|
(6,693
|
)
|
5,608
|
|
(6,693
|
)
|
Non-investment
grade
|
|
4,307
|
|
(18,590
|
)
|
17,622
|
|
(78,343
|
)
|
21,929
|
|
(96,933
|
)
|
U.S. Government
sponsored enterprise equity securities
|
|
995
|
|
(2,345
|
)
|
|
|
|
|
995
|
|
(2,345
|
)
|
Total temporarily
impaired securities available-for-sale
|
|
$
|
350,664
|
|
$
|
(22,719
|
)
|
$
|
581,075
|
|
$
|
(162,302
|
)
|
$
|
931,739
|
|
$
|
(185,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired securities
|
|
$
|
771,542
|
|
$
|
(43,875
|
)
|
$
|
581,075
|
|
$
|
(162,302
|
)
|
$
|
1,352,617
|
|
$
|
(206,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Corporate debt
securities
|
|
40,057
|
|
(234
|
)
|
|
|
|
|
40,057
|
|
(234
|
)
|
Total temporarily
impaired securities held-to-maturity
|
|
$
|
40,057
|
|
$
|
(234
|
)
|
$
|
|
|
$
|
|
|
$
|
40,057
|
|
$
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
143,727
|
|
(1,183
|
)
|
|
|
|
|
143,727
|
|
(1,183
|
)
|
U.S. Government
agency securities and U.S. Government sponsored enterprise mortgage-backed
securities
|
|
72,245
|
|
(397
|
)
|
|
|
|
|
72,245
|
|
(397
|
)
|
Other
mortgage-backed securities
|
|
17,984
|
|
(3,339
|
)
|
519,090
|
|
(105,275
|
)
|
537,074
|
|
(108,614
|
)
|
Corporate debt
securities
|
|
4,016
|
|
(2,946
|
)
|
34,611
|
|
(70,903
|
)
|
38,627
|
|
(73,849
|
)
|
U.S. Government
sponsored enterprise equity securities
|
|
1,184
|
|
(2,156
|
)
|
|
|
|
|
1,184
|
|
(2,156
|
)
|
Total temporarily
impaired securities available-for-sale
|
|
$
|
239,156
|
|
$
|
(10,021
|
)
|
$
|
553,701
|
|
$
|
(176,178
|
)
|
$
|
792,857
|
|
$
|
(186,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired securities
|
|
$
|
279,213
|
|
$
|
(10,255
|
)
|
$
|
553,701
|
|
$
|
(176,178
|
)
|
$
|
832,914
|
|
$
|
(186,433
|
)
|
Corporate Debt Securities
(Held-to-Maturity)
As
of March 31, 2009, the fair value of the Companys held-to-maturity
corporate debt securities totaled $394.9 million, of which $235.3 million were
in an unrealized loss position for less than 12 months. Total gross unrealized losses on these
securities amounted to $10.6 million, or 3% of the aggregate amortized cost
basis of held-to-maturity corporate debt securities.
These
securities mature within 5 years or less and have an investment grade rating of
BBB or better as of March 31, 2009.
Due to their relatively short maturity dates, the Company does not
intend to sell these securities and it is not more likely than not that the
Company will be required to sell these securities before recovery of their
21
Table
of Contents
amortized cost bases. As such, the Company does not deem these
securities to be other-than-temporarily impaired as of March 31, 2009.
Corporate Debt Securities
(Available-for-Sale)
The
majority of unrealized losses in the available-for-sale portfolio at March 31,
2009 are related to pooled trust preferred debt securities. As of March 31, 2009, the Company had
$23.2 million in pooled trust preferred debt securities available-for-sale,
representing 1% of total investment securities available-for-sale
portfolio. In April 2009, all of
the Companys pooled trust preferred securities were downgraded, of which one
pooled trust preferred security was downgraded to an investment grade rating of
BBB, two pooled trust preferred securities were downgraded to a non-investment
grade rating of CC, and ten pooled trust preferred securities were downgraded
to a non-investment grade rating of C.
As of March 31, 2009, these debt instruments had gross unrealized
losses amounting to $97.7 million, or 81% of the total amortized cost basis of
these securities, comprised of $83.8 million and $804 thousand that are
non-investment grade and investment grade, respectively. Included in the $97.7 million in gross
unrealized losses, is the reclassification of $14.0 million, or $8.1 million on
a net of tax basis, in previously recognized noncredit-related impairment
losses from the opening balance of retained earnings to other comprehensive
income. This reclassification was
recorded as of March 31, 2009 pursuant to the provisions of FSP FAS 115-2
and FAS 124-2. Additionally, total gross
unrealized losses on pooled trust preferred securities as of March 31,
2009 also include $13.2 million, or $7.6 million on a net of tax basis, in
noncredit-related impairment losses recorded during the first quarter of 2009
pursuant to the provisions of FSP FAS 115-2 and FAS 124-2.
The
Company attributes these unrealized losses primarily to the current absence of
liquidity in the credit markets and not due to the deterioration in credit
quality. Almost all of the pooled trust
preferred securities held by the Company have underlying collateral issued by
banks and insurance companies
.
Based on the Companys cash flow
analysis as of March 31, 2009, the majority of these pooled trust
preferred securities are overcollateralized and have subordination structures
that management believes will afford sufficient principal and interest
protection. The Company has performed a
cash flow sensitivity analysis to estimate the maximum collateral that could
default and still provide sufficient cash flows that would enable the Company
to recover its cost. With the exception
of one C-rated pooled trust preferred security that experienced a substantial
increase in deferrals and defaults in the pool, the Company has determined,
based on the results of the sensitivity analysis, that the cushion, or percent
of additional collateral that can be deferred on the remaining securities
without causing the realizable value to be less than the Companys recorded
investment, ranged from 2% to 45%.
During
the first quarter of 2009, as a result of the Companys cash flow analysis, it
was determined that one C-rated trust preferred security that experienced a
substantial increase in deferring and defaulting securities in the pool will
not attain a 100% overcollateralization ratio and that the excess cash flows
will not be sufficient to pay down the outstanding amounts due in the
future. Since the Company does not plan
to sell the security and it is not more likely than not that the Company will
be required to sell the security before the recovery of its amortized cost
basis in accordance with FSP FAS 115-2 and FAS 124-2, the Company bifurcated
the impairment on this security between the credit-related component and the
component related to all other factors (i.e. noncredit-related). In applying the methodology described in SFAS
114,
Accounting by Creditors for
Impairment of a Loanan amendment of FASB Statements No. 5 and 15
, the Company determined the amount of credit loss by discounting the
expected future cash flows by the effective yield of the security, and recorded
an impairment loss of $13.4 million, of which $200 thousand was a pre-tax
credit loss recorded through earnings.
The remaining $13.2 million, or $7.6 million on a net of tax basis, in
noncredit-related impairment
loss was recorded in other
comprehensive income as of March 31, 2009.
22
Table of Contents
In
addition to the cash flow sensitivity analysis, the Company also performed a
default stress test analysis on all bank issuers of the underlying pooled trust
preferred securities to identify issuers that are currently exhibiting signs of
weakness or may be susceptible to potential problems that could lead to the
possibility of future default or deferrals on these securities. The default stress test includes an analysis
of each issuers capital ratios, earnings levels, credit quality ratios, and
liquidity ratios. The Company will
continue to monitor the solvency, liquidity, and credit risk profiles of these
issuers on a quarterly basis. The
Company believes that the recent bailout program passed by the U.S. government
to provide for an injection of capital reduces the risk of default by bank
issuers and increases the probability that the liquidity in this market and the
prices of the Companys securities will improve in the future.
Based
on the results of the cash flow sensitivity and default stress test analyses,
the Company believes that it will be able to collect all amounts due on these
securities. Additionally, the Company
does not intend to sell these securities and it is not more likely than not
that the Company will be required to sell these securities before recovery of
their amortized cost bases. As such, the
Company does not deem these securities, with the exception of the C-rated
security discussed above, to be other-than-temporarily impaired as of March 31,
2009.
During
2008 and 2007, the Company recorded $13.6 million and $405 thousand,
respectively, in non-credit related impairment losses on three pooled trust
preferred securities due to rating downgrades caused by
increases in market spreads, concerns
regarding the housing market, and lack of liquidity in the markets
. None of these securities have experienced any
credit-related losses for which OTTI was previously recorded. As previously mentioned, upon the
implementation of
FSP FAS 115-2 and FAS 124
, the Company reclassified
the combined $14.0 million, or $8.1 million on a net of tax basis, in
noncredit-related OTTI impairment losses recognized during 2008 and 2007
through other comprehensive income as of March 31, 2009.
Mortgage-backed Securities
(Held-to-Maturity)
As of March 31,
2009, the aggregate fair value of the Companys AAA-rated non-agency
held-to-maturity mortgage-backed securities amounted to $101.9 million, of
which $69.0 million
were in an unrealized loss position for less than
12 months
. These securities are collateralized by single
family loans and secured by the first lien on these residential
properties.
Total gross unrealized
losses on these securities amounted to $9.3 million, or 8% of the aggregate
amortized cost basis of held-to-maturity mortgage-backed securities.
The decline in fair values of these securities is due to widening market
spreads, concerns regarding the downturn in the housing market, and lack of
liquidity in the market. However, these
securities have strong credit support, low loan-to-values, low delinquency, and
low foreclosure/OREO ratios.
The Company
does not intend to sell these securities and it is not more likely than not
that the Company will be required to sell these securities before recovery of
their amortized cost bases. As such, the
Company does not deem these securities to be other-than-temporarily impaired as
of March 31, 2009.
Mortgage-backed Securities
(Available-for-Sale)
As of March 31,
2009, the Companys portfolio of available-for-sale mortgage-backed securities
had an aggregate fair value of $557.8 million, which includes $528.9 million in
AAA-rated and AA-rated private label securities retained in connection with the
Companys loan securitization activities.
Mortgage-backed securities represent 28% of the total available-for-sale
investment portfolio as of March 31, 2009.
The Companys entire portfolio of private label mortgage-backed
securities has been in an unrealized loss position for more than twelve months
as of March 31, 2009. Gross
unrealized losses on private label mortgage-backed securities totaled $71.2
million, or 12% of the aggregate
amortized cost basis of
these securities. These unrealized
losses are caused by lack of liquidity and widening market spreads
resulting from instability in the
residential real estate and credit markets.
The underlying loans
23
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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 March 31, 2009. Additionally, these securities are insured by
a monoline insurance provider who was recently rated as Aa2 and A+ by two major
rating agencies. The Company has
experienced no credit related losses from these securities and only 0.14% of
the underlying loan collateral have been charged off. The Company also has one BB-rated
mortgage-backed security with a fair value of $11.3 million as of March 31,
2009. This security has been in an
unrealized loss position for twelve months or longer, with the gross unrealized
loss amounting to $2.3 million, or 17% of its amortized cost basis
as of March 31,
2009.
This security is supported by overcollateralization as
of March 31, 2009. Under EITF
99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be
Held by a Transferor in Securitized Financial Assets,
the Company
determined that there were no adverse changes in cash flows related to its
portfolio of available-for-sale investment and non-investment grade mortgage
backed securities.
The Company
does not intend to sell these securities and it is not more likely than not
that the Company will be required to sell these securities before recovery of
their amortized cost bases. As such, the
Company does not deem these securities to be other-than-temporarily impaired as
of March 31, 2009.
Government-Sponsored
Equity Preferred Stock
In
September 2008, 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 stock 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. As the assessment on the status of any
resumption in dividend payments on these securities was uncertain, the Company recorded $55.3 million in
OTTI charges on Fannie Mae and Freddie Mac preferred stock securities in
2008. As of March 31, 2009, the
fair value of these preferred stock securities was $995 thousand. Gross unrealized losses on these securities,
all of which is less than twelve months in duration, amounted to $2.3 million
as of March 31, 2009, or 70% of the aggregate amortized cost basis of
these securities. The value of these
preferred securities have been very volatile and in the first quarter of 2009,
these securities have traded above their carrying values. The Company does not intend to sell these
securities and it is not more likely than not that the Company will be required
to sell these securities before recovery of their amortized cost bases. As such, the Company does not deem these
remaining securities to be other-than-temporarily impaired as of March 31,
2009.
Residual Securities
The
Company retains residual securities in securitized mortgage loans in connection
with certain of its 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. As of March 31, 2009,
the aggregate fair value of residual securities totaling $53.9 million is based on a weighted
average remaining life of 8.02
years, a weighted average projected prepayment rate of 19%, a weighted average expected credit loss rate of 0.06%, and a weighted average discount
rate of 15%. At December 31,
2008, the aggregate fair value of residual securities amounting to $50.1
million is based on a weighted average remaining life of 6.64 years, a weighted
average projected prepayment rate of 21%, a weighted average expected credit
loss rate of 0.07%, and a weighted average discount rate of 15%.
The
Company has seventeen individual securities that have been in a continuous
unrealized loss position for twelve months or longer as of March 31,
2009. These securities are comprised of
twelve
24
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corporate debt securities
with a total fair value of $23.2 million and five mortgage-backed securities
with a total fair value of $557.8 million.
As of March 31, 2009, there were also 115 securities that have been
in a continuous unrealized loss position for less than twelve months. 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. The Company does not intend to sell these
securities and it is not more likely than not that the Company will be required
to sell the investments before recovery of their amortized cost bases. As such, the Company does not deem these
securities to be other-than-temporarily impaired as of March 31, 2009.
The
scheduled maturities of investment securities at March 31, 2009 are
presented as follows:
|
|
Held-to-maturity
|
|
Available-for-sale
|
|
(In thousands)
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
Due within one
year
|
|
$
|
207,794
|
|
$
|
206,245
|
|
$
|
32,974
|
|
$
|
33,227
|
|
Due after one
year through five years
|
|
317,354
|
|
311,749
|
|
138,988
|
|
139,955
|
|
Due after five
years through ten years
|
|
55,648
|
|
54,993
|
|
195,721
|
|
199,824
|
|
Due after ten
years
|
|
154,003
|
|
144,679
|
|
1,761,663
|
|
1,620,402
|
|
Indeterminate
maturity
|
|
|
|
|
|
3,340
|
|
995
|
|
Total
|
|
$
|
734,799
|
|
$
|
717,666
|
|
$
|
2,132,686
|
|
$
|
1,994,403
|
|
6.
GOODWILL
AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill remained at $337.4 million at
March 31, 2009 and December 31,
2008
. 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 losses as
charges to noninterest expense and adjustments to the carrying value of
goodwill. Subsequent reversals of
goodwill impairment are prohibited.
During the first quarter of 2009, 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
March 31, 2009
, the Companys
market capitalization based on total outstanding common and preferred
shares was $609.0 million and its total stockholders equity was $1.54
billion. As a result, the Company
performed an impairment analysis as of
March 31, 2009
to determine whether and to
what extent, if any, recorded goodwill was impaired. The 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.
During
the first quarter of 2009, the Company re-aligned its management reporting
structure and identified three business divisions that meet the criteria of an
operating segment in accordance with SFAS No. 131,
Disclosures
About Segments of an Enterprise and Related Information
. Based on the criteria defined in SFAS No. 131,
the Companys three operating segments are Retail Banking, Commercial Banking,
and Other. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
,
the Company determined that there were no additional reporting units below each
operating segment and therefore reporting units are equivalent to the operating
segments. See Note 10 to the Companys
condensed consolidated financial statements presented elsewhere in this report
for a further discussion of the revised business segments.
25
Table of Contents
In order to determine the fair value of the reporting units, a combined
income and market approach was used.
Under the income approach, the Company provided a net income projection
for the next 5 years plus a terminal growth rate was used to calculate the discounted
cash flows and the present value of the reporting units. Under the market approach, the fair value was
calculated using the current fair values of comparable peer banks of similar
size, geographic footprint and focus.
The market capitalizations and multiples of these peer banks were used
to calculate the market price of the Company and each reporting unit. The fair value was also subject to a control
premium adjustment, which is the cost savings that a purchase of the reporting
unit could achieve by eliminating duplicative costs. Under the combined income and market
approach, the value from each approach was appropriately weighted to determine
the fair value. As a result of this
analysis, the Company determined there was no goodwill impairment at March 31,
2009 as the fair values of all reporting units exceeded the current carrying
amounts of the goodwill. No assurance
can be given that goodwill will not be written down in future periods. The Company did n
ot record any goodwill impairment loss during the
first three months of 2008.
The Company also
has premiums on
acquired deposits which represent the intangible
value of depositor relationships resulting from deposit liabilities assumed
from various acquisitions. Other
intangibles are tested for impairment on an annual basis, or more frequently as
events occur, or as current circumstances and conditions warrant. The gross carrying amount of deposit premiums
totaled $43.0 million as of March 31, 2009 and December 31, 2008,
with related accumulated amortization expense amounting to $22.1 million and
$21.0 million, respectively, as of
March 31, 2009
and December 31,
2008. During the first quarter of 2008,
the Company recorded an $855 thousand impairment loss on deposit premiums
initially recorded for the Desert Community Bank (DCB) acquisition due to
higher than anticipated runoffs in certain deposit categories. The Company amortizes premiums on acquired
deposits based on the projected useful lives of the related deposits.
The following table provides the estimated amortization expense of
premiums on acquired deposits for 2009 and the succeeding four years as
follows:
Estimate For The Year Ending
December 31,
|
|
Amount
|
|
|
|
(In thousands)
|
|
2009
|
|
$
|
4,369
|
|
2010
|
|
3,858
|
|
2011
|
|
3,378
|
|
2012
|
|
2,602
|
|
2013
|
|
1,707
|
|
|
|
|
|
|
7.
ALLOWANCE
FOR LOAN LOSSES
The following table summarizes activity in the allowance for loan
losses for the periods indicated:
26
Table
of Contents
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Allowance
balance, beginning of period
|
|
$
|
178,027
|
|
$
|
88,407
|
|
Allowance for
unfunded loan commitments and letters of credit
|
|
(1,008
|
)
|
(904
|
)
|
Provision for
loan losses
|
|
78,000
|
|
55,000
|
|
Chargeoffs:
|
|
|
|
|
|
Single family
real estate
|
|
3,853
|
|
75
|
|
Multifamily real
estate
|
|
1,746
|
|
|
|
Commercial real
estate
|
|
2,796
|
|
|
|
Land
|
|
12,523
|
|
5,081
|
|
Construction
|
|
18,443
|
|
8,565
|
|
Commercial
business
|
|
19,459
|
|
11,816
|
|
Automobile
|
|
8
|
|
29
|
|
Other consumer
|
|
1,312
|
|
17
|
|
Total chargeoffs
|
|
60,140
|
|
25,583
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Single family
real estate
|
|
21
|
|
|
|
Multifamily real
estate
|
|
122
|
|
|
|
Commercial and
industrial real estate
|
|
6
|
|
3
|
|
Construction
|
|
119
|
|
|
|
Commercial
business
|
|
281
|
|
180
|
|
Automobile
|
|
22
|
|
17
|
|
Total recoveries
|
|
571
|
|
200
|
|
Net chargeoffs
|
|
59,569
|
|
25,383
|
|
Allowance
balance, end of period
|
|
$
|
195,450
|
|
$
|
117,120
|
|
Average loans
outstanding
|
|
$
|
8,197,173
|
|
$
|
8,955,257
|
|
Total gross
loans outstanding, end of period
|
|
$
|
8,064,315
|
|
$
|
8,849,201
|
|
Annualized net
chargeoffs to average loans
|
|
2.91
|
%
|
1.13
|
%
|
Allowance for
loan losses to total gross loans, end of period
|
|
2.42
|
%
|
1.32
|
%
|
At March 31, 2009, the allowance for loan losses amounted to
$195.5 million, or 2.42% of total loans, compared with $178.0 million or 2.16%
of total loans, at December 31, 2008, and $117.1 million or 1.32% of total
gross loans as of March 31, 2008.
The increase in the allowance for loan losses is primarily due to the
$78.0 million in provisions for loan losses recorded during the three months
ended March 31, 2009. In
comparison, $55.0 million in loss provisions were recorded during same period
in 2008. During the first quarter of
2009, the Company continued to be impacted by the sustained real estate
downturn and recessionary economy in California. This was evidenced by the increased levels of
net chargeoffs, nonperforming assets, and delinquent loans. During the three months ended March 31,
2009, the Company recorded $59.6 million in net chargeoffs, compared to $25.4
million in net chargeoffs recorded during the first three months of 2008.
8.
COMMITMENTS
AND CONTINGENCIES
Credit Extensions
- In the normal course of business, the
Company has various outstanding commitments to extend credit that are not
reflected in the accompanying condensed consolidated financial statements. As of March 31, 2009 and December 31,
2008, respectively, undisbursed loan commitments amounted to $1.34 billion and
$1.47 billion, respectively. Commercial
and standby letters
27
Table
of Contents
of credit amounted to $686.4 million and $
696.4
million as of March 31,
2009 and December 31, 2008, 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 March 31, 2009, total loans securitized with recourse amounted to
$521.9 million and were comprised of $60.7 million in single family loans with
full recourse and $461.2 million in multifamily loans with limited
recourse. In comparison, total loans
securitized with recourse amounted to $544.5 million at December 31, 2008,
comprised of $62.4 million in single family loans with full recourse and $482.1
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
as
of March 31, 2009 and December 31, 2008, 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
relatively minimal losses from the 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 March 31, 2009 and December 31, 2008, the amount of loans sold
without recourse totaled $703.5 million and $693.5 million, respectively. Total loans securitized without recourse
amounted to $1.03 billion and $1.04 billion, respectively, at March 31,
2009 and December 31, 2008. The
loans sold or securitized without recourse represent the unpaid principal
balance of the Companys loans serviced for others portfolio.
Litigation
Neither the Company nor the Bank is involved in
any material legal proceedings at March 31, 2009. 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.
STOCKHOLDERS
EQUITY
Series A Preferred Stock Offering
- In April 2008, the
Company issued 200,000 shares of 8% Non-Cumulative Perpetual Convertible
Preferred Stock, Series A (Series A preferred shares), with a
liquidation preference of $1,000 per share.
The Company received $194.1 million of additional Tier 1 qualifying
capital, after deducting underwriting discounts, commissions and offering
expenses. The holders of the Series A
preferred shares will have the right at any time to convert each share of Series A
preferred shares 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,
28
Table
of Contents
2008 of $12.56 per share. On or
after May 1, 2013, the Company will have the right, under certain
circumstances, to cause the Series A preferred shares to be converted into
shares of the Companys common stock.
Dividends on the Series A preferred shares, 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, on February 15, May 15,
August 15 and November 15 of each year. The proceeds from this offering were used to
augment the Companys liquidity and capital positions and reduce its
borrowings.
Series B Preferred Stock Offering -
On December 5, 2008, the Company
issued 306,546 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B
(Series B preferred shares), with a liquidation preference of $1,000 per
share. The Company received $306.5
million of additional Tier 1 qualifying capital from the U.S. Treasury by
participating in the U.S.Treasurys Capital Purchase Program (TCPP). The Series B preferred shares will pay
cumulative dividends at a rate of 5% per annum until the fifth anniversary of
the investment date and thereafter at a rate of 9% per annum. The Series B preferred shares are
transferable by the U.S. Treasury at any time.
Subject to the approval of the Federal Reserve Board, the Series B
preferred shares are redeemable at the option of the Company at 100% of
liquidation preference (plus any accrued and unpaid dividends), provided,
however, that the Series B preferred shares may be redeemed prior to the
first dividend payment date falling after the third anniversary of the Closing
Date (February 15, 2012) only if (i) the Company has raised aggregate
gross proceeds in one or more Qualified Equity Offerings (as defined in the
Stock Purchase Agreement) in excess of $76,636,500, and (ii) the aggregate
redemption price does not exceed the aggregate net proceeds from such Qualified
Equity Offerings.
Warrants
During 2008,
in conjunction with the Series B preferred stock offering, the Company
issued warrants with an initial price of $15.15 per share of common stock for
which the warrant may be exercised, with an allocated fair value of $25.2 million. The warrant may be exercised at any time on
or before December 5, 2018. The
U.S. Treasury may not transfer a portion of the warrants with respect to more
than one-half of the original number of shares of common stock until the
earlier of the successful completion of an offering of replacement Tier 1
capital of at least $306.5 million and December 31, 2009. The warrants, and all rights under the
warrants, are otherwise transferable. As of March 31, 2009, there were
3,035,109 warrants remaining.
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 three months ended March 31,
2009 in connection with this stock repurchase program.
Quarterly Dividends
On January 27, 2009,
the Companys Board of Directors declared first quarter preferred stock cash
dividends of $20.00 per share on its Series A preferred shares payable on
or about February 1, 2009 to shareholders of record on January 15,
2009. On February 17, 2009, the
Companys Board of Directors declared and paid quarterly preferred cash
dividends on its Series B preferred shares. Total cash dividends accrued and paid in
conjunction with the Companys Series A and B preferred stock amounted to
$7.7 million during the three months ended March 31, 2009.
On January 27, 2009, the Companys Board of Directors also
declared quarterly common stock cash dividends of $0.02 per share payable on or
about February 24, 2009 to shareholders of record on February 10,
2009. The Board authorized the reduction
of the common stock dividend to $0.02 per share for the first quarter of 2009,
compared to the $0.10 per share paid in previous quarters, in order to preserve
capital. Cash dividends totaling $929
thousand were paid to the Companys common shareholders during the first
quarter of 2009.
Earnings (Loss) Per Share (EPS)
The actual number of
shares outstanding at March 31, 2009 was 63,951,931. Basic EPS excludes dilution and is computed
by dividing income or loss available
29
Table
of Contents
to common stockholders by the weighted-average number of shares
outstanding during the period. Diluted
EPS is calculated on the basis of the weighted average number of shares
outstanding during the period plus restricted stock and shares issuable upon
the assumed exercise of outstanding convertible preferred 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 months ended March 31, 2009, 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 months ended March 31, 2009 and 2008:
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
Net (loss) available to
common stockholders
|
|
Number
of Shares
|
|
Per Share
Amounts
|
|
Net income available to
common stockholders
|
|
Number
of Shares
|
|
Per Share
Amounts
|
|
|
|
(In
thousands, except per share data)
|
|
Net (loss)
income as reported
|
|
$
|
(22,466
|
)
|
|
|
|
|
$
|
5,044
|
|
|
|
|
|
Less: Preferred
stock dividends and amortization of preferred stock discount
|
|
(8,743
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)
earnings per share
|
|
$
|
(31,209
|
)
|
62,998
|
|
$
|
(0.50
|
)
|
$
|
5,044
|
|
62,485
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
356
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
Stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)
earnings per share
|
|
$
|
(31,209
|
)
|
62,998
|
|
$
|
(0.50
|
)
|
$
|
5,044
|
|
62,949
|
|
$
|
0.08
|
|
The following outstanding convertible preferred stock, stock options,
and restricted stock for the three months ended March 31, 2009 and 2008,
respectively, were excluded from the computation of diluted EPS because
including them would have had an antidilutive effect.
|
|
For the Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In
thousands)
|
|
Convertible
preferred stock
|
|
12,772
|
|
|
|
Stock options
|
|
2,570
|
|
908
|
|
Restricted stock
|
|
779
|
|
|
|
10.
BUSINESS
SEGMENTS
The
Company utilizes an internal reporting system to measure the performance of
various operating segments within the Bank and the Company overall. The Company had previously identified five operating
segments for purposes of management reporting: retail banking, commercial
lending, treasury, residential lending, and other. The Banks strategic focus has been shifting
and evolving over the last several years which has influenced how the chief
operating decision maker views the Companys business operations and assesses
its economic performance. Specifically,
the Companys business focus has culminated in a two-segment core business
structure: Retail Banking and Commercial Banking. A third segment, which is comprised of a
combination of our previous operating segmentsTreasury and Other, provides
broad administrative support to these two core segments. As a result of this evolution in the Companys
strategic focus, the Company realigned its segment methodology during the first
quarter of 2009, and identified these three business divisions as meeting the
criteria of an operating segment in
30
Table
of Contents
accordance
with SFAS No. 131. The objective of
combining certain segments under a new reporting structure was to better align
the Companys service structure with its customer base, and to more efficiently
manage the complexities and challenges impacting the Companys current business
environment.
The
retail banking segment focuses primarily on retail operations through the Banks
branch network. The commercial banking
segment, which includes commercial real estate, primarily generates commercial
loans through the efforts of the commercial lending offices located in the Banks
northern and southern California production offices. Furthermore, the Companys commercial lending
segment also offers a wide variety of international finance and trade services
and products. The former residential
lending segment has been combined with the retail banking segment due to the
consumer-centric nature of the products and services offered by these two
segments as well as the synergistic relationship between these two units in
generating consumer mortgage loans. The
remaining centralized functions, including the former treasury segment, and
eliminations of intersegment amounts have been aggregated and included in Other.
Given the significant decline in short-term and
long-term interest rates since 2007, the Company reassessed its transfer
pricing assumptions during the first quarter of 2009 to be consistent with its
goal of growing core deposits and originating profitable, good credit quality
loans. Changes to the Companys funds
transfer pricing assumptions were made with the intent to promote core deposit
growth and, given the Banks recent credit experience, to better reflect the
current risk profiles of various loan categories within the credit
portfolio. Transfer pricing assumptions
and methodologies are reviewed at least annually to ensure that the Companys
process is reflective of current market conditions. The transfer pricing process is formulated
with the goal of incenting loan and deposit growth that is consistent with the
Companys overall growth objectives as well as provide a reasonable and
consistent basis for the measurement of the Companys business segments and
product net interest margins. Changes to
the Companys transfer pricing assumptions and methodologies are approved by
the Asset Liability Committee.
The changes in transfer pricing assumptions that the
Company implemented during the first quarter of 2009 have not been reflected in
the segment results for the first quarter of 2008 due to lack of readily
available information that is necessary to restate previously reported
results. The Company has, however,
performed a high level assessment of the impact of these transfer pricing
assumption changes to the various operating segments. Based on this assessment, the Company
determined that the impact of these changes was not significant overall and
would have been favorable to the segment pretax profit (loss) results for the
retail banking and other segments but unfavorable to the commercial banking
segment. Additionally, the changes in
transfer pricing assumptions implemented during the first quarter of 2009 would
not have altered the conclusion of the Companys goodwill impairment test
performed as of March 31, 2008, had these assumptions been retroactively
implemented during the first quarter of 2008.
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, 2008. Operating segment results are based on the
Companys internal management reporting process, which reflects assignments and
allocations of capital, certain operating and administrative costs and the
provision for loan losses. Net interest
income is based on the Companys internal funds transfer pricing system which
assigns a cost of funds or a credit for funds to assets or liabilities based on
their type, maturity or repricing characteristics. Noninterest income and noninterest expense,
including depreciation and amortization, directly attributable to a segment are
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
31
Table
of Contents
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.
The following tables present the operating results
and other key financial measures for the individual operating segments for the
three months ended March 31, 2009 and 2008:
|
|
Three Months Ended March 31, 2009
|
|
|
|
Retail
Banking
|
|
Commercial
Banking
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
55,010
|
|
$
|
63,059
|
|
$
|
26,854
|
|
$
|
144,923
|
|
Charge for funds
used
|
|
(15,283
|
)
|
(15,030
|
)
|
(56,866
|
)
|
(87,179
|
)
|
Interest spread
on funds used
|
|
39,727
|
|
48,029
|
|
(30,012
|
)
|
57,744
|
|
Interest expense
|
|
(27,008
|
)
|
(4,696
|
)
|
(33,538
|
)
|
(65,242
|
)
|
Credit on funds
provided
|
|
41,739
|
|
4,600
|
|
40,840
|
|
87,179
|
|
Interest spread
on funds provided
|
|
14,731
|
|
(96
|
)
|
7,302
|
|
21,937
|
|
Net interest
income (expense)
|
|
$
|
54,458
|
|
$
|
47,933
|
|
$
|
(22,710
|
)
|
$
|
79,681
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
|
$
|
34,115
|
|
$
|
43,885
|
|
$
|
|
|
$
|
78,000
|
|
Depreciation,
amortization and accretion
|
|
|
1,960
|
|
|
255
|
|
|
3,592
|
|
|
5,807
|
|
Goodwill
|
|
320,566
|
|
16,872
|
|
|
|
337,438
|
|
Segment pretax
profit (loss)
|
|
(11,706
|
)
|
(6,903
|
)
|
(17,322
|
)
|
(35,931
|
)
|
Segment assets
|
|
6,489,624
|
|
4,864,092
|
|
1,210,808
|
|
12,564,524
|
|
|
|
Three Months Ended March 31, 2008
|
|
|
|
Retail
Banking
|
|
Commercial
Banking
|
|
Other
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
76,046
|
|
$
|
93,048
|
|
$
|
18,090
|
|
$
|
187,184
|
|
Charge for funds
used
|
|
(44,970
|
)
|
(51,797
|
)
|
(9,862
|
)
|
(106,629
|
)
|
Interest spread
on funds used
|
|
31,076
|
|
41,251
|
|
8,228
|
|
80,555
|
|
Interest expense
|
|
(42,003
|
)
|
(4,095
|
)
|
(41,467
|
)
|
(87,565
|
)
|
Credit on funds
provided
|
|
64,607
|
|
5,644
|
|
36,378
|
|
106,629
|
|
Interest spread
on funds provided
|
|
22,604
|
|
1,549
|
|
(5,089
|
)
|
19,064
|
|
Net interest
income
|
|
$
|
53,680
|
|
$
|
42,800
|
|
$
|
3,139
|
|
$
|
99,619
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
|
$
|
31,282
|
|
$
|
23,718
|
|
$
|
|
|
$
|
55,000
|
|
Depreciation,
amortization and accretion
|
|
|
3,259
|
|
|
221
|
|
|
1,799
|
|
|
5,279
|
|
Goodwill
|
|
319,882
|
|
17,694
|
|
|
|
337,576
|
|
Segment pretax
profit (loss)
|
|
(5,095
|
)
|
10,523
|
|
2,214
|
|
7,642
|
|
Segment assets
|
|
6,606,955
|
|
5,430,389
|
|
(277,134
|
)
|
11,760,210
|
|
32
Table of Contents
11.
SUBSEQUENT
EVENTS
On April 27, 2009, the Companys Board of
Directors approved the payment of second quarter dividends of $20.00 per share
on the Companys Series A preferred stock.
The dividend is payable on or about May 1, 2009 to shareholders of
record as of April 15, 2009. The
Board also authorized the payment of second quarter dividends on the Companys Series B
preferred stock to be paid on May 15, 2009.
The Board also declared a dividend of $0.01 per share
on the Companys common stock payable on or about May 26, 2009 to
shareholders of record as of May 18, 2009.
This represents a reduction from the previous quarterly dividend rate of
$0.02 per share paid to common shareholders during the first quarter of
2009. The Board-authorized reduction in
common stock dividends is consistent with the Companys continuing efforts to
preserve capital.
33
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, 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,
2008, and the condensed consolidated financial statements and accompanying
notes presented elsewhere in this report.
Critical Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America and general practices within
the banking industry. The financial information
contained within these statements is, to a significant extent, financial
information that is based on approximate measures of the financial effects of
transactions and events that have already occurred. Various elements of our accounting policies,
by their nature, are inherently subject to estimation techniques, valuation
assumptions and other subjective assessments.
In addition, certain accounting policies require significant judgment in
applying complex accounting principles to individual transactions to determine
the most appropriate treatment. We have
established procedures and processes to facilitate making the judgments
necessary to prepare financial statements.
The
following is a summary of the areas which require more judgmental and complex
accounting estimates and principles. 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.
·
fair valuation of financial
instruments;
·
investment securities;
·
allowance for loan losses;
·
other real estate owned;
·
loan sales;
·
goodwill impairment; and
·
share-based compensation
Our
significant accounting policies are described in greater detail in our 2008
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 Financial Condition and
Results of Operations.
Overview
During the first quarter of
2009, we continued to face credit challenges brought about by the downturn in
the real estate market and the recessionary economy in California as evidenced
by elevated levels of net chargeoffs, nonperforming loans, and delinquent loans.
Although we continued to face challenges
on the credit front as anticipated, our core profitability, as well as our
liquidity, capital and loan loss allowance positions remain strong. During the first quarter of 2009, we
continued to build on
34
Table
of Contents
measures and initiatives
that we undertook throughout 2008 to strengthen our balance sheet and to
provide a solid foundation for strong earnings and growth when the market
turns.
During the first quarter of
2009, we experienced strong deposit growth with total deposits increasing to a
record $8.45 billion as of March 31, 2009, representing a 4% or $312.1
million, increase over year-end 2008.
This increase in total deposits was predominantly due to a 14% or $467.8
million increase in our core deposit base as of March 31, 2009 relative to
December 31, 2008. Since mid-2008,
we have experienced strong deposit momentum through both our retail branch
network and our commercial deposit platforms despite volatile and challenging
market conditions. As a result of this
increase in core deposits, we were able to pay down higher cost FHLB advances
which decreased $120.0 million or 9% to $1.23 billion as of March 31,
2009. We intend to pay down higher cost
FHLB advances totaling $510.0 million throughout the remainder of 2009. Both our cost of deposits and cost of funds
decreased 33 basis points during the first quarter of 2009, relative to
year-end 2008. Our cost of deposits
decreased to 1.81% for the first quarter of 2009, compared to 2.14% for the
fourth quarter of 2008, while our cost of funds decreased to 2.44% for the
first quarter of 2009, from 2.77% for the fourth quarter of 2008. Our ongoing efforts to deleverage our balance
sheet have resulted in a lower loan to deposit ratio of 95% at March 31,
2009, compared to 101% at December 31, 2008 and 110% at September 30,
2008.
Our total borrowing capacity
and holdings of cash and cash equivalents increased to $3.55 billion as of March 31,
2009, compared to $3.34 billion as of December 31, 2008. As of March 31, 2009, we had $541.1
million in cash and cash equivalents and approximately $3.01 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.
We believe that our liquidity position is more than sufficient to meet
our operating expenses, borrowing needs and other obligations.
Our capital position also
remains strong. We raised a total $506.5
million in capital during 2008 through the issuance of $200.0 million of
convertible preferred stock in April 2008 and the issuance of $306.5
million of preferred equity in December 2008 as a participant in the TARP
CPP. These issuances of preferred stock
have bolstered our capital ratios well above regulatory minimums and well-capitalized
thresholds for banks. As of March 31,
2009, our total risk-based capital ratio was 15.65% or $583.3 million more than
the 10.00% regulatory requirement for well-capitalized banks. Our Tier 1 risk-based capital ratio of 13.67%
and our Tier 1 leverage ratio of 11.47% as of March 31, 2009 also
significantly exceeded regulatory guidelines for well-capitalized banks.
Nonperforming assets totaled
$303.8 million representing 2.42% of total assets at March 31, 2009. This compares to $263.9 million or 2.12% of
total assets at December 31, 2008.
Nonperforming assets as of March 31, 2009 are comprised of
nonaccrual loans totaling $248.0 million, other real estate owned (OREO)
totaling $38.6 million, and loans modified or restructured amounting to $17.2
million. Included in nonaccrual loans as
of March 31, 2009 are loans totaling $69.3 million which were not 90 days
past due as of March 31, 2009, but have been classified as nonaccrual due
to concerns surrounding collateral values and future collectibility. Nonaccrual loans experienced the largest
increase from commercial real estate loans, which increased to $55.2 million as
of March 31, 2009 from $24.7 million as of December 31, 2008,
primarily due to one lending relationship comprised of several loans where the
borrower filed for bankruptcy towards the end of the first quarter of
2009. The net book value of total loans
for this lending relationship amounted to $49.2 million as of March 31,
2009, which was collateralized by 23 different properties comprised of land,
residential and income producing commercial real estate located in the downtown
Los Angeles region. Although interest
payments of all of these loans were current or under 90 days delinquent, these
loans were classified nonaccrual loans as of March 31, 2009.
35
Table
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We continue to proactively
identify, quantify, and reduce our exposure to problem loans. We believe that the early identification of
problem loans and potential future problem loans has enabled us to resolve
credit issues with substantially less risk and ultimate losses. At March 31, 2009, the allowance for
loan losses amounted to $195.5 million or 2.42% of total gross loans, compared
to $178.0 million or 2.16% as of December 31, 2008. We recorded $78.0 million in loan loss
provisions during the first quarter of 2009, compared to $43.0 million and
$55.0 million recorded during the fourth and first quarters of 2008,
respectively. Total net chargeoffs amounted
to $59.6 million during the first quarter of 2009, compared to $41.5 million
during the fourth quarter of 2008 and $25.6 million during the first quarter of
2008. These elevated chargeoff levels
that we experienced during 2008 and the first quarter of 2009 reflect the
proactive actions that we have taken to identify and manage our problem loans
and reduce our ultimate loss exposures as we wrote down loans that we believed
to be impaired in accordance with SFAS 114,
Accounting by Creditors
for Impairment of a Loan
, as amended.
Despite a sizeable loss provision recorded during
the first quarter of 2009, our core operating earnings remained profitable
during the period
.
The $22.5 million
, or $(0.50) per share, net
loss we recorded during the first quarter of 2009 includes $78.0 million in
loan loss provisions. Excluding loan
loss provisions, our core pretax operating income was $42.3 million for the
first quarter of 2009. This compares to
$41.4 million and $62.6 million in core pretax operating earnings during the
fourth quarter of 2008 and first quarter of 2008, respectively.
Net
interest income decreased to $79.7 million during the quarter ended March 31,
2009, compared with $99.6 million during the first quarter in 2008. During the first quarter of 2009, our net
interest margin increased 2 basis points, compared with 2.72% during the fourth
quarter of 2008 and decreased 89 basis points, compared with the first quarter
of 2008. Relative to the first quarter
of 2008, our net interest margin during the quarter ended March 31, 2009
decreased as a result of the sharp decline in interest rates prompted by
several consecutive Federal Reserve rate cuts, the reversal of interest from
nonaccrual loans, and the reinvestment of loan payoffs into lower yielding
Treasury securities and other short-term investments. We anticipate our net interest margin to
increase during the remainder of 2009, relative to first quarter of 2009, as we
continue to increase our core deposit base and pay down higher cost FHLB advances.
Total
noninterest income decreased 13% to $13.8 million during the first quarter of
2009, compared with $15.9 million for the corresponding quarter in 2008. The decrease in noninterest income is
primarily due to lower letters of credit fees and commissions and lower net
gains on sales of loans and available-for-sale investment securities. These decreases were partially offset by
higher branch-related revenues and ancillary loan fees during the first quarter
of 2009. Core noninterest income increased
to $10.4 million during the first quarter of 2009, compared to $9.6 million
during the same period in 2008, which excludes the impact of non-cash OTTI
charges of $200 thousand during the first quarter of 2009 and none during the
first quarter of 2008, as well as net gains on sales of investment securities
of $3.5 million and $4.3 million during the first quarter of 2009 and first
quarter of 2008, respectively, and loans and other assets of $33 thousand and
$1.9 million during the first quarter of 2009 and first quarter of 2008,
respectively. We believe that core
noninterest income is a strong indicator of our stable core earnings.
Total noninterest
expense decreased 3% to $51.4 million during the
first quarter of 2009
, compared with $52.9 million for the
same period in 2008. The decrease in
total noninterest expense during the
first quarter of 2009
, relative to the same quarter in 2008,
can be attributed predominantly to lower staffing levels and a reduction in
related benefits and incentive program expenses. These decreases were partially offset by
rising OREO expenses and credit cycle related expenses as well as higher
deposit insurance premiums and regulatory assessments. Our efficiency ratio, which represents
noninterest expense (excluding amortization and impairment losses 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 51.80% during the
first quarter
of 2009
compared
36
Table
of Contents
with 41.93% during the same quarter of 2008. We will continue to focus on cost management throughout
the remainder of 2009.
Total
consolidated assets at March 31, 2009 increased to $12.56 billion,
compared with $12.42 billion at December 31, 2008. The net increase in total assets is comprised
predominantly of increases of held-to-maturity investment securities of $612.5
million and short-term investments of $100.8 million. These increases were partially offset by
decreases in cash and cash equivalents of $337.8 million, net loans receivable
of $203.5 million, and available-for-sale investment securities of $45.8
million. Total liabilities increased 1%
to $11.03 billion as of March 31, 2009, compared to $10.87 billion as of December 31,
2008. The net increase in liabilities is
primarily due to an increase in total deposits of $312.1 million, partially
offset by decreases in FHLB advances of $120.0 million and federal funds
purchased of $28.0 million.
Total
average assets increased 6% to $12.50 billion during the first quarter of 2009,
compared to $11.79 billion for the first quarter of 2008, due primarily to
growth in average short-term investments, and average held-to-maturity and
available-for-sale investment securities.
Total short-term investments rose 856% to $731.6 million during the
first quarter of 2009, compared to $76.5 million during the first quarter of
2008. Similarly, total average
investment securities increased 47% to $2.70 billion during the quarter ended March 31,
2009 from $1.84 billion during the first quarter of 2008. The increases in both average short-term
investments and average investment securities can be attributed to proceeds
received in conjunction with our issuance of Series B preferred stock
during December 2008, the notable increase in our deposit base during the
first quarter of 2009, as well as the reinvestment of a portion of our loan
payoffs into short-term securities and investment securities. Total average deposits rose 13% during the
first quarter of 2009 to $8.31 billion, compared to $7.33 billion for the same
quarter in 2008, with the largest increases coming from money market accounts
and time deposits.
As
of March 31, 2009, 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
determined that there was no goodwill impairment at March 31, 2009.
On April 27, 2009,
the Board of Directors authorized a further reduction in our common stock
dividend to $0.01 per share commencing in the second quarter of 2009, as
compared with $0.02 per share paid during the first quarter of 2009 and the
$0.10 per share paid in quarters previous to 2009. Despite our strong capital position, we
believe the reduction in our common stock dividend payout to be both a
responsible and prudent decision to preserve capital during this period of
prolonged economic uncertainty.
Results
of Operations
Net
loss for the first quarter of 2009 totaled $22.5 million, compared with net
income of $5.0 million for the first quarter of 2008. On a per diluted share basis, net (loss)
income was ($0.50) and $0.08 for the first quarter of 2009 and first quarter of
2008, respectively. During the first
quarter of 2009, our operating results were significantly impacted by $78.0
million in loan loss provisions, partially offset by a higher benefit for
income taxes. Our annualized return on
average total assets decreased to (0.72%) for the quarter ended March 31,
2009, from 0.17% for the same period in 2008.
The annualized return on average stockholders equity decreased to
(11.69%) for the first quarter of 2009, compared with 1.74% for the first
quarter of 2008.
37
Table of Contents
Components of Net (Loss) Income
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In millions)
|
|
Net interest
income
|
|
$
|
79.7
|
|
$
|
99.6
|
|
Provision for
loan losses
|
|
(78.0
|
)
|
(55.0
|
)
|
Noninterest
income
|
|
13.8
|
|
15.9
|
|
Noninterest
expense
|
|
(51.4
|
)
|
(52.9
|
)
|
Benefit
(provision) for income taxes
|
|
13.4
|
|
(2.6
|
)
|
Net (loss)
income
|
|
$
|
(22.5
|
)
|
$
|
5.0
|
|
|
|
|
|
|
|
Annualized
return on average total assets
|
|
-0.72
|
%
|
0.17
|
%
|
Annualized
return on average total equity
|
|
-5.83
|
%
|
1.74
|
%
|
Annualized
return on average common equity
|
|
-11.69
|
%
|
1.74
|
%
|
Net Interest Income
Our primary source of
revenue is net interest income, which is the difference between interest earned
on loans, investment securities and other earning assets less the interest
expense on deposits, borrowings and other interest-bearing liabilities. Net interest income for the first quarter of
2009 totaled $79.7 million, a 20% decrease over net interest income of $
99.6
million
same period in 2008
.
Net
interest margin, defined as net interest income divided by average earning
assets, decreased 89 basis points to 2.74% during the quarter ended March 31,
2009, from 3.63% during the first quarter of 2008. The decline in the net interest margin
reflects the steep decrease in the federal funds target rate during 2008, the
significant increase in our overall level of nonaccrual loans, and the
reinvestment of net loan payoffs into lower yielding investment securities and
other 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 March 31,
2009 and 2008:
38
Table of Contents
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
Average
Volume
|
|
Interest
|
|
Average
Yield/
Rate (1)
|
|
Average
Volume
|
|
Interest
|
|
Average
Yield/
Rate (1)
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
$
|
731,573
|
|
$
|
2,976
|
|
1.65
|
%
|
$
|
76,540
|
|
$
|
538
|
|
2.82
|
%
|
Securities
purchased under resale agreements
|
|
50,000
|
|
1,250
|
|
10.00
|
%
|
64,286
|
|
2,553
|
|
15.93
|
%
|
Investment
securities (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
405,851
|
|
6,695
|
|
6.60
|
%
|
|
|
|
|
|
|
Tax-exempt (4)(5)
|
|
16,642
|
|
277
|
|
6.66
|
%
|
|
|
|
|
|
|
Available-for-sale
(3)(4)(5)
|
|
2,280,766
|
|
22,493
|
|
4.00
|
%
|
1,839,080
|
|
27,445
|
|
5.99
|
%
|
Loans receivable
(2)(6)
|
|
8,197,173
|
|
110,816
|
|
5.48
|
%
|
8,955,257
|
|
155,434
|
|
6.96
|
%
|
FHLB and FRB
stock
|
|
120,040
|
|
506
|
|
1.69
|
%
|
115,646
|
|
1,609
|
|
5.58
|
%
|
Total
interest-earning assets
|
|
11,802,045
|
|
145,013
|
|
4.98
|
%
|
11,050,809
|
|
187,579
|
|
6.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
|
122,899
|
|
|
|
|
|
150,469
|
|
|
|
|
|
Allowance for
loan losses
|
|
(186,058
|
)
|
|
|
|
|
(90,086
|
)
|
|
|
|
|
Other assets
|
|
759,363
|
|
|
|
|
|
677,699
|
|
|
|
|
|
Total assets
|
|
$
|
12,498,249
|
|
|
|
|
|
$
|
11,788,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
361,569
|
|
$
|
393
|
|
0.44
|
%
|
$
|
437,804
|
|
$
|
1,367
|
|
1.25
|
%
|
Money market
accounts
|
|
1,487,178
|
|
5,694
|
|
1.55
|
%
|
1,094,698
|
|
8,464
|
|
3.10
|
%
|
Savings deposits
|
|
410,232
|
|
702
|
|
0.69
|
%
|
471,437
|
|
1,454
|
|
1.24
|
%
|
Time deposits
less than $100,000
|
|
1,332,944
|
|
9,618
|
|
2.93
|
%
|
938,282
|
|
8,841
|
|
3.78
|
%
|
Time deposits
$100,000 or greater
|
|
3,482,074
|
|
20,666
|
|
2.41
|
%
|
3,027,580
|
|
32,127
|
|
4.26
|
%
|
Federal funds
purchased
|
|
2,445
|
|
3
|
|
0.49
|
%
|
165,686
|
|
1,378
|
|
3.34
|
%
|
FHLB advances
|
|
1,285,070
|
|
13,877
|
|
4.38
|
%
|
1,747,313
|
|
19,682
|
|
4.52
|
%
|
Securities sold
under repurchase agreements
|
|
998,583
|
|
11,872
|
|
4.76
|
%
|
1,001,186
|
|
10,529
|
|
4.22
|
%
|
Long-term debt
|
|
235,570
|
|
2,417
|
|
4.10
|
%
|
235,570
|
|
3,723
|
|
6.34
|
%
|
Total
interest-bearing liabilities
|
|
9,595,665
|
|
65,242
|
|
2.76
|
%
|
9,119,556
|
|
87,565
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
1,238,551
|
|
|
|
|
|
1,359,837
|
|
|
|
|
|
Other liabilities
|
|
123,085
|
|
|
|
|
|
152,338
|
|
|
|
|
|
Stockholders
equity
|
|
1,540,948
|
|
|
|
|
|
1,157,160
|
|
|
|
|
|
Total liabilities
and stockholders equity
|
|
$
|
12,498,249
|
|
|
|
|
|
$
|
11,788,891
|
|
|
|
|
|
Interest rate
spread
|
|
|
|
|
|
2.22
|
%
|
|
|
|
|
2.96
|
%
|
Net interest
income and net interest margin
|
|
|
|
$
|
79,771
|
|
2.74
|
%
|
|
|
$
|
100,014
|
|
3.63
|
%
|
(1) Annualized.
(2) Includes
amortization of premium and accretion of discounts on investment securities and
loans receivable totaling $(832)
thousand and $(347) thousand
for the three months ended March 31, 2009 and 2008, respectively. Also includes the amortization
of deferred loan fees
totaling $(1.2 million) and $975 thousand for the three months ended March 31,
2009 and 2008, respectively.
(3) Average balances
exclude unrealized gains or losses on available for sales securities.
(4) Total interest
income and average yield rate on an unadjusted basis for tax-exempt investment
securities held-to-maturity is $187 thousand and 4.49% for three months ended March 31,
2009, respectively, and none for the three months ended March 31, 2008.
There is no total interest income and average yield rate on an unadjusted basis
for tax-exempt investment securities available-for-sale for the three months
ended March 31, 2009. Total interest income and average yield rate on an
unadjusted basis for tax-exempt investment securities available-for-sale is
$1.0 million and 6.20% for the three months ended March 31, 2008,
respectively.
(5) Amounts calculated
on a fully taxable equivalent basis using the current statutory federal tax
rate.
(6) Average balances
include nonperforming loans.
39
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 March 31,
2009 vs. 2008
|
|
|
|
Total
|
|
Changes Due to
|
|
|
|
Change
|
|
Volume (1)
|
|
Rates (1)
|
|
|
|
(In thousands)
|
|
INTEREST-EARNING
ASSETS:
|
|
|
|
|
|
|
|
Short-term
investments
|
|
$
|
2,438
|
|
$
|
2,756
|
|
$
|
(318
|
)
|
Securities
purchased under resale agreements
|
|
(1,303
|
)
|
(489
|
)
|
(814
|
)
|
Investment
securities held-to-maturity
|
|
|
|
|
|
|
|
Taxable
|
|
6,695
|
|
|
|
|
|
Tax-exempt (2)
|
|
277
|
|
|
|
|
|
Investment
securities available-for-sale (2)
|
|
(4,952
|
)
|
5,591
|
|
(10,543
|
)
|
Loans receivable
|
|
(44,618
|
)
|
(12,352
|
)
|
(32,266
|
)
|
FHLB and FRB
stock
|
|
(1,103
|
)
|
59
|
|
(1,162
|
)
|
Total interest
and dividend income
|
|
$
|
(42,566
|
)
|
$
|
(4,435
|
)
|
$
|
(45,103
|
)
|
|
|
|
|
|
|
|
|
INTEREST-BEARING
LIABILITIES
|
|
|
|
|
|
|
|
Checking
accounts
|
|
$
|
(974
|
)
|
$
|
(205
|
)
|
$
|
(769
|
)
|
Money market
accounts
|
|
(2,770
|
)
|
2,398
|
|
(5,168
|
)
|
Savings deposits
|
|
(752
|
)
|
(170
|
)
|
(582
|
)
|
Time deposits
less than $100,000
|
|
777
|
|
3,159
|
|
(2,382
|
)
|
Time deposits
$100,000 or greater
|
|
(11,461
|
)
|
4,283
|
|
(15,744
|
)
|
Federal funds
purchased
|
|
(1,375
|
)
|
(737
|
)
|
(638
|
)
|
FHLB advances
|
|
(5,805
|
)
|
(5,021
|
)
|
(784
|
)
|
Securities sold
under resale agreements
|
|
1,343
|
|
(27
|
)
|
1,370
|
|
Long-term debt
|
|
(1,306
|
)
|
|
|
(1,306
|
)
|
Total interest
expense
|
|
(22,323
|
)
|
3,680
|
|
(26,003
|
)
|
CHANGE
IN NET INTEREST INCOME
|
|
$
|
(20,243
|
)
|
$
|
(8,115
|
)
|
$
|
(19,100
|
)
|
(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 held-to-maturity is $187 thousand,
and there is no total change due to volume and rates on an unadjusted basis for
tax-exempt investment securities held-to-maturity for the three months ended March 31,
2009 vs. 2008. Total change on an unadjusted basis for tax-exempt investment
securities available-for-sale is $(1.0) million, and total changes due to
volume and rates on an unadjusted basis for tax-exempt investment securities
available-for-sale is $(510) thousand and $(536) thousand for the three months
ended March 31, 2009 vs. 2008, respectively.
Provision for Loan Losses
We recorded $78.0 million in provisions for loan losses during the
first quarter of 2009. In comparison, we
recorded $55.0 million in provision for loan losses during the first quarter of
2008. The significant increase in loan
loss provisions recorded during the first three months of 2009 reflects our
increased chargeoff levels as well as our higher volume of classified and
nonperforming loans caused by challenging conditions in the real estate housing
market, turmoil in the financial markets, as well as the
40
Table
of Contents
prolonged downturn in the overall economy. We continued to sustain higher chargeoff
activity and increased loan loss provisions for our land and residential
construction loans during the first quarter of 2009 that were caused by the
sustained weakness in the real estate market.
The Company recorded $59.6 million in net chargeoffs during the first
three months of 2009, compared to $25.4 million in net chargeoffs recorded
during the first three months of 2008.
We believe that credit challenges will continue throughout 2009,
particularly for our residential construction and land loan portfolios. We continue to aggressively monitor
delinquencies and proactively review the credit risk exposure of our loan
portfolio to minimize and mitigate potential losses. Throughout the course of 2008 and the first
quarter of 2009, we have actively reduced exposure to land and construction
loans, reducing both outstanding loan balances as well as total commitments.
Provisions for loan losses are charged to income to bring the allowance
for credit losses as well as the allowance for unfunded loan commitments,
off-balance sheet credit exposures, and recourse provisions to a level deemed
appropriate by the Company based on the factors discussed under the Allowance
for Loan Losses section of this report.
Noninterest Income
Components of Noninterest Income
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In millions)
|
|
Impairment loss
on investment securities
|
|
$
|
(0.20
|
)
|
$
|
|
|
Branch fees
|
|
4.79
|
|
4.10
|
|
Net gain on
investment securities available-for-sale
|
|
3.52
|
|
4.33
|
|
Ancillary loan
fees
|
|
2.23
|
|
1.14
|
|
Letters of
credit fees and commissions
|
|
1.85
|
|
2.68
|
|
Income from life
insurance policies
|
|
1.08
|
|
1.03
|
|
Net gain on sale
of loans
|
|
0.01
|
|
1.85
|
|
Other operating
income
|
|
0.51
|
|
0.78
|
|
Total
|
|
$
|
13.79
|
|
$
|
15.91
|
|
Noninterest income
includes revenues earned from sources other than interest income. These sources include 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, net
gains on sales of loans, investment securities available-for-sale, and other
assets, impairment losses on investment securities and other assets, and other
noninterest-related revenues.
Noninterest
income decreased 13% to $13.8 million during the three months ended March 31,
2009 from $15.9 million for the same quarter in 2008. The decrease in noninterest income for the
quarter ended March 31, 2009, as compared to the same period in 2008, is
primarily attributable to lower net gain on sales of loans and
available-for-sale securities, partially offset by higher branch fees and
ancillary loan fees earned during the first quarter of 2009.
Included
in noninterest income recorded during the first quarter 2009 is a $200 thousand
credit-related impairment loss on investment securities pursuant to the
provisions of FSP FAS 115-2 and FAS 124-2 which the Company implemented during
the first quarter of 2009. There were no
impairment losses recorded on investment securities during the first quarter of
2008.
41
Table of Contents
Branch
fees, which represent revenues derived from branch operations, increased 17% to
$4.8 million in the first quarter of 2009, from $4.1 million for the same
quarter in 2008. The increase in
branch-related fees can be attributed primarily to higher revenues from service
and transaction charges on deposit accounts.
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 95% to $2.2 million during the first
quarter of 2009, compared to $1.1 million recorded during the same period in
2008.
Letters of credit
fees and commissions, which represent revenues from trade finance operations as
well as fees related to the issuance and maintenance of standby letters of
credit, decreased 31% to $1.9 million during the
first three months of 2009,
from $2.7 million
during the same
period in 2008
. The decrease in letters of credit fees and
commissions is primarily due to the decline in the volume of standby letters of
credit during 2009 relative to the prior year as well as a decrease in
commissions generated from trade finance activities due to the downturn in the
economy.
During
the first quarter of 2009, net gain on sales of loans decreased to $8 thousand,
compared to $1.9 million recorded during the first quarter of 2008. The net gain on sales of loans recorded
during the first quarter of 2008 is primarily due to sales of single family
loans to Fannie Mae as well as bulk sales of commercial real estate loans to
various third parties consummated during the period. We had minimal loan sale activity during the
first quarter of 2009.
Noninterest Expense
Components of Noninterest Expense
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In millions)
|
|
Compensation and
employee benefits
|
|
$
|
17.11
|
|
$
|
23.27
|
|
Occupancy and
equipment expense
|
|
7.39
|
|
7.01
|
|
Other real
estate owned expense
|
|
7.03
|
|
0.89
|
|
Deposit
insurance premiums and regulatory assessments
|
|
3.33
|
|
1.19
|
|
Legal expense
|
|
1.78
|
|
1.90
|
|
Amortization of
investments in affordable housing partnerships
|
|
1.76
|
|
1.72
|
|
Loan related
expense
|
|
1.44
|
|
1.37
|
|
Data processing
|
|
1.14
|
|
1.20
|
|
Amortization and
impairment writedowns of premiums on deposits acquired
|
|
1.13
|
|
2.74
|
|
Deposit-related
expenses
|
|
0.90
|
|
0.95
|
|
Other operating
expenses
|
|
8.40
|
|
10.65
|
|
Total
noninterest expense
|
|
$
|
51.41
|
|
$
|
52.89
|
|
Efficiency Ratio
(1)
|
|
51.80
|
%
|
41.93
|
%
|
(1) Represents
noninterest expense, excluding 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, excluding impairment losses on
investment securities.
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Noninterest expense, which is comprised primarily of compensation and
employee benefits, occupancy and other operating expenses decreased 3% to $51.4
million during the first quarter of 2009, from $52.9 million for the same
quarter in 2008.
Compensation and employee benefits decreased 26% to $17.1 million during
the first quarter of 2009, compared to $23.3 million for the first quarter of
2008. The decrease in compensation and
employee benefit expenses during the first quarter of 2009 is due to the impact
of initiatives undertaken by the Company throughout the past year to reduce
overall staffing levels and lower compensation-related incentives and expenses.
We recorded OREO
expenses, net of OREO revenues and gains, totaling $7.0 million during
the quarter
ended March 31, 2009
, compared with $889 thousand during
the same period in 2008
.
The $7.0 million in total OREO
expenses incurred during the first three months of 2009 is comprised of $1.3
million in various operating and maintenance expenses related to our higher
volume of OREO properties, $2.7 million in valuation losses, and $3.0 million
in net losses from the sale of 22 OREO properties consummated during the first
quarter of 2009. As of
March 31,
2009
, total OREO, net
amounted to $38.6 million, compared to $
14.9
million as of March 31, 2008.
Deposit insurance
premiums and regulatory assessments increased 179% to $3.3 million during
the quarter
ended March 31, 2009
, compared with $1.2 million during
the same period in 2008
.
The increase in deposit insurance premiums and regulatory assessments is
primarily due to the recent increases in the FDIC deposit assessment rate and
due to the full utilization of the one-time FDIC assessment credit in
2008.
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 Emergency
Economic Stabilization Act in October 2008 temporarily raised the basic
limit of federal deposit insurance coverage from $100,000 to $250,000 per
depositor and fully insured all non-interest bearing deposit accounts until December 31,
2009. Effective April 1, 2009, the
Federal Deposit Insurance Corporation (FDIC) issued an interim rule imposing
a special emergency assessment on all insured institutions of 20 basis
points. The special assessment is
payable on September 30, 2009. We
anticipate the 20 basis point assessment, estimated at $16.5 million, to impact
our pretax earnings during the second quarter of 2009. The interim rule would also permit the
FDIC to impose an emergency special assessment after June 30, 2009, of up
to 10 basis points if necessary to maintain public confidence in the federal
deposit insurance system. As a result of
these regulations, we anticipate our deposit insurance premiums to further
increase throughout the remainder of 2009.
Amortization expense and impairment losses on premiums on deposits
acquired decreased 59% to $1.1 million during the quarter ended March 31,
2009, compared with $2.7 million during the same period in 2008. During the first quarter of 2008, we
recognized an $855 thousand impairment loss on deposit premiums initially
recorded for the Desert Community Bank acquisition due to higher than
anticipated runoffs in certain deposit categories. Additionally, the amortization expense on
deposit premiums related to the United National Bank and Standard Bank
acquisitions decreased during the first quarter of 2009, relative to the first
quarter of 2008. This is due to lower
runoff or decay rates incorporated into our core deposit amortization model
after three years following the consummation of each acquisition. The projected deposit runoff rates
incorporated into the core deposit amortization models simulate the decay rates
used in the Companys current asset liability model. Premiums on acquired deposits are amortized
over their estimated useful lives.
Other operating
expenses include advertising and public relations, telephone and postage,
stationery and supplies, bank and item processing charges, insurance expenses,
and other professional
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fees, and
charitable contributions. Other
operating expenses decreased 21% to $8.4 million during
the quarter
ended March 31, 2009
, compared with $10.7 million
during the same period in
2008, primarily due to various cost-cutting measures and initiatives that we
undertook throughout 2008 and the first quarter of 2009
.
Our efficiency
ratio increased to 51.80%
for the quarter ended March 31, 2009
, compared to 41.93%
for the
corresponding period in 2008
. The increase in our efficiency
ratio during the first quarter of 2009 can be attributed largely to higher
deposit insurance premiums and higher credit cycle related expenses associated
with OREO/foreclosure transactions as well as lower net interest income before
the provision for loan losses.
Income Taxes
The income tax benefit
totaled $13.5 million for the first quarter of 2009, representing an effective
tax benefit rate of 37.5%. In
comparison, the provision for income taxes of $2.6 million represented an
effective tax rate of 34.0% for the first quarter of 2008. The income tax benefit recognized during the
first quarter of 2009 and 2008 both reflect the utilization of $1.6 million in
tax credits generated from our investments in affordable housing partnerships.
Operating Segment Results
We
had previously identified five operating segments for purposes of management
reporting: retail banking, commercial lending, treasury, residential lending,
and other. Our strategic focus has been
shifting and evolving over the last several years which has influenced how our
chief operating decision maker views the Companys business operations and
assesses its economic performance.
Specifically, our business focus has culminated in a two-segment core
business structure: Retail Banking and Commercial Banking. A third segment, which is comprised of a
combination of our previous operating segmentsTreasury and Other, provides
broad administrative support to these two core segments. As a result of this evolution in our
strategic focus, we realigned our segment methodology during the first quarter
of 2009, and identified these three business divisions as meeting the criteria
of an operating segment in accordance with SFAS No. 131. The objective of combining certain segments
under a new reporting structure was to better align our service structure with
our customer base, and to more efficiently manage the complexities and
challenges impacting our current business environment.
The
retail banking segment focuses primarily on retail operations through the Banks
branch network. The commercial banking
segment, which includes commercial real estate, primarily generates commercial
loans through the efforts of the commercial lending offices located in the Banks
northern and southern California production offices. Furthermore, the commercial lending segment
also offers a wide variety of international finance and trade services and
products. The former residential lending
segment has been combined with the retail banking segment due to the
consumer-centric nature of the products and services offered by these two
segments as well as the synergistic relationship between these two units in
generating consumer mortgage loans. The
remaining centralized functions, including the former treasury segment, and
eliminations of intersegment amounts have been aggregated and included in Other.
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 unless it is not deemed practicable to do so.
Given the significant decline in short-term and
long-term interest rates since 2007, we reassessed our transfer pricing
assumptions during the first quarter of 2009 to be consistent with the Companys
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strategic goal of growing core deposits and originating profitable,
good credit quality loans. Changes to
our funds transfer pricing assumptions were made with the intent to promote
core deposit growth and, given our recent credit experience, to better reflect
the current risk profiles of various loan categories within our credit
portfolio. Our transfer pricing assumptions
and methodologies are reviewed at least annually to ensure that our process is
reflective of current market conditions.
Our transfer pricing process is formulated with the goal of incenting
loan and deposit growth that is consistent with the Companys overall growth
objectives as well as provide a reasonable and consistent basis for measurement
of our business segments and product net interest margins. Changes to our transfer pricing assumptions
and methodologies are approved by the Asset Liability Committee.
The changes in transfer pricing assumptions that we
implemented during the first quarter of 2009 have not been reflected in the
segment results for the first quarter of 2008 due to lack of readily available
information that is necessary to restate previously reported results. We have, however, performed a high level
assessment of the impact of these transfer pricing assumption changes to the
various operating segments. Based on
this assessment, we determined that the impact of these changes was not
significant overall, and would have been favorable to the segment pretax profit
(loss) results for the retail banking and other segments but unfavorable to the
commercial banking segment.
Additionally, the changes in transfer pricing assumptions implemented
during the first quarter of 2009 would not have altered the conclusion of our
goodwill impairment test performed as of March 31, 2008, had these
assumptions been retroactively implemented during the first quarter of 2008.
For more information about our segments, including
information about the underlying accounting and reporting process, please see
Note 10 to the condensed consolidated financial statements presented elsewhere
in this report.
Retail Banking
The retail banking
segment reported an $11.7 million pretax loss for the three months ended March 31,
2009, compared to a $5.1 million pretax loss for the same quarter in 2008. The increase in pretax loss for this segment
during the first quarter of 2009 is comprised of a $2.8 million increase in
loan loss provision and a $4.7 million decrease in noninterest income,
partially offset by a $777 thousand increase in net interest income and a $543
thousand decrease in noninterest expense.
The increase in net
interest income during the first quarter of 2009 is attributable to the
interest rate floors placed on new variable loans, which partially offsets the
steep 225 basis point decrease in interest rates since March 2008. The increase in loan loss provisions for this
segment during the first quarter of 2009, relative to the same period in 2008,
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.
Noninterest income for
this segment decreased 39%, to $7.3 million for the quarter ended March 31,
2009, from $11.9 million recorded during the same period in 2008. The decrease in noninterest income for the
first quarter of 2009 is primarily due to lower loan fee income resulting from
a notable decrease in our loan origination activities and lower net gain on
sale of loans, partially offset by an increase in
branch-related fees,
specifically service and transaction charges on deposit accounts. Additionally, noninterest income during the
first quarter of 2008 reflects the $3.3 million gain on sale of investment
securities from loans originated by this segment that have been securitized as
part of the Companys securitization activities.
Noninterest
expense for this segment decreased 2% to $30.8 million during the first quarter
of 2009, compared with $31.4 million recorded during the first quarter of
2008. The decrease in noninterest
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expense for the
first quarter of 2009 is primarily due to a decrease in compensation and
employee benefits and amortization and impairment losses on premiums on
deposits acquired, partially offset by a higher OREO expenses and FDIC
insurance premiums.
Commercial Banking
The commercial banking
segment reported a pretax loss of $6.9 million during the quarter ended March 31,
2009, or a 166% decrease, compared with pretax income of $10.5 million for the
same period in 2008. The primary driver
of the decrease in pretax income for this segment is due to a significant
increase in loan loss provisions resulting from increased chargeoff activity as
well as higher levels of nonperforming and classified assets, partially offset
by an increase in net interest income.
Loan loss provisions increased 85% to $43.9 million during the first
quarter of 2009, compared with $23.7 million for the same period in 2008.
Net interest income for
this segment increased 12% to $47.9 million during the quarter ended March 31,
2009, compared to $42.8 million for the same period in 2008. 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 33% to $5.3 million during the first quarter of 2009,
compared with $7.9 million recorded in the same quarter of 2008. The decrease in noninterest income is primarily
due to a decrease in net gain on sale of loans as well as a decrease in letters
of credit fees and commissions driven by a decline in the volume of standby
letters of credit and commissions generated from trade finance activities due
to the downturn in the economy.
Noninterest expense for
this segment slightly decreased to $13.1 million during the first quarter of
2009, compared with $
14.0 million recorded during the same quarter in
2008. The decrease in noninterest
expense is due to a decrease in compensation and employee benefits and legal
expenses for this segment, partially offset by an increase in OREO expenses.
Other
This segment reported a
pretax loss of $17.3 million during the quarter ended March 31, 2009,
compared with a pretax income of $2.2 million recorded in the same quarter of
2008. The increase in the pretax loss is
primarily due to a $25.8 million increase in net interest expense, partially
offset by a $5.2 million increase in noninterest income and an $87 thousand
decrease in noninterest expense.
Net interest expense for
this segment increased to $22.7 million during the quarter ended March 31,
2009, compared to net interest income of $3.1 million recorded in the same
quarter of 2008. Since this segment now
includes the treasury function, which is responsible for liquidity and interest
rate risk management, it bears the cost of adverse movements in interest rates
affecting our net interest margin and supports the retail and commercial
banking segments through funds transfer pricing.
Noninterest income for
this segment increased 133% to $1.3 million, compared with $3.9 million
noninterest loss recorded in the same quarter of 2008. The increase in noninterest income during the
first quarter of 2009 is due to higher net gain on sale of investment
securities allocated to the treasury division, partially offset by the $200
thousand credit-related impairment loss recorded on investment securities
during the first quarter of 2009.
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Noninterest
expense for this segment slightly decreased 1% to $7.5 million, compared with
$7.6 million recorded during the same quarter in 2008.
Balance Sheet Analysis
Total assets
increased $141.7 million, or 1%, to $12.56 billion as of March 31,
2009. The increase is comprised
predominantly of
increases in short-term investments amounting to
$100.8 million and held-to-maturity investment securities totaling $612.5
million,
partially
offset by
decreases in cash and cash equivalents totaling $337.8 million, net
loans receivable amounting to $203.5 million and available-for-sale investment
securities totaling $45.8 million
. The net
increase in total assets was funded by deposit growth of $312.1 million
, partially
offset by decreases in federal funds purchased of $28.0 million and FHLB
advances of $120.0 million.
SFAS 157,
Fair Value Measurement
,
and SFAS 159,
Fair Value Option
SFAS
157 and SFAS 159 became effective on January 1, 2008. We adopted SFAS 157 which 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 our financial condition, results of operations, or cash flows.
We
adopted FSP SFAS 157-2 effective January 1, 2009. FSP SFAS 157-2 provided for a one-year
deferral of the implementation of SFAS 157 for other nonfinanical assets and
liabilities, effective for fiscal years beginning after November 15,
2008. As a result of adopting FSP SFAS
157-2, we are now providing fair value disclosures related to our OREO
properties. See Note 3 to our condensed
consolidated financial statements presented elsewhere in this report.
We
did not elect to adopt the fair value option as permitted under SFAS 159, but
to continue recording the financial instruments in accordance with current
practice.
Securities
Purchased Under Resale Agreements
We
purchase securities under resale agreements (resale agreements) with terms
that range from one day to several years.
Total resale agreements remained at $50.0 million as of March 31,
2009 and December 31, 2008, representing one
resale agreement with an original term of fifteen
years. The interest rate is initially
fixed for the first two years and thereafter becomes floating. There is no interest payment on this
agreement if certain swap yield curves are inverted. The collateral for this resale agreement
consists of U.S. Government agency and/or U.S. Government sponsored enterprise
debt and mortgage-backed securities held in safekeeping by a third party
custodian.
Purchases of securities under resale agreements are overcollateralized
to ensure against unfavorable market price movements. We monitor the market value of the underlying
securities which collateralize the related receivable on resale agreements,
including accrued interest. In the event
that the fair market value of the securities decreases below the carrying
amount of the related repurchase agreement, our counterparty is required to
designate an equivalent value of additional securities. The counterparty 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.
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Investment Securities
Income from
investing activities provides a significant portion of our total income. We aim to maintain an investment portfolio
with an adequate mix of fixed-rate and adjustable-rate securities with
relatively short maturities to minimize overall interest rate risk. Our investment securities portfolio primarily
consists of U.S. Treasury securities, U.S. Government agency securities, U.S.
Government sponsored enterprise debt securities, U.S. Government sponsored and
other mortgage-backed securities, municipal securities, corporate debt securities,
residual securities, and U.S. Government sponsored enterprise equity
securities. We classify certain
investment securities as held-to-maturity, and accordingly, these securities
are recorded based on their amortized cost.
We also classify certain investments as available-for-sale, and
accordingly, these securities are carried at their estimated fair values with
the corresponding changes in fair values recorded in accumulated other
comprehensive income, as a component of stockholders equity.
Investment securities
held-to-maturity totaled $734.8 million and $122.3 million at March 31,
2009 and December 31, 2008, respectively, representing U.S. Government
agency and U.S. Government sponsored enterprise debt securities, municipal
securities, corporate debt securities and private label mortgage
backed-securities purchased during the first quarter of 2009 and fourth quarter
of 2008. The increase in investment
securities was funded by deposit growth and capital raised during 2008.
Total investment securities
available-for-sale decreased 2% to $1.99 billion as of March 31, 2009,
compared with $2.04 billion at December
31, 2008. Total repayments/maturities and proceeds from
sales of available-for-sale securities amounted to $611.0 million and $185.8
million, respectively, during the first quarter of 2009. We recorded net gains totaling $3.5 million
and $4.3 million on sales of available-for-sale securities during the first
quarters of 2009 and 2008, respectively.
A
portion of the proceeds from repayments, maturities, sales, and redemptions of
investment securities were applied towards additional investment securities
purchases totaling $1.33 billion.
At
March 31, 2009, investment securities held to maturity with an aggregate
par value of $614.9 million and available-for-sale securities with an aggregate
par value of $1.22 billion were pledged to secure public deposits, repurchase
agreements, the FRB discount window, and other purposes required or permitted
by law.
We perform regular
impairment analyses on our portfolio of investment securities. If we determine that a decline in fair value
is other-than-temporary, a credit-related impairment loss is recognized in
current earnings and non-credit-related impairment is charged to other
comprehensive income.
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, the probability that we will be
unable to collect all amounts due, 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. We perform a monthly analysis on the broker
quotes received from third parties to ensure that the prices represent a
reasonable estimate of the fair value.
Our procedures include, but are not limited to, initial and ongoing
review of third party pricing methodologies, review of pricing trends, and monitoring
of trading volumes. We ensure that
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 we determine that there is a
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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 that the current broker prices obtained on the private label
mortgage-backed securities and 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. 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
modified our approach in determining the fair values of these securities. Each of these securities will be individually
examined for the appropriate valuation methodology based on a discounted cash
flow approach. In calculating the fair
value derived from the income approach, we made 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.
Corporate Debt Securities
(Held-to-Maturity)
As
of March 31, 2009, the fair value of our held-to-maturity corporate debt
securities totaled $394.9 million, of which $235.3 million were in an
unrealized loss position for less than 12 months. Total gross unrealized losses on these
securities amounted to $10.6 million, or 3% of the aggregate amortized cost
basis of held-to-maturity corporate debt securities.
These
securities mature within 5 years or less and have an investment grade rating of
BBB or better as of March 31, 2009.
Due to their relatively short maturity dates, we do not intend to sell
these securities and it is not more likely than not that we will be required to
sell these securities before recovery of their amortized cost bases. As such, we do not deem these securities to
be other-than-temporarily impaired as of March 31, 2009.
Corporate Debt Securities
(Available-for-Sale)
The
majority of unrealized losses in the available-for-sale portfolio at March 31,
2009 are related to pooled trust preferred debt securities. As of March 31, 2009, we had $23.2
million in pooled trust preferred debt securities available-for-sale,
representing 1% of total investment securities available-for-sale
portfolio. In April 2009, all of
our pooled trust preferred securities were downgraded. Specifically, one pooled trust preferred
security was downgraded to an investment grade rating of BBB, two pooled trust
preferred securities were downgraded to a non-investment grade rating of CC,
and ten pooled trust preferred securities were downgraded to a non-investment
grade rating of C. As of March 31,
2009, these debt instruments had gross unrealized losses amounting to $97.7
million, or 81% of the total amortized cost basis of these securities,
comprised of $83.8 million and $804 thousand that are non-investment grade and
investment grade, respectively. Included
in the $97.7 million in gross unrealized losses, is the reclassification of
$14.0 million, or $8.1 million on a net of tax basis, in previously recognized
noncredit-related impairment losses from the opening balance of retained
earnings to other comprehensive income.
This reclassification was recorded as of March 31, 2009 pursuant to
the provisions of FSP FAS 115-2 and FAS 124-2.
Additionally, total gross unrealized losses on pooled trust preferred
securities as of March 31, 2009 also include $13.2 million, or $7.6
million on a net of tax basis, in noncredit-related impairment losses recorded
during the first quarter of 2009 pursuant to the provisions of FSP FAS 115-2
and FAS 124-2.
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We
attribute these unrealized losses primarily to the current absence of liquidity
in the credit markets and not due to the deterioration in credit quality. Almost all of our pooled trust preferred
securities have underlying collateral issued by banks and insurance companies
.
Based on our cash
flow analysis as of March 31, 2009, the majority of these pooled trust
preferred securities are overcollateralized and have subordination structures
that we believe will afford sufficient principal and interest protection. We performed a cash flow sensitivity analysis
to estimate the maximum collateral that could default and still provide sufficient
cash flows that would enable us to recover our cost. With the exception of one C-rated pooled
trust preferred security that experienced a substantial increase in deferrals
and defaults in the pool, we have determined, based on the results of our sensitivity
analysis, that the cushion, or percent of additional collateral that can be
deferred on the remaining securities without causing the realizable value to be
less than our recorded investment, ranged from 2% to 45%.
During
the first quarter of 2009, as a result of our cash flow analysis, we determined
that one C-rated trust preferred security that experienced a substantial
increase in deferring and defaulting securities in the pool will not attain a
100% overcollateralization ratio and that the excess cash flows will not be
sufficient to pay down the outstanding amounts due in the future. Since we do not plan to sell the security and
it is not more likely than not that we will be required to sell the security
before the recovery of our amortized cost basis in accordance with FSP FAS 115-2
and FAS 124-2, we bifurcated the impairment on this security between the
credit-related component and the component related to all other factors (i.e.
noncredit-related). In applying the
methodology described in SFAS 114,
Accounting
by Creditors for Impairment of a Loanan amendment of FASB Statements No. 5
and 15
, we determined the amount
of credit loss by discounting the expected future cash flows by the effective
yield of the security, and recorded an impairment loss of $13.4 million, of
which $200 thousand was a pre-tax credit loss recorded through earnings. The remaining $13.2 million, or $7.6 million
on a net of tax basis, in noncredit-related impairment
loss was
recorded in other comprehensive income as of March 31, 2009.
In
addition to the cash flow sensitivity analysis, we also performed a default
stress test analysis on all bank issuers of the underlying pooled trust
preferred securities to identify issuers that are currently exhibiting signs of
weakness or may be susceptible to potential problems that could lead to the
possibility of future default or deferrals on these securities. The default stress test includes an analysis
of each issuers capital ratios, earnings levels, credit quality ratios, and
liquidity ratios. We will continue to
monitor the solvency, liquidity, and credit risk profiles of these issuers on a
quarterly basis. We believe that the
recent bailout program passed by the U.S. government to provide for an
injection of capital reduces the risk of default by bank issuers and increases
the probability that the liquidity in this market and the prices of our
securities will improve in the future.
Based
on the results of our cash flow sensitivity and default stress test analyses,
we believe that we will be able to collect all amounts due on these
securities. Additionally, we do not
intend to sell these securities and it is not more likely than not that we will
be required to sell these securities before recovery of our amortized cost
bases. As such, we do not deem these
securities, with the exception of the C-rated security discussed above, to be
other-than-temporarily impaired as of March 31, 2009.
During
2008 and 2007, we recorded $13.6 million and $405 thousand, respectively, in
non-credit related impairment losses on three pooled trust preferred securities
due to rating downgrades caused by
increases in market spreads, concerns regarding the
housing market, and lack of liquidity in the markets
. None of these securities have experienced any
credit-related losses for which OTTI was previously recorded. As previously mentioned, upon the
implementation of
FSP FAS 115-2 and FAS 124
, we reclassified the
combined $14.0 million, or $8.1 million on a net of tax basis, in
noncredit-related OTTI impairment losses recognized during 2008 and 2007
through other comprehensive income as of March 31, 2009.
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Mortgage-backed Securities
(Held-to-Maturity)
As of March 31,
2009, the aggregate fair value of our AAA-rated non-agency held-to-maturity
mortgage-backed securities amounted to $101.9 million, of which $69.0 million
were in an
unrealized loss position for less than 12 months
. These
securities are collateralized by single family loans and secured by the first
lien on these residential properties.
Total gross
unrealized losses on these securities amounted to $9.3 million, or 8% of the
aggregate amortized cost basis of held-to-maturity mortgage-backed securities.
The decline in fair values of these securities is due to widening market
spreads, concerns regarding the downturn in the housing market, and lack of
liquidity in the market. However, these
securities have strong credit support, low loan-to-values, low delinquency, and
low OREO ratios.
We do not
intend to sell these securities and it is not more likely than not that the
Company will be required to sell these securities before recovery of their
amortized cost bases. As such, we do not
deem these securities to be other-than-temporarily impaired as of March 31,
2009.
Mortgage-backed Securities
(Available-for-Sale)
As of March 31,
2009, our portfolio of available-for-sale mortgage-backed securities had an
aggregate fair value of $557.8 million, which includes $528.9 million in
AAA-rated and AA-rated private label securities retained in connection with our
loan securitization activities.
Mortgage-backed securities represent 28% of the total available-for-sale
investment portfolio as of March 31, 2009.
Our entire portfolio of private label mortgage-backed securities has
been in an unrealized loss position for more than twelve months as of March 31,
2009. Gross unrealized losses on private
label mortgage-backed securities totaled $71.2 million, or 12% of the aggregate
amortized cost basis of these securities. These unrealized losses are caused by lack of
liquidity and widening 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 March 31, 2009. Additionally, these securities are insured by
a monoline insurance provider who was recently rated as Aa2 and A+ by two major
rating agencies. We have experienced no
credit related losses from these securities and only 0.14% of the underlying
loan collateral has been charged off. We
also have one BB-rated mortgage-backed security with a fair value of $11.3
million as of March 31, 2009. This
security has been in an unrealized loss position for twelve months or longer,
with the gross unrealized loss amounting to $2.3 million, or 17% of its
amortized cost basis
as of March 31, 2009.
This security is supported by overcollateralization as
of March 31, 2009. Under EITF
99-20,
Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be
Held by a Transferor in Securitized Financial Assets,
we determined
that there were no adverse changes in cash flows related to our portfolio of
available-for-sale investment and non-investment grade mortgage backed
securities.
We do not intend to sell
these securities and it is not more likely than not that we will be required to
sell these securities before recovery of their amortized cost bases. As such, we do not deem these securities to
be other-than-temporarily impaired as of March 31, 2009.
Government-Sponsored
Equity Preferred Stock
In
September 2008, 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 stock 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. As the assessment on the status of any
resumption in dividend payments on these securities was uncertain, we recorded $55.3 million in OTTI
charges on Fannie Mae and Freddie Mac preferred stock
51
Table
of Contents
securities in 2008. As of March 31, 2009, the fair value of
these preferred stock securities was $995 thousand. Gross unrealized losses on these securities,
all of which is less than twelve months in duration, amounted to $2.3 million
as of March 31, 2009, or 70% of the aggregate amortized cost basis of
these securities. The value of these
preferred securities have been very volatile and in the first quarter of 2009,
these securities have traded above their carrying values. We do not intend to sell these securities and
it is not more likely than not that we will be required to sell these
securities before recovery of our amortized cost bases. As such, we do not deem these remaining
securities to be other-than-temporarily impaired as of March 31, 2009.
Residual Securities
We
retain residual securities in securitized mortgage loans in connection with
certain of 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. As of March 31, 2009,
the aggregate fair value of residual securities totaling $53.9 million is based on a weighted
average remaining life of 8.02
years, a weighted average projected prepayment rate of 19%, a weighted average expected credit loss rate of 0.06%, and a weighted average discount
rate of 15%. At December 31,
2008, the aggregate fair value of residual securities amounting to $50.1
million is based on a weighted average remaining life of 6.64 years, a weighted
average projected prepayment rate of 21%, a weighted average expected credit
loss rate of 0.07%, and a weighted average discount rate of 15%.
We
have seventeen individual securities that have been in a continuous unrealized
loss position for twelve months or longer as of March 31, 2009. These securities are comprised of twelve
corporate debt securities with a total fair value of $23.2 million and five
mortgage-backed securities with a total fair value of $557.8 million. As of March 31, 2009, there were also
115 securities that have been in a continuous unrealized loss position for less
than twelve months. 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. We do not intend to sell these
securities and it is not more likely than not that we will be required to sell
the investments before recovery of our amortized cost bases. As such, we do not deem these securities to
be other-than-temporarily impaired as of March 31, 2009.
The following table sets forth the amortized cost of
investment securities held-to-maturity and the fair values of investment
securities available-for-sale as of March 31, 2009
and December 31,
2008:
52
Table of Contents
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
(In
thousands)
|
|
As of
March 31, 2009
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
$
|
190,345
|
|
$
|
207
|
|
$
|
(795
|
)
|
$
|
189,757
|
|
Municipal
securities
|
|
31,065
|
|
489
|
|
(445
|
)
|
31,109
|
|
Corporate debt
securities
|
|
402,483
|
|
3,050
|
|
(10,625
|
)
|
394,908
|
|
Other
mortgage-backed securities
|
|
110,906
|
|
277
|
|
(9,291
|
)
|
101,892
|
|
Total
investment securities held-to-maturity
|
|
$
|
734,799
|
|
$
|
4,023
|
|
$
|
(21,156
|
)
|
$
|
717,666
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
2,509
|
|
$
|
4
|
|
$
|
|
|
$
|
2,513
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
467,439
|
|
6,299
|
|
(404
|
)
|
473,334
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise mortgage-backed
securities
|
|
865,499
|
|
9,501
|
|
(1,380
|
)
|
873,620
|
|
Other
mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
621,450
|
|
|
|
(74,930
|
)
|
546,520
|
|
Non-investment
grade
|
|
13,661
|
|
|
|
(2,336
|
)
|
11,325
|
|
Corporate debt
securities
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
14,316
|
|
35
|
|
(6,693
|
)
|
7,658
|
|
Non-investment
grade (1)(2)
|
|
118,863
|
|
|
|
(96,933
|
)
|
21,930
|
|
U.S. Government
sponsored enterprise equity securities
|
|
3,340
|
|
|
|
(2,345
|
)
|
995
|
|
Residual
securities
|
|
23,031
|
|
30,897
|
|
|
|
53,928
|
|
Other securities
|
|
2,578
|
|
2
|
|
|
|
2,580
|
|
Total
investment securities available-for-sale
|
|
$
|
2,132,686
|
|
$
|
46,738
|
|
$
|
(185,021
|
)
|
$
|
1,994,403
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
|
$
|
2,867,485
|
|
$
|
50,761
|
|
$
|
(206,177
|
)
|
$
|
2,712,069
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
5,772
|
|
$
|
118
|
|
$
|
|
|
$
|
5,890
|
|
Corporate debt
securities
|
|
116,545
|
|
904
|
|
(234
|
)
|
117,215
|
|
Total
investment securities held-to-maturity
|
|
$
|
122,317
|
|
$
|
1,022
|
|
$
|
(234
|
)
|
$
|
123,105
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
2,505
|
|
$
|
8
|
|
$
|
|
|
$
|
2,513
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise debt securities
|
|
1,020,355
|
|
4,762
|
|
(1,183
|
)
|
1,023,934
|
|
U.S. Government
agency securities and U.S. Government sponsored enterprise mortgage-backed
securities
|
|
373,690
|
|
6,758
|
|
(397
|
)
|
380,051
|
|
Other mortgage-backed
securities
|
|
645,940
|
|
|
|
(108,614
|
)
|
537,326
|
|
Corporate debt
securities (1)
|
|
116,127
|
|
266
|
|
(73,849
|
)
|
42,544
|
|
U.S. Government
sponsored enterprise equity securities
|
|
3,340
|
|
|
|
(2,156
|
)
|
1,184
|
|
Residual
securities
|
|
25,043
|
|
25,019
|
|
|
|
50,062
|
|
Other securities
|
|
2,570
|
|
10
|
|
|
|
2,580
|
|
Total
investment securities available-for-sale
|
|
$
|
2,189,570
|
|
$
|
36,823
|
|
$
|
(186,199
|
)
|
$
|
2,040,194
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
|
$
|
2,311,887
|
|
$
|
37,845
|
|
$
|
(186,433
|
)
|
$
|
2,163,299
|
|
(1) As of December 31, 2008, the Company
recorded an OTTI charge of $13.6 million for corporate debt securities, $55.3
million for U.S. Government sponsored enterprise equity securities, and $4.3
million for Other securities. Upon
adoption of FSP FAS 115-2 and FAS 124-2, the Company reclassified the noncredit
portion of previously recognized OTTI for pooled trust preferred securities
totaling $14.0 million, on a pre-tax basis, from the opening balance of
retained earnings to other comprehensive income as of March 31, 2009. Additionally, upon implementation of this
FSP, the Company recorded $200 thousand, on a pre-tax basis, of the credit
portion of OTTI through earnings and $7.6 million, net of tax, of the
non-credit portion of OTTI for pooled trust preferred securities in other comprehensive
income as of March 31, 2009.
(2) Includes pooled trust preferred securities
with a fair value of $14.9 million that were downgraded from investment grade
to non-investment grade in April 2009.
53
Table of Contents
The following
table sets forth certain information regarding the amortized cost of our
investment securities held-to-maturity and fair values of our investment
securities available-for-sale, as well as the weighted average yields, and
contractual maturity distribution, excluding periodic principal payments, of
our investment securities held-to-maturity and available-for-sale portfolio at March 31,
2009. Securities with no stated maturity
dates, such as equity securities, are included in the indeterminate maturity
category.
|
|
Within
One Year
|
|
After
One
But Within
Five Years
|
|
After
Five
But Within
Ten Years
|
|
After
Ten Years
|
|
Indeterminate
Maturity
|
|
Total
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
|
|
(Dollars
in thousands)
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
agency and U.S. Government sponsored enterprise debt securities
|
|
$
|
125,000
|
|
4.30
|
%
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
65,345
|
|
6.13
|
%
|
$
|
|
|
|
|
$
|
190,345
|
|
4.93
|
%
|
Municipal
securities
|
|
|
|
|
|
13,713
|
|
5.63
|
%
|
12,569
|
|
6.63
|
%
|
4,783
|
|
6.74
|
%
|
|
|
|
|
31,065
|
|
6.21
|
%
|
Corporate debt
securities
|
|
82,794
|
|
6.03
|
%
|
303,641
|
|
5.88
|
%
|
16,048
|
|
4.96
|
%
|
|
|
|
|
|
|
|
|
402,483
|
|
5.88
|
%
|
Other
mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
27,031
|
|
5.33
|
%
|
83,875
|
|
6.28
|
%
|
|
|
|
|
110,906
|
|
6.05
|
%
|
Total investment
securities held-to-maturity
|
|
$
|
207,794
|
|
4.99
|
%
|
$
|
317,354
|
|
5.87
|
%
|
$
|
55,648
|
|
5.52
|
%
|
$
|
154,003
|
|
6.23
|
%
|
$
|
|
|
0.00
|
%
|
$
|
734,799
|
|
5.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
$
|
2,513
|
|
0.64
|
%
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
|
|
0.00
|
%
|
$
|
|
|
|
|
$
|
2,513
|
|
0.64
|
%
|
U.S. Government
agency and U.S. Government sponsored enterprise debt securities
|
|
25,235
|
|
5.56
|
%
|
135,508
|
|
3.88
|
%
|
148,667
|
|
4.09
|
%
|
163,924
|
|
5.05
|
%
|
|
|
|
|
473,334
|
|
4.44
|
%
|
U.S. Government
agency and U.S. Government sponsored enterprise mortgage-backed securities
|
|
2,899
|
|
9.49
|
%
|
2,397
|
|
6.77
|
%
|
51,157
|
|
4.67
|
%
|
817,167
|
|
5.17
|
%
|
|
|
|
|
873,620
|
|
5.15
|
%
|
Other mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546,520
|
|
0.94
|
%
|
|
|
|
|
546,520
|
|
0.94
|
%
|
Non-investment
grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,325
|
|
2.06
|
%
|
|
|
|
|
11,325
|
|
2.06
|
%
|
Corporate debt
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
|
|
|
|
2,050
|
|
4.85
|
%
|
|
|
|
|
5,608
|
|
1.88
|
%
|
|
|
|
|
7,658
|
|
2.30
|
%
|
Non-investment
grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,930
|
|
4.21
|
%
|
|
|
|
|
21,930
|
|
4.21
|
%
|
U.S. Government
sponsored enterprise equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
995
|
|
0.00
|
%
|
995
|
|
0.00
|
%
|
Residual
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,928
|
|
48.41
|
%
|
|
|
|
|
53,928
|
|
48.41
|
%
|
Other securities
|
|
2,580
|
|
1.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,580
|
|
1.29
|
%
|
Total investment
securities available-for-sale
|
|
$
|
33,227
|
|
5.06
|
%
|
$
|
139,955
|
|
3.94
|
%
|
$
|
199,824
|
|
4.24
|
%
|
$
|
1,620,402
|
|
4.12
|
%
|
$
|
995
|
|
0.00
|
%
|
$
|
1,994,403
|
|
4.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment
securities
|
|
$
|
241,021
|
|
5.00
|
%
|
$
|
457,309
|
|
5.28
|
%
|
$
|
255,472
|
|
4.52
|
%
|
$
|
1,774,405
|
|
4.30
|
%
|
$
|
995
|
|
0.00
|
%
|
$
|
2,729,202
|
|
4.52
|
%
|
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, land loans, construction loans, commercial
business loans, trade finance loans, and consumer loans. Net loans receivable decreased $203.5
million, or 3%, to $7.87 billion at March 31, 2009.
The following table sets forth the composition of the loan portfolio as
of the dates indicated:
54
Table
of Contents
|
|
March 31, 2009
|
|
December 31, 2008
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
|
Residential,
single family
|
|
$
|
517,844
|
|
6.4
|
%
|
$
|
491,315
|
|
6.0
|
%
|
Residential,
multifamily
|
|
689,728
|
|
8.6
|
%
|
677,989
|
|
8.2
|
%
|
Commercial real
estate
|
|
3,510,749
|
|
43.5
|
%
|
3,472,000
|
|
42.1
|
%
|
Land
|
|
544,892
|
|
6.8
|
%
|
576,564
|
|
7.0
|
%
|
Construction
|
|
1,154,782
|
|
14.3
|
%
|
1,260,724
|
|
15.3
|
%
|
Total real
estate loans
|
|
6,417,995
|
|
79.6
|
%
|
6,478,592
|
|
78.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
1,128,903
|
|
14.0
|
%
|
1,210,260
|
|
14.6
|
%
|
Trade finance
|
|
292,816
|
|
3.6
|
%
|
343,959
|
|
4.2
|
%
|
Automobile
|
|
8,921
|
|
0.1
|
%
|
9,870
|
|
0.1
|
%
|
Other consumer
|
|
215,680
|
|
2.7
|
%
|
206,772
|
|
2.5
|
%
|
Total other
loans
|
|
1,646,320
|
|
20.4
|
%
|
1,770,861
|
|
21.4
|
%
|
Total gross
loans
|
|
8,064,315
|
|
100.0
|
%
|
8,249,453
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Unearned fees,
premiums and discounts, net
|
|
(2,940
|
)
|
|
|
(2,049
|
)
|
|
|
Allowance for
loan losses
|
|
(195,450
|
)
|
|
|
(178,027
|
)
|
|
|
Loan receivable,
net
|
|
$
|
7,865,925
|
|
|
|
$
|
8,069,377
|
|
|
|
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual
loans, loans past due 90 days or more but not on nonaccrual, restructured loans
and other real estate owned, net.
Nonperforming
assets totaled $303.8
million or
2.42
% of total assets at March 31,
2009 and $263.9 million or 2.12% of total assets at December 31,
2008. Nonaccrual loans amounted to
$248.0
million at March 31,
2009, compared with $214.6 million at year-end 2008. Loans totaling $177.3
million were placed on
nonaccrual status during the first quarter of 2009. As a part of our comprehensive loan review,
loans totaling $69.3
million which
were not 90 days past due as of March 31, 2009, were classified as nonaccrual
loans due to concerns regarding collateral values and future
collectibility. Additions to nonaccrual
loans were offset by $39.5
million in net chargeoffs, $18.5
million
in payoffs and principal
paydowns, $29.9 million in loans that were transferred to other real estate
owned, and $56.0
million in
loans brought current. The additions to
nonaccrual loans during the first quarter of 2009 were comprised of $13.8
million in single family loans, $11.8 million in multifamily loans, $61.2
million in commercial real estate loans, $35.0 million in land loans, $36.5
million in construction loans, $18.4 million in commercial business loans
including SBA loans, $177 thousand in trade finance loans, and $300 thousand in
automobile and other consumer loans.
Loans that were past due 90
days or more were on nonaccrual status as of March 31, 2009 and December 31,
2008.
We had $17.2
million and $11.0 million in restructured loans as of
March 31,
2009 and
December 31,
2008, respectively. As of
March 31,
2009
, restructured
loans were comprised of $2.8 million in single family loans, $4.5 million in
multifamily loans, $3.3 million in commercial real estate loans, and $6.6
million in commercial business loans.
Other real estate
owned includes properties acquired through foreclosure or through full or
partial satisfaction of loans. We had 57
OREO properties as of
March 31, 2009
with a combined aggregate carrying value of $38.6
million.
The majority of these properties were related to our land and single
family residential loan portfolios.
Approximately 68% of OREO properties as of
March 31, 2009
55
Table
of Contents
were located in the Greater Los Angeles area and Inland Empire region
of Southern California. As of December 31,
2008, we had 41 OREO properties with a carrying value of $38.3 million. During the first quarter of 2009, we
foreclosed on 35 properties with an aggregate carrying value of $31.1 million
as of the foreclosure date. During the
first quarter of 2009, we sold 22 OREO properties with a carrying value of
$24.3 million resulting in a total net loss on sale of $3.0 million. There were no OREO sales during the first
quarter of 2008.
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:
|
|
March 31,
2009
|
|
December 31,
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
248,015
|
|
$
|
214,607
|
|
Loans past due
90 days or more but not on nonaccrual
|
|
|
|
|
|
Total
nonperforming loans
|
|
248,015
|
|
214,607
|
|
|
|
|
|
|
|
Restructured
loans
|
|
17,146
|
|
10,992
|
|
Other real
estate owned, net
|
|
38,634
|
|
38,302
|
|
Total
nonperforming assets
|
|
$
|
303,795
|
|
$
|
263,901
|
|
|
|
|
|
|
|
Total
nonperforming assets to total assets
|
|
2.42
|
%
|
2.12
|
%
|
Allowance for
loan losses to nonperforming loans
|
|
78.81
|
%
|
82.95
|
%
|
Nonperforming
loans to total gross loans
|
|
3.08
|
%
|
2.60
|
%
|
We evaluate loan
impairment according to the provisions of SFAS No. 114. Under SFAS No. 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 No. 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
March 31,
2009
, our total
recorded investment in impaired loans was $267.1
million, compared with $
232.1
million at December 31, 2008.
The increase in impaired
loans is largely due to an increase in nonaccrual commercial real estate loans
primarily as a result of one lending relationship comprised of several loans
with a total net book value of $49.2 million, where the borrower filed for
bankruptcy during the first quarter of 2009.
All nonaccrual
and doubtful loans are included in impaired loans. Impaired loans at
March 31, 2009
are comprised of single family loans
totaling $19.1 million, multifamily loans totaling $9.9 million, commercial
real estate loans totaling $
55.2
million, land totaling $69.3 million, construction
loans totaling $71.2
million,
commercial business loans totaling $40.7
million, trade finance loans amounting to $177
thousand,
SBA loans
totaling $194 thousand, and automobile and other consumer loans totaling $1.3
million.
56
Table of Contents
Specific reserves on impaired loans amounted to $23.0 million and $23.4
million at March 31, 2009 and December 31, 2008, respectively. Our average recorded investment in impaired
loans for the three months ended March 31, 2009 and 2008 were $281.8
million and $184.0 million, respectively.
During the three months ended March 31, 2009 and 2008, gross
interest income that would have been recorded on impaired loans had they
performed in accordance with their original terms, totaled $4.8 million and
$3.6 million, respectively. Of this
amount, actual interest recognized on impaired loans, on a cash basis, was $1.1
million and $2.6 million, for the three months ended March 31, 2009 and
2008, respectively.
In light of the credit and
mortgage crisis affecting the entire financial industry and its impact on our
borrowers, we took a more proactive approach in assessing potential loan
impairment in our overall portfolio. We
have 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 March 31,
2009 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 commensurate
with estimated and known risks in the loan portfolio. In addition to regular quarterly reviews of
the adequacy of the allowance for loan losses, we perform an ongoing assessment
of the risks inherent in the loan portfolio.
While we believe that the allowance for loan losses is adequate at March 31,
2009, 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 chargeoffs, respectively, during the
period.
At March 31, 2009, the allowance for loan losses amounted to $195.5
million, or 2.42% of total loans, compared with $178.0 million, or 2.16% of
total loans, at December 31, 2008, and $117.1 million, or 1.32% of total
loans, at March 31, 2008. The $17.5
million increase in the allowance for loan losses at March 31, 2009, from
year-end 2008, reflects $78.0 million in additional loss provisions, less $59.6
million in net chargeoffs recorded during the quarter. The allowance for unfunded loan commitments,
off-balance-sheet credit exposures, and recourse provisions is included in
accrued expenses and other liabilities and amounted to $7.3 million at March 31,
2009, compared to $6.3 million at December 31, 2008.
We recorded
$78.0 million
in loan loss provisions
during the first quarter of 2009, as compared to $55.0 million in loss
provisions recorded for the same period in 2008. The increase in
loss provisions
57
Table of Contents
recorded during
the first
quarter of 2009
was
brought on by the sustained downturn in the real estate market and continued
instability in the overall economy.
During
the first quarter of 2009
, we
recorded $59.6
million in net chargeoffs representing
2.91% of average loans outstanding during the quarter. In comparison, we recorded net chargeoffs
totaling $25.4 million, or 1.13% of average loans outstanding
for the same
period in 2008
. We believe that overall market conditions
will continue to remain challenging in 2009 and we expect to record additional
loan loss provisions during the remainder of 2009.
The following table
summarizes activity in the allowance for loan losses for the three months ended
March 31, 2009 and 2008:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Allowance
balance, beginning of period
|
|
$
|
178,027
|
|
$
|
88,407
|
|
Allowance for
unfunded loan commitments and letters of credit
|
|
(1,008
|
)
|
(904
|
)
|
Provision for
loan losses
|
|
78,000
|
|
55,000
|
|
Chargeoffs:
|
|
|
|
|
|
Single family
real estate
|
|
3,853
|
|
75
|
|
Multifamily real
estate
|
|
1,746
|
|
|
|
Commercial real
estate
|
|
2,796
|
|
|
|
Land
|
|
12,523
|
|
5,081
|
|
Construction
|
|
18,443
|
|
8,565
|
|
Commercial
business
|
|
19,459
|
|
11,816
|
|
Automobile
|
|
8
|
|
29
|
|
Other consumer
|
|
1,312
|
|
17
|
|
Total chargeoffs
|
|
60,140
|
|
25,583
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Single family
real estate
|
|
21
|
|
|
|
Multifamily real
estate
|
|
122
|
|
|
|
Commercial and
industrial real estate
|
|
6
|
|
3
|
|
Construction
|
|
119
|
|
|
|
Commercial
business
|
|
281
|
|
180
|
|
Automobile
|
|
22
|
|
17
|
|
Total recoveries
|
|
571
|
|
200
|
|
Net chargeoffs
|
|
59,569
|
|
25,383
|
|
Allowance
balance, end of period
|
|
$
|
195,450
|
|
$
|
117,120
|
|
Average loans
outstanding
|
|
$
|
8,197,173
|
|
$
|
8,955,257
|
|
Total gross
loans outstanding, end of period
|
|
$
|
8,064,315
|
|
$
|
8,849,201
|
|
Annualized net
chargeoffs to average loans
|
|
2.91
|
%
|
1.13
|
%
|
Allowance for
loan losses to total gross loans, end of period
|
|
2.42
|
%
|
1.32
|
%
|
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 historical loss
factors derived from trends and losses associated with each pool over a
specified period of time. Based on this
process, we assign loss factors to each loan grade within each category of loans. Loss rates derived by the migration model are
based predominantly on historical loss trends that may not be indicative of the
actual or inherent loss potential for loan categories. As such, we utilize qualitative and
environmental factors as adjusting mechanisms to supplement the historical
results of the classification migration model.
58
Table
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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:
|
|
March 31, 2009
|
|
December 31, 2008
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
Residential,
single family
|
|
$
|
7,825
|
|
6.4
|
%
|
$
|
6,178
|
|
5.9
|
%
|
Residential,
multifamily
|
|
3,464
|
|
8.6
|
%
|
6,811
|
|
8.2
|
%
|
Commercial real
estate
|
|
19,520
|
|
43.5
|
%
|
19,169
|
|
42.1
|
%
|
Land
|
|
43,756
|
|
6.8
|
%
|
30,398
|
|
7.0
|
%
|
Construction
|
|
62,222
|
|
14.3
|
%
|
60,478
|
|
15.3
|
%
|
Commercial
business
|
|
48,612
|
|
14.0
|
%
|
40,843
|
|
14.7
|
%
|
Trade finance
|
|
8,224
|
|
3.6
|
%
|
12,721
|
|
4.2
|
%
|
Automobile
|
|
88
|
|
0.1
|
%
|
282
|
|
0.1
|
%
|
Other consumer
|
|
1,739
|
|
2.7
|
%
|
1,147
|
|
2.5
|
%
|
Total
|
|
$
|
195,450
|
|
100.0
|
%
|
$
|
178,027
|
|
100.0
|
%
|
Deposits
Deposits increased 4% to
$8.45 billion at March 31, 2009, from $8.14 billion at December 31,
2008. The net increase in deposits
primarily came from money market accounts which rose $483.6 million or
37%. These were offset by decreases in
time deposits of 3% or $155.7 million, interest-bearing checking accounts of
$11.0 million or 3%, and savings accounts of $9.0 million or 2%.
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
commencing in mid-2008.
59
Table
of Contents
As of March 31, 2009,
time deposits within the Certificate of Deposit Account Registry Service (CDARS)
program increased to $970.7 million, compared to $946.8 million at December 31,
2008. Included in the $970.7 million and
$946.8 million CDARS balance at March 31, 2009 and December 31, 2008,
respectively, is the Banks reciprocal CDARS balance of $412.8 million and
$417.4 million at March 31, 2009 and December 31, 2008,
respectively. 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. The Bank acts as custodian for
the depositor with respect to certificates issued to the depositor by
participating institutions. In
reciprocal CDARS transactions, the Bank, in turn, issues certificates to
depositors for funds originally deposited at other participating
institutions. Additionally, during the
third quarter of 2008, 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. Deposits gathered through these
programs have been considered brokered deposits under regulatory reporting
guidelines. Beginning in the first
quarter of 2009, however, the FDIC ruled to exclude CDARs reciprocal balances
as a brokered deposit for regulatory reporting purposes.
The
following table sets forth the composition of the deposit portfolio as of the
dates indicated:
|
|
March 31,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$
|
1,297,151
|
|
$
|
1,292,997
|
|
Interest-bearing
checking
|
|
352,334
|
|
363,285
|
|
Money market
|
|
1,806,985
|
|
1,323,402
|
|
Savings
|
|
411,104
|
|
420,133
|
|
Total core
deposits
|
|
3,867,574
|
|
3,399,817
|
|
Time deposits:
|
|
|
|
|
|
Less than
$100,000
|
|
1,211,480
|
|
1,521,988
|
|
$100,000 or
greater
|
|
3,375,005
|
|
3,220,154
|
|
Total time
deposits
|
|
4,586,485
|
|
4,742,142
|
|
Total deposits
|
|
$
|
8,454,059
|
|
$
|
8,141,959
|
|
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 March 31, 2009, federal funds
purchased decreased to $22 thousand from the $28.0 million balance at December 31,
2008. FHLB advances decreased
9
% to $1.23
billion as of March 31,
2009, compared to $1.35 billion at December 31, 2008. The decrease in federal funds purchased and
FHLB advances is consistent with our overall strategy to deleverage our balance
sheet. During 2009, a portion of the
proceeds from the maturities and sales of investment securities and redemption
of our money-market mutual funds were used to pay down our borrowings. During the first quarter of 2009, four FHLB
advances totaling $120.0 million matured and were paid off. As of March 31, 2009 and December 31,
2008, we had no overnight FHLB advances.
In
addition to federal funds purchased and FHLB advances, we also utilize
securities sold under repurchase agreements (repurchase agreements) to manage
our liquidity position. Repurchase
agreements totaled $998.1 million and $998.4 million as of March 31, 2009
and December 31, 2008, respectively.
Included in this balance is $3.1 million in overnight repurchase
agreements with customers
60
Table of Contents
that
the Company assumed in conjunction with the DCB acquisition. The interest rates on these customer repurchase
agreements ranged from 0.50% to 0.75% as of March 31, 2009. All of the other repurchase agreements are
long-term with ten year maturity terms.
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.
Long-term Debt
Long-term debt remained at $235.6 million at
March 31, 2009 and
December 31, 2008. 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 purposes.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The
following table
presents, as of March 31, 2009, the Companys
significant fixed and determinable contractual obligations, within the
categories described below, by payment date.
With the exception of operating lease obligations
, these contractual obligations are included
in the consolidated balance sheets. The
payment amounts represent the amounts and interest contractually due to the
recipient.
|
|
Payment Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
After
|
|
Indeterminate
|
|
|
|
Contractual Obligations
|
|
1 year
|
|
1-3 years
|
|
3-5 years
|
|
5 years
|
|
Maturity
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,529,215
|
|
$
|
98,263
|
|
$
|
33,312
|
|
$
|
6,968
|
|
$
|
3,976,284
|
|
$
|
8,644,042
|
|
Federal funds
purchased
|
|
22
|
|
|
|
|
|
|
|
|
|
22
|
|
FHLB advances
|
|
898,108
|
|
374,727
|
|
5,302
|
|
3,157
|
|
|
|
1,281,294
|
|
Securities sold
under repurchase agreements
|
|
50,642
|
|
95,163
|
|
95,163
|
|
1,103,773
|
|
|
|
1,344,741
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
14,597
|
|
14,597
|
|
Long-term debt
obligations
|
|
8,285
|
|
16,570
|
|
16,570
|
|
368,604
|
|
|
|
410,029
|
|
Operating lease
obligations
|
|
11,682
|
|
25,027
|
|
25,613
|
|
66,707
|
|
|
|
129,029
|
|
Unrecognized tax
benefits
|
|
|
|
|
|
|
|
|
|
7,392
|
|
7,392
|
|
Postretirement
benefit payments
|
|
4,144
|
|
11,156
|
|
1,732
|
|
2,316
|
|
|
|
19,348
|
|
Total
contractual obligations
|
|
$
|
5,502,098
|
|
$
|
620,906
|
|
$
|
177,692
|
|
$
|
1,551,525
|
|
$
|
3,998,273
|
|
$
|
11,850,494
|
|
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 our customers as of March 31, 2009
is
as follows:
61
Table of Contents
|
|
Commitments
|
|
|
|
Outstanding
|
|
|
|
(In thousands)
|
|
Undisbursed loan
commitments
|
|
$
|
1,339,604
|
|
Standby letters
of credit
|
|
646,692
|
|
Commercial
letters of credit
|
|
39,725
|
|
|
|
|
|
|
Capital Resources
Our primary source of capital is the retention of net
after tax earnings. At
March 31,
2009
, stockholders
equity totaled $1.54
billion, a
1
% decrease from the year-end 2008 balance of $1.55 billion. The decrease is comprised of the following:
(1) net
loss of $22.5 million recorded during 2009; (2) a noncredit-related
impairment loss on investment securities recorded in the current year of $7.6
million, net of tax; (3) Series B preferred stock issuance cost of
$41 thousand; (4) tax provision of $403 thousand from various stock plans;
(5) purchase of treasury shares related to vested restricted stock
amounting to $35 thousand, representing 8,882 shares; and (6) accrual and
payment of quarterly cash dividends on common and preferred stock totaling $8.6
million during the first quarter of 2009.
These transactions were offset by:
(1) net
unrealized gain on investment securities available-for-sale of $22.2 million; (2) stock
compensation costs amounting to $1.4 million related to grants of restricted
stock and stock options; and (3) net issuance of common stock totaling $15
thousand, representing 290,296 shares, pursuant to various stock plans and
agreements.
Series A Preferred Stock Offering
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 9 to
the condensed consolidated financial statements presented elsewhere in this
report.
Series B Preferred Stock Offering
On December 5, 2008, we
received $306.5 million of additional Tier 1 qualifying capital from the U.S.
Treasury through the issuance of 306,546 shares of fixed-rate, cumulative
perpetual preferred stock. The issuance
of Series B preferred stock was made in conjunction with the Companys
participation in the U.S. Treasurys Capital Purchase Program.
For a further discussion on this preferred stock offering, see Note 9 to
the condensed consolidated financial statements presented elsewhere in this
report.
Risk-Based Capital
We
are committed to maintaining capital at a level sufficient to assure our
shareholders, our customers and our regulators that our company and our bank
subsidiary are financially sound. We are
subject to risk-based capital regulations and capital adequacy guidelines
adopted by the federal banking regulators.
These guidelines are used to evaluate capital adequacy and are based on
an institutions asset risk profile and off-balance sheet exposures. According to these guidelines, institutions
whose Tier I and total capital ratios meet or exceed 6.0% and 10.0%,
respectively, may be deemed well-capitalized.
At
March 31, 2009
, the Banks Tier I
and total capital ratios were 13.5% and
15.5
%, respectively,
compared to
13.6
% and
15.6
%, respectively, at December 31,
2008.
62
Table of
Contents
The following table compares East West Bancorp, Inc.s
and East West Banks actual capital ratios at
March 31, 2009
, 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)
|
|
15.7
|
%
|
15.5
|
%
|
8.0
|
%
|
10.0
|
%
|
Tier 1 Capital
(to Risk-Weighted Assets)
|
|
13.7
|
%
|
13.5
|
%
|
4.0
|
%
|
6.0
|
%
|
Tier 1 Capital
(to Average Assets)
|
|
11.5
|
%
|
11.3
|
%
|
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 the needs of the Bank, 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 brokered
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
securitizations of loans. In addition,
government programs, such as the FDICs TLGP, may influence deposit
behavior. 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 quarter of 2009
, we experienced net cash inflows from operating activities of $40.5
million,
compared to net cash inflows
of $73.0 million for the first quarter of 2008
. Net cash
inflows from operating activities reflects the $78.0 million and $55.0 million
loan loss provision recorded during the first quarter of 2009 and 2008,
respectively.
Net
cash outflows from investing activities totaled $531.9
million
for the first quarter of
2009 compared with net inflows from investing activities of $68.5 million for
the first quarter 2008.
Net cash outflows from investing activities
for the first
quarter of 2009
were
due primarily to purchases of short-term investments and investment
securities. These factors were partially
offset by the proceeds from the sale of investment securities, as well as
repayments, maturities and redemptions of investment securities, and a decrease
in loans receivable due to the higher level of chargeoffs during the first
quarter of 2009.
Net cash
inflows from investing activities for the first quarter of 2008 were due
primarily to the proceeds from sale of investment securities and loans, early
termination of a resale agreement, and repayments, maturity and redemption of
investment securities. These factors
were partially offset by the growth in our loan portfolio and purchases of
investment securities.
We experienced net cash
inflows from financing activities of $153.6 million for the first quarter of
2009, primarily due to the net increase in deposits. 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 second half of
2008. Since mid-2008, we have focused on
attracting new
63
Table
of Contents
customers and growing
deposits through our retail branch and commercial deposit platforms. We have successfully introduced new core
deposit products and increased money market deposits during the first quarter
of 2009. Cash from financing activities
were partially offset by net decreases in federal funds purchased and FHLB
advances, as well as $7.8 million of existing cash and cash equivalents to pay
cash dividends to our stockholders. We
experienced net cash outflows from financing activities of $36.8 million for
the first quarter of 2008, primarily due to the repayment of federal funds
purchased and FHLB advances. These
factors were partially offset by deposit growth.
As
a means of augmenting our liquidity, 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. As of March 31,
2009, o
ur
total borrowing capacity and holdings of cash and cash equivalents increased to
$3.55 billion, compared to $3.34 billion as of December 31, 2008.
We believe our liquidity sources to
be stable and adequate to meet our day-to-day cash flow requirements.
The liquidity of East West Bancorp, Inc. is
primarily dependent on the payment of cash dividends by its subsidiary, East
West Bank, subject to applicable statutes and regulations. The amount of dividends that the Bank can pay
to the Bancorp is restricted by earnings, retained earnings, and risk-based
capital requirements. For the three
months ended March 31, 2009 and 2008, total dividends paid by the Bank to
East West Bancorp, Inc. amounted to $10.1 million and $6.3 million, respectively. The increase in dividend payment for the
three months ended March 31, 2009 reflects the additional dividends paid by
the Bank to permit the Bancorp to, in turn, make the dividend payment on the Series A
and B preferred stock issued in April 2008 and December 2008,
respectively, which was partially offset by the common stock dividend reduction
to $0.02 from $0.10 during the first quarter of 2009 and 2008, respectively.
The Companys Board of Directors approved the
declaration of second quarter 2009 dividends on April 27, 2009 on our
common stock and Series A preferred stock.
Additionally, our Board of Directors also approved the payment of second
quarter dividends on our Series B preferred stock payable on May 15,
2009. The dividend of $0.01 per share on
our common stock payable on or about May 26, 2009 to shareholders of
record as of May 18, 2009 represents a reduction from the previous
quarterly dividend rate of $0.02 per share paid to common shareholders during
the first quarter of 2009. The
Board-authorized reduction in common stock dividends is consistent with our
continuing efforts to preserve capital.
Future dividend payments from Bank to Bancorp and to our common and
preferred shareholders will continue to be reviewed quarterly in light of the
business conditions we are operating in, current and projected earnings and
desired capital levels.
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 among the more significant market
risks and could potentially have 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 while maintaining adequate levels of
liquidity and capital. Our strategy is
formulated by the Asset Liability Committee, which coordinates with the Board
of Directors to monitor our overall asset and liability composition. The Committee meets regularly to evaluate,
among other things, the sensitivity of our assets and liabilities to interest
rate changes, the book and market values of assets and liabilities, unrealized
gains and losses on the available-for-sale portfolio (including those
64
Table of
Contents
attributable to
hedging transactions, if any), purchase and securitization activity, and
maturities of investments 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 net interest
income and market value of equity as of March 31, 2009 and December 31,
2008, assuming a non-parallel shift of 100 and 200 basis points in both
directions:
|
|
Net Interest Income
|
|
Net Portfolio Value
|
|
|
|
Volatility (1)
|
|
Volatility (2)
|
|
Change in Interest Rates
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
(Basis Points)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
+200
|
|
10.7
|
%
|
11.6
|
%
|
(1.0
|
)%
|
8.8
|
%
|
+100
|
|
4.7
|
%
|
5.4
|
%
|
(0.9
|
)%
|
4.4
|
%
|
-100
|
|
(0.9
|
)%
|
(1.6
|
)%
|
2.0
|
%
|
(4.5
|
)%
|
-200
|
|
(1.1
|
)%
|
(1.4
|
)%
|
1.8
|
%
|
(9.7
|
)%
|
(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 March 31, 2009 and December 31, 2008. At March 31, 2009 and December 31,
2008, our estimated changes in net interest income and net portfolio value were
within the ranges established by the Board of Directors.
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 March 31, 2009. The
information presented below is based on the repricing date for variable rate
instruments and the expected maturity date for fixed rate instruments.
65
Table of Contents
|
|
Expected
Maturity or Repricing Date by Year
|
|
Fair
Value at
March 31,
|
|
|
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Thereafter
|
|
Total
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CD investments
|
|
$
|
329,288
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329,288
|
|
$
|
329,511
|
|
average yield
(fixed rate)
|
|
1.94
|
%
|
|
|
|
|
|
|
|
|
|
|
1.94
|
%
|
|
|
Short-term
investments
|
|
394,302
|
|
|
|
|
|
|
|
|
|
|
|
$
|
394,302
|
|
$
|
394,302
|
|
Weighted average
rate
|
|
1.02
|
%
|
|
|
|
|
|
|
|
|
|
|
1.02
|
%
|
|
|
Securities
purchased under resale agreements
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
$
|
50,594
|
|
Weighted average
rate
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
10.00
|
%
|
|
|
Investment
securities held-to-maturity (fixed rate)
|
|
$
|
82,402
|
|
$
|
72,250
|
|
$
|
45,199
|
|
$
|
36,318
|
|
$
|
128,481
|
|
$
|
77,985
|
|
$
|
442,635
|
|
$
|
433,792
|
|
Weighted average
rate
|
|
6.10
|
%
|
6.38
|
%
|
5.96
|
%
|
5.64
|
%
|
5.51
|
%
|
5.20
|
%
|
5.76
|
%
|
|
|
Investment
securities held-to-maturity (variable rate)
|
|
$
|
154,666
|
|
$
|
32,314
|
|
$
|
99,806
|
|
$
|
3,986
|
|
$
|
1,392
|
|
|
|
$
|
292,164
|
|
$
|
283,874
|
|
Weighted average
rate
|
|
2.44
|
%
|
4.32
|
%
|
4.42
|
%
|
5.19
|
%
|
5.10
|
%
|
|
|
3.37
|
%
|
|
|
Investment
securities available-for-sale (fixed rate)
|
|
$
|
274,449
|
|
$
|
143,932
|
|
$
|
110,487
|
|
$
|
99,694
|
|
$
|
47,406
|
|
$
|
256,562
|
|
$
|
932,530
|
|
$
|
939,686
|
|
Weighted average
rate
|
|
5.72
|
%
|
5.70
|
%
|
4.48
|
%
|
4.59
|
%
|
5.08
|
%
|
5.09
|
%
|
5.24
|
%
|
|
|
Investment
securities available-for-sale (variable rate) (1)
|
|
$
|
1,015,468
|
|
$
|
110,881
|
|
$
|
44,012
|
|
$
|
20,826
|
|
$
|
8,196
|
|
$
|
773
|
|
$
|
1,200,156
|
|
$
|
1,054,717
|
|
Weighted average
rate
|
|
3.29
|
%
|
5.39
|
%
|
5.50
|
%
|
5.88
|
%
|
4.96
|
%
|
4.74
|
%
|
3.62
|
%
|
|
|
Total gross loans
|
|
$
|
6,543,441
|
|
$
|
841,683
|
|
$
|
380,638
|
|
$
|
164,295
|
|
$
|
79,015
|
|
$
|
55,243
|
|
$
|
8,064,315
|
|
$
|
8,041,084
|
|
Weighted average
rate
|
|
5.36
|
%
|
6.94
|
%
|
6.78
|
%
|
6.76
|
%
|
6.53
|
%
|
4.34
|
%
|
5.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
352,334
|
|
|
|
|
|
|
|
|
|
|
|
$
|
352,334
|
|
$
|
299,710
|
|
Weighted average
rate
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
0.38
|
%
|
|
|
Money market
accounts
|
|
$
|
1,806,985
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,806,985
|
|
$
|
1,774,315
|
|
Weighted average
rate
|
|
1.38
|
%
|
|
|
|
|
|
|
|
|
|
|
1.38
|
%
|
|
|
Savings deposits
|
|
$
|
411,104
|
|
|
|
|
|
|
|
|
|
|
|
$
|
411,104
|
|
$
|
357,097
|
|
Weighted average
rate
|
|
0.65
|
%
|
|
|
|
|
|
|
|
|
|
|
0.65
|
%
|
|
|
Time deposits
|
|
$
|
4,467,796
|
|
$
|
82,555
|
|
$
|
8,461
|
|
$
|
26,756
|
|
$
|
861
|
|
$
|
56
|
|
$
|
4,586,485
|
|
$
|
4,597,577
|
|
Weighted average
rate
|
|
2.26
|
%
|
2.88
|
%
|
4.39
|
%
|
4.12
|
%
|
4.07
|
%
|
2.18
|
%
|
2.29
|
%
|
|
|
Federal funds
purchased
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22
|
|
$
|
22
|
|
Weighted average
rate
|
|
0.31
|
%
|
|
|
|
|
|
|
|
|
|
|
0.31
|
%
|
|
|
FHLB advances
(term)
|
|
$
|
860,269
|
|
$
|
310,000
|
|
$
|
55,000
|
|
$
|
5,000
|
|
|
|
$
|
3,000
|
|
$
|
1,233,269
|
|
$
|
1,267,754
|
|
Weighted average
rate
|
|
4.44
|
%
|
4.07
|
%
|
5.20
|
%
|
4.46
|
%
|
|
|
4.44
|
%
|
4.38
|
%
|
|
|
Customer
repurchase agreements
|
|
$
|
3,061
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,061
|
|
$
|
3,061
|
|
Weighted average
rate
|
|
0.66
|
%
|
|
|
|
|
|
|
|
|
|
|
0.66
|
%
|
|
|
Securities sold
under repurchase agreements (fixed rate)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
945,000
|
|
$
|
945,000
|
|
$
|
1,157,634
|
|
Weighted average
rate
|
|
|
|
|
|
|
|
|
|
|
|
4.82
|
%
|
4.82
|
%
|
|
|
Securities sold
under repurchase agreements (variable rate)
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
$
|
55,789
|
|
Weighted average
rate
|
|
4.15
|
%
|
|
|
|
|
|
|
|
|
|
|
4.15
|
%
|
|
|
Subordinated debt
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,000
|
|
$
|
48,076
|
|
Weighted average
rate
|
|
2.29
|
%
|
|
|
|
|
|
|
|
|
|
|
2.29
|
%
|
|
|
Junior
subordinated debt (fixed rate)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,392
|
|
$
|
21,392
|
|
$
|
22,754
|
|
Weighted average
rate
|
|
|
|
|
|
|
|
|
|
|
|
10.91
|
%
|
10.91
|
%
|
|
|
Junior
subordinated debt (variable rate)
|
|
$
|
139,178
|
|
|
`
|
|
|
|
|
|
|
|
|
$
|
139,178
|
|
$
|
33,306
|
|
Weighted average
rate
|
|
3.04
|
%
|
|
|
|
|
|
|
|
|
|
|
3.04
|
%
|
|
|
(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 for deposits with no stated
maturity
dates. We utilize assumptions supported by
documented analyses for the expected maturities of our loans and repricing of
our deposits. We also use prepayment
projections
66
Table
of Contents
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 discounted cash flow analyses. 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 may elect to 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. Currently, derivative instruments do not have
material effect on our operating results or financial position.
In August and November 2004, we entered
into four equity swap agreements with a major investment brokerage firm 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 Hang
Seng China Enterprises Index, or the HSCEI.
As of March 31, 2009, the combined notional amounts of the equity
swap agreements total $15.6 million with termination dates similar to the
stated maturity date on the underlying certificate of deposit host
contracts. For the equity swap
agreements, we agreed to pay interest based on the one-month Libor minus a
spread on a monthly basis and receive any increase in the HSCEI at swap
termination date. Under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities
, a certificate of deposit that pays interest based on
changes in an equity index is a hybrid instrument with an embedded derivative
(i.e., equity call option) that must be accounted for separately from the host
contract (i.e., the certificate of deposit).
In accordance with SFAS No. 133, both the embedded equity call
options on the certificates of deposit and the freestanding equity swap
67
Table
of Contents
agreements are marked-to-market every month with resulting changes in
fair value recorded in the consolidated statements of income
.
On April 1, 2005, we 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, we entered into two
additional 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 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. As of March 31, 2009, the
combined notional amounts of these new equity swap agreements totaled $23.3
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 derivative liability for these six derivative contracts amounted to
$11.4 million and $11.5 million as of March 31, 2009, respectively,
compared to $13.9 million as of December 31, 2008. The 19% decrease in fair value of the
derivative contracts as of March 31, 2009 relative to December 31,
2008 is primarily due to a 14% reduction in the HSCEI volatility, partially offset
by a 2% increase of the HSCEI index.
The embedded derivative liability is 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. We also considered the counterpartys as well
as our 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.
68
Table of
Contents
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures
As of
March 31, 2009
, 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
March 31, 2009
.
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.
Internal
Controls
During
our most recent fiscal quarter, there have been no changes in our internal
control over financial reporting that has materially affected or is reasonably
likely to materially affect our internal control over financial reporting.
69
PART II - OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the
Company nor the Bank is involved in any material legal proceedings. The Bank, from time to time, is 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 would not have a material adverse impact on the
financial position, results of operations, or liquidity of the Company or the
Bank.
ITEM 1A. RISK FACTORS
The Companys 2008 Form 10-K contains
disclosure regarding the risks and uncertainties related to the Companys
business under the heading Item A. Risk Factors. There are no material
changes to our risk factors as presented in the Companys 2008 Form 10-K
under the heading Item 1A. Risk Factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
There were no unregistered sales of equity
securities during the three months ended March 31, 2009. The following
summarizes share repurchase activities during the first quarter of 2009:
|
|
|
|
|
|
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)
|
|
January 31,
2009
|
|
|
|
$
|
|
|
|
|
$
|
26.2
|
|
February 28,
2009
|
|
|
|
|
|
|
|
26.2
|
|
March 31,
2009
|
|
|
|
|
|
|
|
26.2
|
|
Total
|
|
|
|
$
|
|
|
|
|
$
|
26.2
|
|
(1)
Excludes
33,016
in repurchased shares totaling $
612
thousand 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.
70
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.
71
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: May 11, 2009
|
EAST WEST BANCORP, INC.
|
|
|
|
|
|
By:
|
/s/
Thomas J. Tolda
|
|
THOMAS J. TOLDA
Executive Vice President and Chief Financial Officer
|
72
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