- Annual Report (10-K)
March 01 2010 - 6:04AM
Edgar (US Regulatory)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
|
|
Mark One
|
|
|
ý
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 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
(State or other jurisdiction of incorporation or organization)
|
|
95-4703316
(I.R.S. Employer Identification No.)
|
135 North Los Robles Ave., 7
th
Floor, Pasadena, California
(Address of principal executive offices)
|
|
91101
(Zip Code)
|
Registrant's telephone number, including area code:
(626) 768-6000
|
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
|
Title of each class
|
|
Name of each exchange on which registered
|
Common Stock, $0.001 Par Value
|
|
NASDAQ "Global Select Market"
|
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
ý
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
ý
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
ý
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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K.
ý
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 definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filed
o
|
|
Accelerated filer
ý
|
|
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
ý
The aggregate market value of the registrant's common stock held by non-affiliates is approximately $346,390,718 (based on the June 30, 2009
closing price of Common Stock of $6.49 per share).
As
of February 12, 2010, 110,506,071 shares of East West Bancorp, Inc. Common Stock were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Definitive
Proxy Statement for the Annual Meeting of Stockholders Part III
Table of Contents
EAST WEST BANCORP, INC.
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
2
Table of Contents
PART I
Certain matters discussed in this Annual Report contains or incorporates statements that we believe are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as
amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They
usually can be identified by the use of forward-looking language, such as "will likely result," "may," "are expected to," "is anticipated," "estimate," "forecast," "projected," "intends to," or may
include other similar words or phrases, such as "believes," "plans," "trend," "objective," "continue," "remain," or similar expressions, or future or conditional verbs, such as "will," "would,"
"should," "could," "might," "can," or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those
described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we
may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.
There
are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause
such a difference include, but are not limited to:
-
-
our ability to integrate the former United Commercial Bank operations and to achieve expected synergies, operating
efficiencies or other benefits within expected time frames, or at all, or within expected cost projections;
-
-
our ability to integrate and retain former depositors and borrowers of United Commercial Bank;
-
-
our ability to manage the loan portfolio acquired from United Commercial Bank within the limits of the loss protection
provided by the FDIC;
-
-
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 may disrupt or increase volatility in securities or otherwise affect
economic conditions.
3
Table of Contents
For
a more detailed discussion of some of the factors that might cause such differences, see "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.
ITEM 1. BUSINESS
Organization
East West Bancorp, Inc.
East West Bancorp, Inc. (referred to herein on an unconsolidated basis as
"East West" and on a consolidated
basis as the "Company" or "we") is a bank holding company incorporated in Delaware on August 26, 1998 and registered under the Bank Holding Company Act of 1956, as amended ("BHCA"). The Company
commenced business on December 30, 1998 when, pursuant to a reorganization, it acquired all of the voting stock of East West Bank, or the "Bank". The Bank is the Company's principal asset. In
addition to the Bank, the Company has ten other subsidiaries, namely East West Insurance Services, Inc., East West Capital Trust I, East West Capital Trust II, East West Capital
Statutory Trust III, East West Capital Trust IV, East West Capital Trust V, East West Capital Trust VI, East West Capital Trust VII, East West Capital
Trust VIII, and East West Capital Trust IX.
East West Insurance Services, Inc.
On August 22, 2000, East West completed the acquisition of East
West Insurance
Services, Inc. (the "Agency") in a stock exchange transaction. The Agency provides business and consumer insurance services to the Southern California market. The Agency runs its operations
autonomously from the operations of the Company. The operations of the Agency are limited and are not deemed material in relation to the overall operations of the Company.
Other Subsidiaries of East West Bancorp, Inc.
The Company has established nine other subsidiaries as
statutory business trusts, East West
Capital Trust I and East West Capital Trust II in 2000, East West Capital Statutory Trust III in 2003, East West Capital Trust IV and East West Capital Trust V in
2004, East West Capital Trust VI in 2005, East West Capital Trust VII in 2006, and East West Capital Trusts VIII and IX in 2007, collectively referred to as the "Trusts".
In nine separate private placement transactions, the Trusts have issued either fixed or variable rate capital securities representing undivided preferred beneficial interests in the assets of the
Trusts. East West is the owner of all the beneficial interests represented by the common securities of the Trusts. The purpose of issuing the capital securities was to provide the Company with a
cost-effective means of obtaining Tier I capital for regulatory purposes. In accordance with Financial Accounting Standards Interpretation No. 46R,
Consolidation of Variable Interest Entities
("FIN No. 46R"), the Trusts are not consolidated into the accounts of the Company.
East
West's principal business is to serve as a holding company for the Bank and other banking or banking-related subsidiaries which East West may establish or acquire. East West has
not engaged in any other activities to date. As a legal entity separate and distinct from its subsidiaries, East West's principal source of funds is, and will continue to be, dividends that may be
paid by its subsidiaries. East West's other sources of funds include proceeds from the issuance of its common stock in connection with stock option and warrant exercises and employee stock purchase
plans. At December 31, 2009, the Company had $20.56 billion in total consolidated assets, $13.84 billion in net consolidated loans, and $14.99 billion in total consolidated
deposits.
The
principal office of the Company is located at 135 N. Los Robles Ave., 7
th
Floor, Pasadena, California 91101, and the telephone number is
(626) 768-6000.
4
Table of Contents
East West Bank.
East West Bank was chartered by the Federal Home Loan Bank Board in June 1972, as the first
federally chartered savings institution
focused primarily on the Chinese-American community, and opened for business at its first office in the Chinatown district of Los Angeles in January 1973. From 1973 until the early 1990's, the Bank
conducted a traditional savings and loan business by making predominantly long-term, single family residential and commercial and multifamily real estate loans. These loans were made
principally within the ethnic Chinese market in Southern California and were funded primarily with retail savings deposits and advances from the Federal Home Loan Bank of San Francisco. The Bank has
emphasized commercial lending since its conversion to a state-chartered commercial bank on July 31, 1995. The Bank now also provides loans for commercial, construction, and residential real
estate projects and for the financing of international trade for companies primarily in California.
At
December 31, 2009, the Bank had four wholly owned subsidiaries. The first subsidiary, E-W Services, Inc., is a California corporation organized by the Bank
in 1977. E-W Services, Inc. holds property used by the Bank in its operations. The secondary subsidiary, East-West Investments, Inc., primarily acts as a trustee
in connection with real estate secured loans. The remaining two other subsidiaries, Cal Canton and United Commercial Bank (China) Limited were the result of the UCB Acquisition.
Acquisitions
of existing banks have contributed to the Bank's growth. We continue to look for opportunities to expand the Bank's branch network by acquiring other financial institutions
to diversify our customer base in order to compete for new deposits and loans, and to serve our customers effectively by providing them with a wide array of financial solutions, products and services.
On
August 17, 2007, the Bank completed the acquisition of Desert Community Bank ("DCB"), a commercial bank headquartered in Victorville, California. The purchase price was
$145.0 million with fifty-five percent of the merger consideration paid in East West common stock and the remainder in cash. DCB operated through nine branches located throughout
the High Desert area of San Bernardino County. The Bank acquired approximately $406.1 million in net loans receivable and assumed $506.7 million in deposits through this acquisition.
These nine branches are operated under the name Desert Community Bank, a division of East West Bank.
On
November 6, 2009, the Bank entered into a purchase and assumption agreement ("Purchase and Assumption Agreement") with the Federal Deposit Insurance Corporation ("FDIC"),
pursuant to which the Bank acquired certain assets and assumed certain liabilities of the former United
Commercial Bank ("United Commercial Bank"), a California state-chartered bank headquartered in San Francisco, California (the "UCB Acquisition"). The UCB Acquisition included all 63 U.S. branches of
United Commercial Bank, which opened as branches of the Bank as of Monday, November 9, 2009. It also included the Hong Kong branch of United Commercial Bank and United Commercial Bank (China)
Limited, the subsidiary of United Commercial Bank headquartered in Shanghai, China.
Under
the terms of the Purchase and Assumption Agreement, the Bank acquired certain assets of United Commercial Bank with a fair value of approximately $9.86 billion, including
$5.90 billion of loans, $1.56 billion of investment securities, $93.5 million of Federal Home Loan Bank stock, $599.0 million of cash and cash equivalents,
$147.4 million of securities purchased under sale agreements, $38.0 million of other real estate owned ("OREO"), and $207.6 million of other assets. Liabilities with a fair value
of approximately $9.57 billion were also assumed, including $6.53 billion of insured and uninsured deposits, but excluding certain brokered deposits, $1.84 billion of Federal Home
Loan ("FHLB") advances, $858.2 million of securities sold under agreements to repurchase, $90.6 million in other borrowings and $254.2 million of other liabilities.
5
Table of Contents
See
the "Business Combination" section of the Notes to the Consolidated Financial Statements in Note 2 on page 111 for more information on the acquisition.
The
Bank has also grown through strategic partnerships and additional branch locations. On August 30, 2001, the Bank entered into an exclusive ten-year agreement with
99 Ranch Market to provide retail banking services in their stores throughout California. 99 Ranch Market is the largest Asian-focused chain of supermarkets on the West Coast, with 24 full service
stores in California, two in Washington, and affiliated licensee stores in Arizona, Georgia, Hawaii, Nevada, and Indonesia. Tawa Supermarket Companies or "Tawa" is the parent company of 99 Ranch
Market. Tawa's property development division owns and operates many of the shopping centers where 99 Ranch Market stores are located. We are currently providing in-store banking services
to nine 99 Ranch Market locations in Southern California and one in Northern California.
The
Bank continues to expand its market presence in the international arena. The Bank has two full-service branches in Hong Kong, one of which commenced operations during
the first quarter of 2007 and the other was the result of the UCB Acquisition. The Hong Kong branches offer a variety of deposit, loan, and international banking products. In addition, the Bank has
two full-service branches in China, one in Shanghai, and one in Shantou, also the result of the UCB Acquisition. The Bank also has four overseas representative offices in China and one in
Taipei, Taiwan. The first office, located in Beijing, was opened on January 20, 2003. The second overseas representative office was opened on August 10, 2007, and is located in Shanghai.
The remainder of the representative offices were acquired in the UCB Acquisition. These representative offices serve to further develop the Bank's existing international banking capabilities. In
addition to facilitating
traditional letters of credit and trade finance to businesses, these representative offices allow the Bank to assist existing clients, as well as develop new business relationships. Through these
offices, the Bank is focused on growing its export-import lending volume by aiding domestic exporters in identifying and developing new sales opportunities to China-based customers as well as
capturing additional letters of credit business generated from China-based exports through broader correspondent banking relationships with a variety of Chinese financial institutions.
The
Bank continues to explore opportunities to establish other foreign offices, subsidiaries or strategic investments and partnerships to expand its footprint in the international and
global marketplace.
Banking Services
The Bank is the third largest independent commercial bank headquartered in California as of December 31, 2009, and the largest
bank in the United States that focuses on the Asian-American community. Through its network of 135 branches worldwide, the Bank provides a wide range of personal and commercial banking services to
small and medium-sized businesses, business executives, professionals, and other individuals. The Bank offers multilingual services to its customers in English, Cantonese, Mandarin, Vietnamese, and
Spanish. The Bank also offers a variety of deposit products which includes the traditional range of personal and business checking and savings accounts, time deposits and individual retirement
accounts, travelers' checks, safe deposit boxes, and MasterCard and Visa merchant deposit services.
The
Bank's lending activities include residential and commercial real estate, construction, commercial, trade finance, accounts receivable, small business administration ("SBA"),
inventory and working capital loans. The Bank's commercial borrowers are engaged in a wide variety of manufacturing, wholesale trade, and service businesses. The Bank provides commercial loans to
small and medium-sized businesses with annual revenues that generally range from several million to
6
Table of Contents
$200 million.
In addition, the Bank provides short-term trade finance facilities for terms of less than one year primarily to U.S. importers and manufacturers doing business in the
Asia Pacific region.
Market Area and Competition
The Bank concentrates on marketing its services primarily in the Los Angeles metropolitan area, Orange County, San Bernardino County,
and the greater San Francisco Bay area, including San Mateo County, the Silicon Valley area of Santa Clara County, and Alameda County, with a particular focus on regions with a high concentration of
ethnic Chinese. The ethnic Chinese markets within the Bank's primary market area have experienced rapid growth in recent years. According to information provided by the U.S. Census Bureau's
2005-2007 American Community Survey, there were an estimated 4.6 million Asians and Pacific Islanders residing in California, or 12.6% of the total population. As California
continues to gain momentum as the hub of the Pacific Rim, the Bank provides important competitive advantages to its customers participating in the Asia Pacific marketplace. We believe that our
customers benefit from our understanding of Asian markets and cultures, our corporate and organizational ties throughout Asia, as well as our international banking products and services. We believe
that this approach, combined with the extensive ties of our management and Board of Directors to the growing Asian and ethnic Chinese communities, provides us with an advantage in competing for
customers in our market area. The Bank is also committed to expanding its customer base to other high growth communities in Northern and Southern California, New York, Georgia, Massachusetts, Texas
and Washington
The
Bank has 111 branches in California located in the following counties: Los Angeles, Orange, San Bernardino, San Francisco, San Mateo, Santa Clara and Alameda. Additionally, the Bank
has eight branches in New York, five branches in Georgia, three branches in Massachusetts, two branches in Texas, and two branches in Washington. In Greater China, East West's presence includes four
full-service branches, including two in Hong Kong, one in Shanghai, and one in Shantou. The Bank also has representative offices in Beijing, Guangzhou, Shanghai and Shenzhen, China, and
Taipei, Taiwan.
The
banking and financial services industry in California generally, and in our market areas specifically, is highly competitive. The increasingly competitive environment is a result
primarily of changes in laws and regulations, changes in technology and product delivery systems, as well as continuing consolidation and nationwide expansion among financial services providers.
The
Bank competes for loans, deposits, and customers with other commercial banks, savings and loan associations, savings banks, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Some of these competitors are larger in total assets and capitalization, have
greater access to capital markets, including foreign ownership, and offer a broader range of financial services than the Bank.
Economic Conditions, Government Policies, Legislation, and Regulation
The Company's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the
difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on interest-earning assets,
such as loans extended to customers and securities held in the investment portfolio, will comprise the major portion of the Company's earnings (losses). These rates are highly sensitive to many
factors that are beyond the control of the Company, such as inflation, recession and
7
Table of Contents
unemployment,
and the impact which future changes in domestic and foreign economic conditions might have on the Company cannot be predicted.
The
Company's business is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of
the Federal Reserve System (the "FRB"). The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations
in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest earned on
interest-earning assets and paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on the Company cannot be predicted.
From
time to time, federal and state legislation is enacted which may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities,
or affecting the competitive balance between banks and other financial services providers. Several proposals for legislation that could substantially intensify the regulation of the financial services
industry (including a possible comprehensive overhaul of the financial institutions regulatory system) are expected to be introduced and possibly enacted in the new Congress in response to the current
economic downturn and financial industry instability. Other legislative and regulatory initiatives which could affect us and the banking industry in general are pending, and additional initiatives may
be proposed or introduced, before the Congress, the California legislature, and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation, and
competitive relationship among financial institutions, and may subject us to increased regulation, disclosure, and reporting requirements. In addition, the various bank regulatory agencies often adopt
new rules and regulations and policies to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations or changes in policy may be
enacted or the extent to which the business of the Bank would be affected thereby. The Company cannot predict whether or when potential legislation will be enacted, and if enacted, the effect that it,
or any implemented regulations and supervisory policies, would have on our financial condition or results of operations. In addition, the
outcome of examinations, any litigation or any investigations initiated by state or federal authorities may result in necessary changes in our operations and increased compliance costs.
Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage market and the securitization markets for such loans, together with volatility in oil
prices and other factors, have resulted in uncertainty in the financial markets in general and a related general economic downturn, which have continued through 2009. Dramatic declines in the housing
market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant
write-downs of assets by many financial institutions, including the Bank. In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. General
downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in
additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This
market turmoil and tightening of credit has led to increased commercial and consumer delinquencies, lack of customer confidence, increased market volatility and widespread reduction in general
business activity. Competition among depository institutions for deposits has increased significantly. Bank and bank holding company stock prices have been significantly negatively affected as has the
ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. The bank regulatory agencies have
8
Table of Contents
been
very aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased issuance of enforcement orders requiring action to address credit quality,
liquidity and risk management, and capital adequacy concerns, as well as other safety and soundness concerns.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted ("EESA") to restore confidence and stabilize the volatility in the U.S. banking system and to
encourage financial institutions to increase their lending to customers and to each other. Initially introduced as the Troubled Asset Relief Program ("TARP"), the EESA authorized the United States
Department of the Treasury ("U.S. Treasury") to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain
other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program. Initially, $350 billion or
half of the $700 billion was made immediately available to the U.S. Treasury. On January 15, 2009, the remaining $350 billion was released to the U.S. Treasury.
On
October 14, 2008, the U.S. Treasury announced its intention to inject capital into nine large U.S. financial institutions under the TARP Capital Purchase Program (the "TARP
CPP"), and since has injected capital into many other financial institutions, including the Company. The U.S. Treasury initially allocated $250 billion towards the TARP CPP. On
December 5, 2008, the Company entered into a Securities Purchase Agreement Standard Terms with the U.S. Treasury ("Stock Purchase Agreement"), pursuant to which, among
other things, the Company sold to the U.S. Treasury for an aggregate purchase price of $306.5 million, preferred stock and warrants. Under the terms of the
TARP CPP, the Company is prohibited from increasing dividends on its common stock, and from making certain repurchases of equity securities, including its common stock, without the U.S. Treasury's
consent. Furthermore, as long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including the
Company's common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources" in Part II, Item 7 herein.
In
order to participate in the TARP CPP, financial institutions were required to adopt certain standards for executive compensation and corporate governance. These standards generally
apply to the Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers. The standards include (1) ensuring that incentive
compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive
compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute
payments to senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. The Company has complied with these
requirements.
The
bank regulatory agencies, U.S. Treasury and the Office of Special Inspector General, also created by the EESA, have issued guidance and requests to the financial institutions that
participate in the TARP CPP to document their plans and use of TARP CPP funds and their plans for addressing the executive compensation requirements associated with the TARP CPP.
On
February 10, 2009, the U.S. Treasury and the federal bank regulatory agencies announced in a Joint Statement a new Financial Stability Plan which would include additional
capital support for banks under a Capital Assistance Program, a public-private investment fund to address existing bank
9
Table of Contents
loan
portfolios and expanded funding for the FRB's pending Term Asset-Backed Securities Loan Facility to restart lending and the securitization markets.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 ("ARRA") was signed into law by President Obama. The ARRA includes a wide variety of programs intended to
stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposes certain new executive compensation and corporate expenditure limits
on all current and future TARP recipients, including the Company, until the institution has repaid the U.S. Treasury, which is now permitted under the ARRA without penalty and without the need to
raise new capital, subject to the U.S. Treasury's consultation with the recipient's appropriate regulatory agency.
The
executive compensation standards are more stringent than those currently in effect under the TARP CPP or those previously proposed by the U.S. Treasury. The new standards include
(but are not limited to) (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which do not fully vest during the TARP period up to
one-third of an employee's total annual compensation, (ii) prohibitions on golden parachute payments for departure from a company, (iii) an expanded clawback of bonuses,
retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on compensation plans that
encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other compensation previously provided by TARP recipients if found by the U.S. Treasury to
be inconsistent with the purposes of TARP or otherwise contrary to public interest, (vi) required establishment of a company-wide policy regarding "excessive or luxury
expenditures," and (vii) inclusion in a participant's proxy statements for annual shareholder meetings of a nonbinding "Say on Pay" shareholder vote on the compensation of executives.
On
February 23, 2009, the U.S. Treasury and the federal bank regulatory agencies issued a Joint Statement providing further guidance with respect to the Capital Assistance
Program ("CAP") announced February 10, 2009, including: (i) that the CAP will be initiated on February 25, 2009 and will include "stress test" assessments of major banks and that
should the "stress test" indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital; otherwise the temporary capital
buffer will be made available from the government; (ii) such additional government capital will be in the form of mandatory convertible preferred shares, which would be converted into common
equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory; and
(iii) previous capital injections under the TARP CPP will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion of preferred shares to common equity
shares would enable institutions to maintain or enhance the quality of their capital by increasing their tangible common equity capital ratios; however, such conversions would necessarily dilute the
interests of existing shareholders.
On
February 25, 2009, the first day the CAP program was initiated, the U.S. Treasury released the actual terms of the program, stating that the purpose of the CAP is to restore
confidence throughout the financial system that the nation's largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to more a
more severe economic environment, and to support lending to creditworthy borrowers. Under the CAP terms, eligible U.S. banking institutions with assets in excess of $100 billion on a
consolidated basis are required to participate in coordinated supervisory assessments, which are forward-looking "stress test" assessments to evaluate the capital needs of the institution under a more
challenging economic environment. Should this assessment indicate the need for the bank to establish an additional capital buffer to withstand more stressful conditions, these institutions may access
the CAP immediately as a
10
Table of Contents
means
to establish any necessary additional buffer or they may delay the CAP funding for six months to raise the capital privately. Eligible U.S. banking institutions with assets below
$100 billion may also obtain capital from the CAP. The CAP program is an additional program from the TARP CCP and is open to eligible institutions regardless of whether they participated in the
TARP CCP. The deadline to
apply to the CAP was May 25, 2009. Recipients of capital under the CAP will be subject to the same executive compensation requirements as if they had received TARP CCP.
The
EESA also increased Federal Deposit Insurance Corporation ("FDIC") deposit insurance on most accounts from $100,000 to $250,000. This increase was originally scheduled to end in
2009; however, Congress extended the temporary increase until December 31, 2013. The increase is not covered by deposit insurance premiums paid by the banking industry. In addition, the FDIC
has implemented two temporary programs under the Temporary Liquidity Guaranty Program ("TLGP") to provide deposit insurance for the full amount of most noninterest bearing transaction accounts through
the end of 2009, and later extended through June 30, 2010 and to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012. Financial institutions
had until December 5, 2008 to opt out of these two programs. The Company and the Bank have elected to not opt out of these two programs. The FDIC charges "systemic risk special assessments" to
depository institutions that participate in the TLGP.
Supervision and Regulation
General.
The Company and the Bank are extensively regulated under both federal and state laws. Regulation and
supervision by the federal and state
banking agencies are intended primarily for the protection of depositors and the Deposit Insurance Fund ("DIF") administered by the FDIC and not for the benefit of stockholders. Set forth below is a
brief description of key laws and regulations which relate to our operations. These descriptions are qualified in their entirety by reference to the applicable laws and regulations. The federal and
state agencies regulating the financial services industry also frequently adopt changes to their regulations.
The Company.
As a bank holding company and financial holding company, the Company is subject to regulation and
examination by the FRB under the
BHCA. Accordingly, the Company is subject to the FRB's regulation and its authority to:
-
-
require periodic reports and such additional information as the FRB may require.
-
-
require the Company to maintain certain levels of capital. See "Capital Requirements".
-
-
require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and commit
resources as necessary to support each subsidiary bank. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered
by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both.
-
-
terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if
the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary.
-
-
regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve
requirements on such debt and require prior approval to purchase or redeem our securities in certain situations.
-
-
approve acquisitions and mergers with banks and consider certain competitive, management, financial and other factors in
granting these approvals. Similar California and other state banking agency approvals may also be required.
11
Table of Contents
Subject to certain prior notice or FRB approval requirements, bank holding companies may engage in any, or acquire shares of companies
engaged in, those nonbanking activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company may engage in these
nonbanking activities and broader securities, insurance, merchant banking and other activities that are determined to be "financial in nature" or are incidental or complementary to activities that are
financial in nature without prior FRB approval pursuant to its election to become a financial holding company. Pursuant to the Gramm-Leach-Bliley Act of 1999 ("GLBA"), in order to elect and retain
financial holding company status, all depository institution subsidiaries of a bank holding company must be well capitalized, well managed, and, except in limited circumstances, be in satisfactory
compliance with the Community Reinvestment Act ("CRA"). Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to
divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company.
The
Company is also a bank holding company within the meaning of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be
required to file reports with, the Department of Financial Institutions ("DFI").
The Company's securities are registered with the Securities Exchange Commission ("SEC") under the Exchange Act of 1934, as amended
(the "Exchange Act"). As such, the Company is subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of the Exchange Act.
The Company is subject to the accounting oversight and corporate governance requirements of the Sarbanes-Oxley Act of 2002,
including:
-
-
required executive certification of financial presentations;
-
-
increased requirements for board audit committees and their members;
-
-
enhanced disclosure of controls and procedures and internal control over financial reporting;
-
-
enhanced controls over, and reporting of, insider trading; and
-
-
increased penalties for financial crimes and forfeiture of executive bonuses in certain circumstances.
The Bank.
As a California chartered bank, the Bank is subject to primary supervision, periodic examination, and
regulation by the DFI and by the FRB
as the Bank's primary federal regulator. As a member bank, the Bank is a stockholder of the Federal Reserve Bank of San Francisco (the "Reserve Bank").
In
general, under the California Financial Code, California banks have all the powers of a California corporation, subject to the general limitation of state bank powers under the
Federal Deposit Insurance Act ("FDIA") to those permissible for national banks. Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of
their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The regulatory
structure also gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities
12
Table of Contents
and
examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. If, as a result of an
examination, the DFI or the FRB should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank's operations
are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the DFI and the FRB, and separately the FDIC as insurer of the Bank's deposits, have residual
authority to:
California law permits state chartered commercial banks to engage in any activity permissible for national banks. Therefore, the Bank
may form subsidiaries to engage in the many so-called "closely related to banking" or "nonbanking" activities commonly conducted by national banks in operating subsidiaries, and further,
pursuant to GLBA, the Bank may conduct certain "financial" activities in a subsidiary to the same extent as may a national bank, provided the Bank is and remains "well-capitalized,"
"well-managed" and in satisfactory compliance with the CRA. Presently, none of the Bank's subsidiaries are financial subsidiaries.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, bank holding companies and banks generally
have the ability to acquire or merge with banks in other states and, subject to certain state restrictions, banks may also acquire or establish new branches outside their home state. Interstate
branches are subject to certain laws of the states in which they are located.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of San Francisco. Among other benefits, each FHLB serves as a reserve or
central bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB
system. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2009, the Bank was in compliance with the FHLB's stock ownership
requirement and our investment in FHLB capital stock totaled $180.2 million. In January 2009, the FHLB announced that it will suspend dividend payments for the fourth quarter of 2008 to
preserve capital given the possibility of other-than-temporary charges on certain non-agency mortgage-backed securities in the future. Additionally, the FHLB
announced that it will not repurchase excess capital stock on January 31, 2009, which was the next regularly scheduled repurchase date.
13
Table of Contents
The Federal Reserve Board requires all depository institutions to maintain interest bearing reserves at specified levels against their
transaction accounts. At December 31, 2009, the Bank was in compliance with these requirements. As a member bank, the Bank is also required to own capital stock in the Reserve Bank. At
December 31, 2009, the Bank held an investment of $36.8 million in capital stock.
As a result of the UCB Acquisition, the Bank currently has four full-service branches, two in Hong Kong, one in Shanghai,
and one in Shantou, China. The Bank also has representative offices in Beijing, Guangzhou, Shanghai and Shenzhen, China and Taipei, Taiwan. The Bank's overseas activities are regulated by the FRB and
the DFI, and are also regulated by supervisory authorities of the host countries where the Bank has offices.
Dividends from the Bank constitute the principal source of income to the Company. The Bank is subject to various statutory and
regulatory restrictions on its ability to pay dividends. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $85.8 million at
December 31, 2009. The Bank is permitted to pay dividend to the Company as long as the banking regulatory authorities of the Bank are notified of the proposed dividend and there is non
objection language from the banking regulatory authorities. In addition, the banking agencies have the authority to prohibit or limit the Bank from paying dividends, depending upon the Bank's
financial condition, if such payment is deemed to constitute an unsafe or unsound practice. Furthermore, under the federal Prompt Corrective Action regulations, the FRB or FDIC may prohibit a bank
holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." See "Capital Requirements."
It
is FRB policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention
is consistent with the organization's expected future needs and financial condition. It is also FRB policy that bank holding companies should not maintain dividend levels that undermine the company's
ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the FRB has indicated that bank holding companies
should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
Under
the terms of the TARP CPP, for so long as any preferred stock issued under the TARP CPP remains outstanding, the Company is prohibited from increasing dividends on its common
stock, and from making certain repurchases of equity securities, including its common stock, without the U.S. Treasury's consent until the third anniversary of the U.S. Treasury's investment or until
the U.S. Treasury has transferred all of the preferred stock it purchased under the TARP CPP to third parties. As long as the preferred stock issued to the U.S. Treasury is outstanding, as well as the
Company's Series A Preferred Stock, dividend payments and repurchases or redemptions relating to certain equity securities, including the Company's common stock, are also prohibited until all
accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions (see "Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources" in Part II, Item 7 herein).
14
Table of Contents
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal banking
agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
At December 31, 2009, the Company's and the Bank's capital ratios exceed the minimum capital adequacy guideline percentage requirements of the federal banking agencies for "well capitalized"
institutions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Risk-Based Capital" and Note 25 to the consolidated
financial statements for further information regarding the regulatory capital guidelines as well as the Company's and the Bank's actual capitalization as of December 31, 2009.
The
federal banking agencies have adopted risk-based minimum capital adequacy guidelines for bank holding companies and banks which are intended to provide a measure of
capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions which are recorded as
off-balance sheet items. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted
categories, with higher levels of capital being required for those categories perceived as representing greater risk. Bank holding companies and banks engaged in significant trading activity may also
be subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards. Under the
capital adequacy guidelines, a banking organization's total capital is divided into tiers. "Tier I capital" includes common equity and trust-preferred securities, subject to certain criteria
and quantitative limits. The TARP CPP capital received by the Company from the U.S. Treasury and the capital received from the Series A preferred stock offering also qualifies as Tier I
capital. "Tier II capital" includes hybrid capital instruments, other qualifying debt instruments, a limited amount of the allowance for loan and lease losses, and a limited amount of
unrealized holding gains on equity securities. "Tier III capital" consists of qualifying unsecured debt. The sum of Tier II and Tier III capital may not exceed the amount of
Tier I capital. The risk-based capital guidelines require a minimum ratio of qualifying total capital to risk-weighted assets of 8% and a minimum ratio of Tier I
capital to risk-weighted assets of 4%. An institution is defined as well capitalized if its total capital to risk-weighted assets ratio is 10.00% or more; its core capital to
risk-weighted assets ratio is 6.00% or more; and its core capital to adjusted average assets ratio is 5.00% or more.
Bank
holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization's Tier 1 capital
to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for holding companies and banks that either have the
highest supervisory rating or have implemented the appropriate federal regulatory authority's risk-adjusted measure for market risk. All other holding companies and banks are required to
maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an
appropriate regulatory authority. For a depository institution to be considered "well capitalized" under the regulatory framework for prompt corrective action, its leverage ratio must be at least
5.0%.
The current risk-based capital guidelines which apply to the Company and the Bank are based upon the 1988 capital accord
of the International Basel Committee on Banking Supervision, a committee of central banks and bank supervisors and regulators from the major industrialized countries
15
Table of Contents
that
develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply. A new international accord, referred to as Basel II, which emphasizes
internal assessment of credit, market and operational risk; supervisory assessment and market discipline in determining minimum capital requirements, became mandatory for large or "core" international
banks outside the U.S. in 2008 (total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more); is optional for others, and if adopted, must first be
complied with in a "parallel run" for two years along with the existing Basel I standards. In January 2009, the Basel Committee proposed to reconsider regulatory-capital standards, supervisory and
risk-management requirements and additional disclosures to further strengthen Basel II framework in response to recent worldwide developments.
In
July 2008, the U.S. federal banking agencies issued a proposed rule for banking organizations that do not use the "advanced approaches" under Basel II. While this proposed rule
generally parallels the relevant approaches under Basel II, it diverges where U.S. markets have unique characteristics and risk profiles, most notably with respect to risk weighting residential
mortgage exposures. A definitive final rule has not yet been issued. The U.S. banking agencies have indicated, however, that they will retain the minimum leverage requirement for all U.S. banks.
The FDIA provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by
their federal banking regulators. Among other things, it requires the relevant federal banking regulator to take "prompt corrective action" with respect to a depository institution if that institution
does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate federal banking regulator
under the prompt corrective action rules generally depend
upon an institution's classification within five capital categories as defined in the regulations. The relevant capital measures are the capital ratio, the Tier 1 capital ratio and the leverage
ratio. However, the federal banking agencies have also adopted non-capital safety and soundness standards to assist examiners in identifying and addressing potential safety and soundness
concerns before capital becomes impaired. These include operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan
documentation, (iii) credit underwriting, (iv) asset quality and growth, (v) earnings, (vi) risk management, and (vii) compensation and benefits.
A
depository institution's capital tier under the prompt corrective action regulations will depend upon how its capital levels compare with various relevant capital measures and the
other factors established by the regulation. A bank will be: (i) "well capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1
risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1
risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not "well capitalized"; (iii) "undercapitalized" if the institution has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of
less than 3.0%; and (v) "critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded
to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory
examination rating with respect to certain matters.
16
Table of Contents
The
FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company
if the depository institution would thereafter be "undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The
agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital.
In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan.
The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0%
of the depository institution's total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is
treated as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized"
institutions are subject to the appointment of a receiver or conservator.
The
appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDIA provides that
an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems
the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory
information other than the capital levels of the institution.
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and
savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor.
Pursuant to the EESA, the maximum deposit insurance amount has been increased from $100,000 to $250,000. The amount of FDIC assessments paid by each DIF member institution is based on its relative
risk of default as measured by regulatory capital ratios and other supervisory factors. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC is authorized to set the reserve ratio
for the DIF annually at between 1.15% and 1.50% of estimated insured deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. In an effort to
restore capitalization levels and to ensure the DIF will adequately cover projected losses from future bank failures, the FDIC, in October 2008, proposed a rule to alter the way in which it
differentiates for risk in the risk-based assessment system and to revise deposit insurance assessment rates, including base assessment rates. Effective April 1, 2009, initial base
assessment rates were increased to between 12 and 45 cents for every $100 of assessable domestic deposits, with most banks paying between 12 and 14 cents.
On
February 27, 2009, the FDIC approved an interim rule to institute a one-time special assessment of 20 cents per $100 in assessable domestic deposits to restore the
DIF reserves depleted by recent bank failures. The interim rule additionally reserves the right of the FDIC to charge an additional up-to-10 basis point special premium at a
later point if the DIF reserves continue to fall.
17
Table of Contents
The
FDIC also approved an increase in regular premium rates for the second quarter of 2009. For most banks, this will be between 12 to 16 basis points per $100 in assessable domestic deposits.
On
September 29, 2009, the FDIC adopted an Amended Restoration Plan to allow the DIF to return to a reserve ratio of 1.15 percent within eight years, as mandated by
statute. While the Amended Restoration Plan and higher assessment rates address the need to return the DIF reserve ratio to 1.15 percent, the FDIC must also consider its need for cash to pay
for projected bank failures. On November 17, 2009, the FDIC amended its regulation requiring insured institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009, and for all of 2010, 2011, and 2012. The Bank prepaid a total of $80.6 million to the FDIC in December 2009.
If
the DIF's reserves exceed the designated reserve ratio, the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%, a portion of the excess as a dividend to
insured depository institutions based on the percentage of insured deposits held on December 31, 1996 adjusted for subsequently paid premiums.
Additionally,
by participating in the TLGP, banks temporarily become subject to "systemic risk special assessments" of 10 basis points for transaction account balances in excess of
$250,000 assessments up to 100 basis points of the amount of TLGP debt issued. Further, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments
on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the DIF. The FICO assessment rates, which are determined
quarterly, averaged 0.0106% of insured deposits in fiscal 2009. These assessments will continue until the FICO bonds mature in 2017.
The
FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in
unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank's depositors. The termination of deposit insurance for a bank would also result in the revocation
of the bank's charter by the DFI.
With certain limited exceptions, the maximum amount of obligations, secured or unsecured, that any borrower (including certain related
entities) may owe to a California state bank at any one time may not exceed 25% of the sum of the shareholders' equity, allowance for loan losses, capital notes and debentures of the bank. Unsecured
obligations may not exceed 15% of the sum of the shareholders' equity, allowance for loan losses, capital notes and debentures of the bank. The Bank has established internal loan limits which are
lower than the legal lending limits for a California bank.
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit
to:
-
-
a bank or bank holding company's executive officers, directors and principal shareholders (i.e., in most cases,
those persons who own, control or have power to vote more than 10% of any class of voting securities);
-
-
any company controlled by any such executive officer, director or shareholder; or
-
-
any political or campaign committee controlled by such executive officer, director or principal shareholder.
18
Table of Contents
Such
loans and leases:
-
-
must comply with loan-to-one-borrower limits;
-
-
require prior full board approval when aggregate extensions of credit to the person exceed specified amounts;
-
-
must be made on substantially the same terms (including interest rates and collateral) and follow credit-underwriting
procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders; and
-
-
must not involve more than the normal risk of repayment or present other unfavorable features.
In
addition, Regulation O provides that the aggregate limit on extensions of credit to all insiders of a bank as a group cannot exceed the bank's unimpaired capital and
unimpaired surplus. California has laws and the DFI has regulations which adopt and also apply Regulation O to the Bank.
The
Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B and FRB Regulation W on any extensions of credit to, or the issuance
of a guarantee or letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the
purchase of assets of any affiliates. Affiliates include parent holding companies, sister banks, sponsored and advised companies, financial subsidiaries and investment companies where the Bank's
affiliate serves as investment advisor. Sections 23A and 23B and Regulation W generally:
-
-
prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated
amounts;
-
-
limit such loans and investments to or in any affiliate individually to 10.0% of the Bank's capital and surplus;
-
-
limit such loans and investments to all affiliate in the aggregate to 20.0% of the Bank's capital and surplus; and
-
-
require such loans and investments to or in any affiliate to be on terms and under conditions substantially the same or at
least as favorable to the Bank as those prevailing for comparable transactions with nonaffiliated parties.
Additional
restrictions on transactions with affiliates may be imposed on the Bank under the FDIA prompt corrective action provisions and the supervisory authority of the federal and
state banking agencies.
FRB Regulation R implements exceptions provided in GLBA for securities activities which banks may conduct without registering
with the SEC as securities broker or moving such activities to a broker-dealer affiliate. Regulation R provides exceptions for networking arrangements with third-party broker-dealers and
authorizes compensation for bank employees who refer and assist retail and high net worth bank customers with their securities, including sweep accounts to money market funds, and with related trust,
fiduciary, custodial and safekeeping needs. The current securities activities which the Bank provides customers are conducted in conformance with these rules and regulations.
19
Table of Contents
The USA PATRIOT Act of 2001 and its implementing regulations significantly expanded the anti-money laundering and
financial transparency laws, including the Bank Secrecy Act. The Bank has adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act. Material deficiencies in
anti-money laundering compliance can result in public enforcement actions by the banking agencies, including the imposition of civil money penalties and supervisory restrictions on growth
and expansion. Such enforcement actions could also have serious reputation consequences for the Company and the Bank.
The Bank and the Company are subject to many federal and state consumer protection laws and regulations prohibiting unfair or
fraudulent business practices, untrue or misleading advertising and unfair competition, including:
-
-
The Home Ownership and Equity Protection Act of 1994, or HOEPA, which requires extra disclosures and consumer protections
to borrowers from certain lending practices, such as practices deemed to be "predatory lending."
-
-
Privacy policies required by federal and state banking laws and regulations which limit the ability of banks and other
financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties.
-
-
The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, or the FACT Act, which
requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and gives consumers more control of their credit data.
-
-
The Equal Credit Opportunity Act, or ECOA, which generally prohibits discrimination in any credit transaction, whether for
consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act.
-
-
The Truth in Lending Act, or TILA, which requires that credit terms be disclosed in a meaningful and consistent way so
that consumers may compare credit terms more readily and knowledgeably.
-
-
The Fair Housing Act, which regulates many lending practices, including making it unlawful for any lender to discriminate
in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status.
-
-
The CRA, which requires insured depository institutions, while operating safely and soundly, to help meet the credit needs
of their communities; directs the federal regulatory agencies in examining insured depository institutions to assess a bank's record of helping meet the credit needs of its entire community, including
low- and moderate-income neighborhoods, consistent with safe and sound banking practices; and further requires the agencies to take a financial institution's record of meeting its
community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. In its last examination for CRA
compliance, as of July 7, 2008, the Bank was rated "satisfactory."
-
-
The Home Mortgage Disclosure Act, or HMDA, which includes a "fair lending" aspect that requires the collection and
disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
20
Table of Contents
-
-
The Real Estate Settlement Procedures Act, or RESPA, which requires lenders to provide borrowers with disclosures
regarding the nature and cost of real estate settlements and prohibits certain abusive practices, such as kickbacks.
-
-
The National Flood Insurance Act, which requires homes in flood-prone areas with mortgages from a federally regulated
lender to have flood insurance.
Foreign-based subsidiaries, including United Commercial Bank China (Limited), are subject to applicable foreign laws and regulations.
Nonbank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. East West Insurance Services, Inc. is
subject to the licensing and supervisory authority of the California Commissioner of Insurance.
Employees
East West does not have any employees other than officers who are also officers of the Bank. Such employees are not separately
compensated for their employment with the Company. As of December 31, 2009, the Bank had a total of 2,522 full-time employees and 145 part-time employees and the Agency
had a total of 12 full-time employees. None of the employees are represented by a union or collective bargaining group. The managements of the Bank and Agency believe that their employee
relations are satisfactory.
Recently Issued Accounting Standards
For a discussion of recent accounting pronouncements and their expected impact on the Company's consolidated financial statements,
refer to Note 1 "Recent Accounting Pronouncements" in the accompanying notes to the consolidated financial statements included elsewhere in this report.
Available Information
We file reports with the SEC, including our proxy statements, annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K. These reports and other information on file can be inspected and copied at the SEC's Public Reference Room at
100 F Street, N.E., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission maintains a web site that contains the reports, proxy and information statements and other information we file
with them. The address of the site is
http://www.sec.gov
.
The
Company also maintains an internet website at
www.eastwestbank.com
. The Company makes its website content available for information
purposes only. It should not be relied upon for investment purposes.
We
make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and proxy statements for our annual shareholders meetings, as well as any amendments to those reports, as soon as reasonably practicable after the Company files such
reports with the SEC. The Company's SEC reports can be accessed through the investor information page of its website. None of the information contained in or hyperlinked from our website is
incorporated into this Form 10-K. The SEC also maintains a website at
www.sec.gov
that contains reports, proxy statements and other
information regarding SEC registrants, including the Company.
21
Table of Contents
Executive Officers of the Registrant
The following table sets forth the executive officers of the Company, their positions, and their ages. Each officer is appointed by
the Board of Directors of the Company or the Bank and serves at their pleasure.
|
|
|
|
|
|
Name
|
|
Age (1)
|
|
Position with Company or Bank
|
|
|
|
|
|
|
Dominic Ng
|
|
|
51
|
|
Chairman and Chief Executive Officer of the Company and the Bank
|
Julia S. Gouw
|
|
|
50
|
|
Vice-Chairman, President and Chief Operating Officer of the Company and the Bank
|
Ming Lin Chen
|
|
|
49
|
|
Executive Vice President and Director of Loan Operations
|
Wellington Chen
|
|
|
50
|
|
Executive Vice President and Director of Corporate Banking Division of the Bank
|
Donald S. Chow
|
|
|
59
|
|
Executive Vice President
|
William H. Fong
|
|
|
62
|
|
Executive Vice President and Head of Northern California Commercial Lending Division of the Bank
|
Karen Fukumura
|
|
|
45
|
|
Executive Vice President and Head of Retail Banking & Technology Division of the Bank
|
Agatha Fung
|
|
|
50
|
|
Executive Vice President and Head of the International Banking Division of the Bank
|
Douglas P. Krause
|
|
|
53
|
|
Executive Vice President, Chief Risk Officer, General Counsel, and Secretary of the Company and the Bank
|
William J. Lewis
|
|
|
66
|
|
Executive Vice President and Chief Credit Officer of the Bank
|
Irene H. Oh
|
|
|
32
|
|
Executive Vice President and Chief Financial Officer of the Company and the Bank
|
Lawrence B. Schiff
|
|
|
57
|
|
Executive Vice President and Director of Credit Risk Management
|
Andy Yen
|
|
|
52
|
|
Executive Vice President and Director of the Business Banking Division of the Bank
|
-
(1)
-
As
of February 26, 2010
Dominic Ng
serves as Chairman and Chief Executive Officer of East West Bancorp, Inc. and East West Bank. Prior to taking the helm
of East West in 1992, Mr. Ng was President and Chief Executive Officer of Seyen Investment, Inc. and before that spent over a decade as a CPA with Deloitte & Touche LLP.
Mr. Ng serves on the Boards of Directors of the Federal Reserve Bank of San Francisco, Los Angeles Branch and Mattel, Inc.
22
Table of Contents
Julia S. Gouw
serves as Vice-Chairman, President and Chief Operating Officer of the Company and the Bank. Prior to that,
Ms. Gouw served as Executive Vice President and Chief Financial Officer of the Company and the Bank from 1994 until April 2008. In April 2008, she became the Vice Chairman of the Board of
Directors of the Company and the Bank and the Chief Risk Officer of the Bank. Ms. Gouw retired from her position as Chief Risk Officer of the Bank at the end of 2008 and rejoined the Bank in
December 2009. Prior to joining East West in 1989, Ms. Gouw spent over five years as a CPA with KPMG LLP. She was ranked among the top ten bank CFOs in the nation by
U.S. Banker
in January
2006 and was listed four times among the "25 Most Powerful Women in Banking" by U.S. Banker magazine. She was also selected on
the "Best CFOs in America of 2007 and 2006" as determined by
Institutional Investor
magazine.
Ming Lin Chen
serves as Executive Vice President and Director of Loan Operations. Ms. Chen joined East West Bank in 2004 as Senior
Vice President and Senior Relationship Manager and was promoted to her current position in 2009. Prior to joining East West Bank, Ms. Chen was Senior Vice President and Corporate Secretary of
General Bank and General Bancorp. She was responsible for several management positions including international banking, commercial and SBA lending, marketing and branch operations during her
19 years with General Bank. Ms. Chen is a board member of the Taiwanese American Chamber of Commerce, Greater Los Angeles.
Wellington Chen
serves as Executive Vice President and Director of the Corporate Banking Division. Prior to joining East West in 2003,
Mr. Chen was Senior Executive Vice President of Far East National Bank (Far East), heading up their Commercial Banking and Consumer Banking groups. He also served on the Board of Directors of
Far East. Mr. Chen's career with Far East started in 1986 and included a variety of branch and credit management positions. Prior to that, Mr. Chen spent three years with Security
Pacific National Bank where he began his banking career as an asset-based lending auditor. Mr. Chen serves on the Board of Directors of the Pasadena Tournament of Roses Foundation.
Donald S. Chow
serves as Executive Vice President. Mr. Chow has over 30 years of experience in commercial lending. Before
joining East West in 1993, Mr. Chow was First Vice President and Senior Credit Officer for Mitsui Manufacturers Bank from 1987 to 1993, and prior to that spent over 14 years with
Security Pacific National Bank where he held a number of management positions in the commercial lending area.
William H. Fong
serves as Executive Vice President and Head of the Bank's Northern California Commercial Lending division.
Mr. Fong joined East West in April 2006 from United Commercial Bank where he was the Head of Commercial Banking. Prior to this, Mr. Fong spent 23 years with the BNP Paribas/Bank
of the West group. His responsibilities as an Executive Vice President with Bank of the West included the oversight of the Pacific Rim Division's Corporate Banking department as well as the strategic
planning and development of the division's branch network in Portland, California, Nevada, and representative offices in Shanghai. Mr. Fong is a member of the California Economic Development
Commission Goods Movement International Trade Advisory Committee.
Karen Fukumura
serves as Executive Vice President and Head of the Bank's Retail Banking & Technology Division. Prior to joining
East West in April 2008, Ms. Fukumura was a Senior Vice President with Bank of America and held several transformational leadership roles within the Consumer Bank and Service &
Fulfillment Operations. Additionally, Ms. Fukumura has seven years of management and technology consulting experience in Asia, and previously held sales and manufacturing operations roles
within Mobil Oil and Xerox Corporation, respectively.
Agatha Fung
serves as Executive Vice President and Head of the International Banking division. In October 2005, Ms. Fung joined
East West from CITIC International Financial Holdings in Hong
23
Table of Contents
Kong
where she held positions as Head of Business Banking of CITIC Ka Wah Bank and Chief Executive Officer and Executive Director of HKCB Finance. Ms. Fung has over 20 years of banking
experience and has also held senior management positions at Standard Chartered Bank and Citibank in both Hong Kong and Tokyo. Ms. Fung is a member of the Advisory Board for Asia Society
Southern California.
Douglas P. Krause
serves as Executive Vice President, Chief Risk Officer, General Counsel and Corporate Secretary of East West
Bancorp, Inc. and East West Bank. Prior to joining East West in 1996, Mr. Krause was Corporate Senior Vice President and General Counsel of Metrobank from 1991 to 1996. Mr. Krause
started his career with the law firms Dewey & LeBoeuf and Jones, Day, Reavis and Pogue where he specialized in financial services. Mr. Krause also serves on the governing boards of the
Port of Los Angeles and of the Alameda Corridor Transportation Authority; he is the chairman of the Audit Committees of both Commissions.
Irene H. Oh
serves as Executive Vice President and Chief Financial Officer of East West Bancorp, Inc. and East West Bank.
Ms. Oh joined East West in 2004. Prior to being promoted to Chief Financial Officer, Ms. Oh served as Senior Vice President and Director of Corporate Finance. A Certified Public
Accountant, she began her financial career in 1999 with Deloitte & Touche in Los Angeles and spent two years with Goldman Sachs.
William J. Lewis
serves as Executive Vice President and Chief Credit Officer. Mr. Lewis joined the Bank in 2002 with over
35 years of banking experience, during which time he has held a number of senior management positions. He was Executive Vice President and Chief Credit Officer of PriVest Bank from 1998 to 2002
and held the same positions with Eldorado Bank from 1994 to 1998. Prior to that, Mr. Lewis was with Sanwa Bank for over 12 years where he administered a 35 branch region. Before that,
Mr. Lewis spent 13 years with First Interstate Bank where he held a variety of branch and credit management positions.
Lawrence B. Schiff
serves as Executive Vice President and Director of Credit Risk Management. Mr. Schiff joined East West Bank in
early 2010, after serving for several years as Director of National Credit Risk Management at KPMG and as a Group Vice President in SunTrust Bank's Credit Risk Management Division. Mr. Schiff
spent the majority of his career as a commercial bank examiner with the Federal Reserve System, both in Washington, DC and in New York. Earlier in his career, Mr. Schiff was a Senior Vice
President and Chief Financial Officer of a community bank in Honolulu. Mr. Schiff has lectured in Finance and International Finance at several universities, and he is presently a board member
of the City of Hope Hospital's LA Real Estate Council.
Andy Yen
serves as Executive Vice President and Director of Business Banking Division. Mr. Yen joined the Bank in September 2005
through its merger with United National Bank. Before being promoted to President of UNB in 2001, Mr. Yen was the Executive Vice President from 1998 to 2000 and Senior Vice President from 1992
to 1997, overseeing both the operations and lending functions of UNB. Mr. Yen also served as a member of the Board of Directors of UNB from 1992 to 2005. Mr. Yen has over 20 years
experience in commercial and real estate lending and also held positions at Tokai Bank of California and Trans National Bank before he joined UNB.
24
Table of Contents
ITEM 1A. RISK FACTORS
Risk Factors That May Affect Future Results
Together with the other information on the risks we face and our management of risk contained in this Annual Report or in our other
SEC filings, the following presents significant risks which may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition,
operating results, cash flows and prospects, and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face and
additional risks that we may currently view as not material may also impair our business operations and results.
Difficult economic and market conditions have adversely affected our industry.
Dramatic declines in the
housing market, with decreasing home prices
and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant writedowns of assets by many financial
institutions. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit,
resulting in additional writedowns. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each
other. This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in
general business activity. Financial institutions have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence
in the financial markets may adversely affect our business, financial condition, results of operations and stock price. A worsening of these conditions would likely exacerbate the adverse effects of
these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:
-
-
We potentially face increased regulation of our industry including heightened legal standards and regulatory requirements
or expectations imposed in connection with the EESA and the ARRA. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
-
-
The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex
judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic
conditions may adversely affect the accuracy of our estimates which may, in turn, impact the reliability of the process.
-
-
We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the
insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.
-
-
The Company's commercial and residential borrowers may be unable to make timely repayments of their loans, or the decrease
in value of real estate collateral securing the payment of such loans could result in significant credit losses, increased delinquencies, foreclosures and customer bankruptcies, any of which could
have a material adverse effect on the Company's operating results.
-
-
Further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating
investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions.
-
-
Increased competition among financial services companies due to the recent consolidation of certain competing financial
institutions and the conversion of certain investment banks to bank
25
Table of Contents
Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system. If current
levels of market disruption and
volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial
condition, results of operations, and cash flows.
The EESA, which established TARP, was signed into law on October 3, 2008. As part of TARP, the U.S.
Treasury established the TARP CPP to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the
purpose of stabilizing and providing liquidity to the U.S. financial markets. Then, on February 17, 2009, the ARRA was signed into law as a sweeping economic recovery package intended to
stimulate the economy and provide for broad infrastructure, energy, health, and education needs. There can be no assurance as to the actual impact that EESA or its programs, including the TARP CPP,
and ARRA or its programs, will have on the national economy or financial markets. The failure of these significant legislative measures to help stabilize the financial markets and a continuation or
worsening of current financial market conditions could materially and adversely affect the Company's business, financial condition, results of operations, access to credit or the trading price of its
common shares.
There
have been numerous actions undertaken in connection with or following the EESA and ARRA by the FRB, Congress, U.S. Treasury, the SEC and the federal bank regulatory agencies in
efforts to address the current liquidity and credit crisis in the financial industry that followed the sub-prime mortgage market meltdown which began in late 2007. These measures include
homeowner relief that encourages loan restructuring and modification; the temporary increase in FDIC deposit insurance from $100,000 to $250,000, the establishment of significant liquidity and credit
facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market
funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and
other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system. The EESA, ARRA and the other regulatory initiatives
described
above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, the Company's business, financial condition and results of
operations could be materially and adversely affected.
U.S. and international financial markets and economic conditions, particularly in California, could adversely affect our liquidity, results of operations
and financial
condition.
As described in "Management's Discussion and Analysis of Financial Condition and Results of Operations," the turmoil and downward economic trends the
past couple of years have been particularly acute in the financial sector. Although the Company and the Bank remain well capitalized and have not suffered any significant liquidity issues as a result
of these events, the cost and availability of funds may be adversely affected by illiquid credit markets and the demand for our products and services may decline as our borrowers and customers realize
the impact of an economic slowdown and recession. In view of the concentration of our operations and the collateral securing our loan portfolio primarily in Northern and Southern California, we may be
particularly susceptible to the adverse economic conditions in the state of California, where our business is concentrated. In addition, the severity and duration of these adverse conditions is
unknown and may exacerbate our exposure to credit risk and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us. In addition, the severity and
duration of these adverse conditions is unknown and may exacerbate the Company's exposure to credit risk and adversely affect the ability of borrowers to perform under the terms of their lending
26
Table of Contents
arrangements
with us. Accordingly, continued turbulence in the U.S. and international markets and economy may adversely affect our liquidity, financial condition, results of operations and
profitability.
We may be required to make additional provisions for loan losses and charge off additional loans in the future, which could adversely affect our results of
operations.
During the year ended December 31, 2009, we recorded a $528.7 million provision for loan losses and charged off $485.3 million,
gross of $9.9 million in recoveries. There has been a significant slowdown in the housing market in portions of Los Angeles, Riverside, San Bernardino and Orange counties where a majority of
our loan customers are based. This slowdown reflects declining prices and excess inventories of homes to be sold, which has contributed to financial strain on home builders and suppliers. As of
December 31, 2009, we had $4.43 billion and $3.90 billion in non-covered and covered, respectively, commercial real estate and construction loans. Continuing
deterioration in the real estate market generally and in the residential building segment in particular could result in additional loan charge offs and provisions for loan losses in the future, which
could have a material adverse effect on our financial condition, net income and capital.
Our allowance for loan and lease losses may not be adequate to cover actual losses.
A significant source
of risk arises from the possibility that we
could sustain losses because borrowers, guarantors, and related
parties may fail to perform in accordance with the terms of their loans and leases. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not
prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. We maintain an allowance for loan and lease losses to
provide for loan and lease defaults and non-performance. The allowance is also appropriately increased for new loan growth. While we believe that our allowance for loan and lease losses is
adequate to cover current losses, we cannot assure you that we will not increase the allowance for loan and lease losses further.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An
inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to
finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources
include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors
that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the turmoil
faced by banking organizations in the domestic and worldwide credit markets.
The actions and commercial soundness of other financial institutions could affect the Company's ability to engage in routine funding
transactions.
Financial service institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to
different industries and counterparties, and executes transactions with various counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and
hedge funds, and other institutional clients. Recent defaults by financial services institutions, and even rumors or questions about one or more financial services institutions or the financial
services industry in general, have led to market wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to
credit risk in the event of default of its counterparty or client. In addition, the Company's credit risk may increase when the collateral held by it cannot be realized upon or is liquidated at prices
not sufficient to recover the full amount of the loan or derivative exposure due to the Company. Any such losses could materially and adversely affect the Company's results of operations.
27
Table of Contents
Our loan portfolio is predominantly secured by real estate and thus we have a higher degree of risk from a
downturn in our real estate markets.
A downturn in our real estate markets could hurt our business because many of our loans are secured by real estate. Real
estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential
purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes and national disasters particular to California. Substantially all of
our real estate collateral is located in California. If real estate values continue to further decline, the value of real estate collateral securing our loans could be significantly reduced. Our
ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. Furthermore, a
substantial portion of our loan portfolio is comprised of commercial real estate. Commercial real estate and multi-family loans typically involve large balances to single borrowers or groups of
related borrowers. Since payments on these loans are often dependent on the successful operation or management of the properties, as well as the business and financial condition of the borrower,
repayment of such loans may be subject to adverse conditions in the real estate market, adverse economic conditions or changes in applicable government regulations. Borrowers' inability to repay such
loans may have an adverse affect on our business.
We may experience additional goodwill impairment.
In light of the overall instability of the economy,
the continued volatility in the financial
markets, the downward pressure on bank stock prices, and expectations of financial performance for the banking industry, including the Company, our estimates of goodwill fair value may be subject to
change or adjustment and we may determine that additional impairment charges are necessary. Estimates of fair value are determined based on a complex model using cash flows and company comparisons. If
management's estimates of future cash flows are inaccurate, the fair value determined could be inaccurate and impairment may not be recognized in a timely manner. No assurance can be given that
goodwill will not be written down further in future periods.
Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
A substantial
portion of our income is derived from the differential or "spread" between the interest earned on loans, investment securities and other interest-earning assets, and the interest paid on deposits,
borrowings and other interest-bearing liabilities. Because of the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes
in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Significant fluctuations in market interest
rates could materially and adversely affect not only our net interest spread, but also our asset quality and loan origination volume.
We are subject to extensive government regulation that could limit or restrict our activities, which, in turn, may hamper our ability to increase our
assets and
earnings.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules, regulations and supervisory
guidance and policies applicable to us are subject to regular modification and change. The Company is now also subject to supervision, regulation and investigation by the U.S. Treasury and the Office
of the Special Inspector General for the TARP under the EESA by virtue of its participation in the TARP CPP. From time to time, various laws, rules and regulations are proposed, which, if adopted,
could impact our operations by making compliance much more difficult or expensive, restricting our ability to originate or sell loans or further restricting the amount of interest or other charges or
fees earned on loans or other products.
28
Table of Contents
The short term and long term impact of the new Basel II capital standards and the forthcoming new capital rules to be proposed for non-Basel II U.S. banks
is
uncertain.
As a result of the deterioration during the past few years in the global credit markets and the potential impact of increased liquidity risk and
interest rate risk, it is unclear what the short term impact of the implementation of Basel II may be or what impact a pending alternative standardized approach to Basel II option for
non-Basel II U.S. banks may have on the cost and availability of different types of credit and the potential compliance costs of implementing the new capital standards.
Failure to manage our growth may adversely affect our performance.
Our financial performance and
profitability depend on our ability to manage our
recent and possible future growth. Future acquisitions and our continued growth may present operating, integration and other issues that could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
We face strong competition from financial services companies and other companies that offer banking services.
We conduct most of our operations in
California. The banking and financial services businesses in California are highly competitive and increased competition in our primary market area may adversely impact the level of our loans and
deposits. Ultimately, we may not be able to compete successfully against current and future competitors. These competitors include national banks, regional banks and other community banks. We also
face competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and
other financial intermediaries. In particular, our competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous
locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in
quality of products and services provided, including new technology-driven products and services. If we are unable to attract and retain banking customers, we may be unable to continue our loan growth
and level of deposits.
If we cannot attract deposits, our growth may be inhibited.
Our ability to increase our deposit base
depends in large part on our ability to attract
additional deposits at favorable rates. We seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets.
We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an
interruption in those
systems.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology,
including our internet banking services and data processing systems. Any failure or interruption of these services or systems or breaches in security of these systems could result in failures or
interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems. The occurrence of any failures or interruptions may require us to identify
alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing
systems without the need to expend substantial resources, if at all.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Competition
for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking
industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our
ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued
29
Table of Contents
contributions
of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President, and certain other
employees.
Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to the Company's reputation can
come from many sources, including unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent
activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative
publicity regarding our business, employees, or
customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.
State laws may restrict our ability to pay dividends.
Our ability for the Bank to pay dividends to the
Company is limited by California law and the
Company's ability to pay dividends on its outstanding stock is limited by Delaware law. See "Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources."
The terms of our outstanding preferred stock limit our ability to pay dividends on and repurchase our common stock, and there can be no assurance of any
future dividends on our common
stock.
The Stock Purchase Agreement between the Company and the U.S. Treasury pursuant to which we sold $306.5 million of our Series B Preferred
Stock (the "Series B Preferred Stock") and issued a warrant to purchase up to 3,035,109 shares of our common stock (the "TARP Warrant") provides that prior to the earlier of
(i) December 5, 2011 and (ii) the date on which all of the shares of the Series B Preferred Stock have been redeemed by us or transferred by the U.S. Treasury to third
parties, we may not, without the consent of the U.S. Treasury, (a) increase the cash dividend on our common stock above $0.10 per share or (b) subject to limited exceptions, redeem,
repurchase or otherwise acquire shares of our common stock or preferred stock other than the Series A Preferred Stock and Series B Preferred Stock. The terms of our outstanding
Series A Preferred Stock have similar limitations on our ability to redeem or repurchase our common stock. In addition, we are unable to pay any dividends on our common stock unless we are
current in our dividend payments on the TARP Preferred Stock and Series A Preferred Stock. These restrictions, together with the potentially dilutive impact of the TARP Warrant and common stock
issuable upon conversion of the Series A Preferred Stock, described below, could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to
receive dividends only when, as and if declared by our Board of Directors. Although we have historically paid cash dividends on our common stock, we are not required to do so. Commencing with second
quarter 2009 dividends, our Board of Directors reduced our common stock dividend to $0.01 per share from the first quarter 2009 dividends of $0.02 per share and relative to our previous quarterly
dividend rate of $0.10 per share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources" herein. The terms of
the Stock Purchase Agreement allow the U.S. Treasury to impose additional restrictions, including those on dividends and including unilateral amendments required to comply with changes in applicable
federal law. During the fourth quarter of 2009, the Company received a 50% reduction in the TARP Warrant. As of December 31, 2009, the new share count of the TARP Warrant is 1,517,555. This
adjustment to the TARP Warrant was due to the fact that within one year of issuance, the Company raised new capital in excess of the Series B preferred stock.
Our outstanding preferred stock impacts net income available to our common stockholders and earnings per common share, and the TARP Warrant as well as other
potential issuances of
equity securities may be dilutive to holders of our common stock.
The dividends declared and the accretion on discount on our outstanding preferred stock will
reduce the net income available to common stockholders and
30
Table of Contents
our
earnings per common share. Our outstanding preferred stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of the Company. Additionally, the
ownership interest of the existing holders of our common stock will be diluted to the extent the TARP Warrant is exercised. The shares of common stock underlying the TARP Warrant represent
approximately 1% of the shares of our common stock outstanding as of January 31, 2010 (including the shares issuable upon exercise of the TARP Warrant in total shares outstanding). Although the
U.S. Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the TARP Warrant, a transferee of any portion of the TARP Warrant or of any shares of common stock
acquired upon exercise of the TARP Warrant is not bound by this restriction. In addition, to the extent our Series A Preferred Stock and Series C Preferred Stock are converted, or
options to purchase common stock under our employee and director stock option plans are exercised, holders of our common stock will incur additional dilution. Further, if we sell additional equity or
convertible debt securities, such sales could result in increased dilution to our shareholders. If our stockholders do not approve the conversion of the Series C Preferred Stock at the special
meeting of stockholders to be held on March 25, 2010, the Series C Preferred Stock will remain outstanding and we will be required to pay a cash dividend of approximately of
$17.8 million and dividends in kind of approximately $8.1 million on May 1, 2010 and a cash dividend of approximately $18.9 million on November 1, 2010 and dividends
in kind of approximately $8.6 million (if stockholder approval is not subsequently obtained by those dates). Payment of such dividends would reduce the net income available to our common
stockholders and would reduce our earning per common share.
Because of our participation in the Troubled Asset Relief Program, we are subject to several restrictions including restrictions on compensation paid to
our
executives.
Pursuant to the terms of the Stock Purchase Agreement, we adopted certain standards for executive compensation and corporate governance for the period
during which the U.S. Treasury holds the equity issued pursuant to the Purchase Agreement, including the common stock which may be issued pursuant to the TARP Warrant. These standards generally apply
to our Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers. The standards include (1) ensuring that incentive compensation for
senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a
senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior
executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. In particular, the change to the deductibility limit on
executive compensation will likely increase the overall cost of our compensation programs in future periods. Since the TARP Warrant has a ten year term, we could potentially be subject to the
executive compensation and corporate governance restrictions for a ten year time period.
The
adoption of the ARRA on February 17, 2009 imposed certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including the
Company, until the institution has repaid the U.S. Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the U.S. Treasury's
consultation with the recipient's appropriate regulatory agency. The executive compensation standards are more stringent than those currently in effect under the TARP CPP or those previously proposed
by the U.S. Treasury. The new standards include (but are not limited to) (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which
do not fully vest during the TARP period up to one-third of an employee's total annual compensation, (ii) prohibitions on golden parachute payments for departure from a company,
(iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria,
(iv) prohibitions on compensation plans that encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other
31
Table of Contents
compensation
previously provided by TARP recipients if found by the Treasury to be inconsistent with the purposes of TARP or otherwise contrary to public interest, (vi) required establishment
of a company-wide policy regarding "excessive or luxury expenditures," and (vii) inclusion in a participant's proxy statements for annual shareholder meetings of a nonbinding "Say
on Pay" shareholder vote on the compensation of executives.
The price of our common stock may be volatile or may decline.
The trading price of our common stock may
fluctuate widely as a result of a number of
factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many
companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
-
-
actual or anticipated quarterly fluctuations in our operating results and financial condition;
-
-
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
-
-
failure to meet analysts' revenue or earnings estimates;
-
-
speculation in the press or investment community;
-
-
strategic actions by us or our competitors, such as acquisitions or restructurings;
-
-
actions by institutional shareholders;
-
-
fluctuations in the stock price and operating results of our competitors;
-
-
general market conditions and, in particular, developments related to market conditions for the financial services
industry;
-
-
proposed or adopted regulatory changes or developments;
-
-
anticipated or pending investigations, proceedings or litigation that involve or affect us; or
-
-
domestic and international economic factors unrelated to our performance.
The
stock market and, in particular, the market for financial institution stocks, has experienced significant volatility during the year. As a result, the market price of our common
stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause
significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time,
including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified above in
"Special Cautionary Note Regarding Forward-Looking Statements." Market volatility during the past couple of years is unprecedented. The capital and credit markets have been experiencing volatility and
disruption for more than a year. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying
financial strength. A significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.
Anti-takeover provisions could negatively impact our stockholders.
Provisions of Delaware law and of our
certificate of incorporation,
as amended, and bylaws could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. For example,
our certificate of incorporation requires the approval of the holders of at least two-thirds of our outstanding shares of voting stock to approve certain business combinations. We are
subject to Section 203 of the Delaware General Corporation Law, which would make it more difficult for another party to acquire us without the approval of our board of directors. Additionally,
our certificate of incorporation, as amended, authorizes our board of directors to issue preferred stock and preferred stock could be issued as a defensive measure in response to a takeover proposal.
These and other provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our stockholders.
32
Table of Contents
Natural disasters and geopolitical events beyond our control could adversely affect us.
Natural disasters
such as earthquakes, wildfires, extreme
weather conditions, hurricanes, floods, and other acts of nature and geopolitical events involving terrorism or military conflict could adversely affect our business operations and those of our
customers and cause substantial damage and loss to real and personal property. These natural disasters and geopolitical events could impair our borrowers' ability to service their loans, decrease the
level and duration of deposits by customers, erode the value of loan collateral, and result in an increase in the amount of our nonperforming loans and a higher level of nonperforming assets
(including real estate owned), net chargeoffs, and provision for loan losses, which could adversely affect our earnings.
Adverse conditions in Asia could adversely affect our business.
A substantial number of our customers
have economic and cultural ties to Asia and,
as a result, we are likely to feel the effects of adverse economic
and political conditions in Asia. Additionally, we also have four representative offices in China and one in Taipei, Taiwan, and two full-service branches in Hong Kong and China. U.S. and
global economic policies, military tensions, and unfavorable global economic conditions may adversely impact the Asian economies. Pandemics and other public health crises or concerns over the
possibility of such crises could create economic and financial disruptions in the region. If economic conditions in Asia deteriorate, we could, among other things, be exposed to economic and transfer
risk, and could experience an outflow of deposits by those of our customers with connections to Asia. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet
its obligations or to provide liquidity. This may adversely impact the recoverability of investments with or loans made to such entities. Adverse economic conditions in Asia, and in China in
particular, may also negatively impact asset values and the profitability and liquidity of our customers who operate in this region.
We have engaged in and may continue to engage in further expansion through acquisitions, which could negatively affect our business and
earnings.
We
have engaged in and may continue to engage in expansion through acquisitions, such as the UCB Acquisition that was completed on November 6, 2009. There are risks associated with such expansion.
These risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired
businesses, facing resistance from customers or employees, and being unable to profitably deploy assets acquired in the transaction. Additional country- and region-specific risks are associated with
transactions outside the United States, including in China. To the extent we issue capital stock in connection with additional transactions, these transactions and related stock issuances may have a
dilutive effect on earnings per share and share ownership.
Our
earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of the acquired company. We may be
unable to integrate operations successfully or to achieve expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings.
We may experience difficulties in integrating the operations of United Commercial Bank, which may negatively impact our business and
earnings.
The
acquisition of United Commercial Bank involves the integration of East West Bank and United Commercial Bank, which have previously operated independently. The successful integration of operations of
East West Bank and United Commercial Bank depends primarily upon our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. No assurance can be given that
we will be able to integrate the banking operations without encountering difficulties including, without limitation, the loss of key employees and customers, the disruption of on-going
business or possible inconsistencies in standards, controls, procedures and policies. Estimated cost savings and revenue enhancements are projected to come from various areas that our management has
identified through the integration planning process. The elimination and consolidation of duplicate tasks at these banks are projected to result in annual
33
Table of Contents
cost
savings. If we experience difficulty with the integration, we may not achieve all the economic benefits we expect to result from the acquisition, and this may hurt our business and earnings. In
addition, we may experience greater than expected costs or difficulties relating to the integration of the business of United Commercial Bank and/or may not realize expected cost savings from the
acquisition within the anticipated time frames.
We may have difficulty integrating and retaining the deposits of United Commercial Bank.
We may
experience some attrition of former customers of
United Commercial Bank following the FDIC receivership. Following the November 6, 2009 acquisition, total deposits decreased from $6.52 billion (excluding fair value adjustments) as of
the date of the November 6, 2009 acquisition to $6.10 billion at December 31, 2009. Withdrawal of a material amount of such deposits could adversely impact the our liquidity,
profitability, business prospects, results of operations and cash flows. Any difficulties we may experience in integrating the operations of East West Bank and United Commercial Bank may also affect
our retention of deposit accounts and former United Commercial Bank Customers.
We may experience difficulty in managing the acquired United Commercial Bank loan portfolio within the limits of the loss protection provided by the
FDIC.
In connection with the United Commercial Bank acquisition, East West Bank entered into a shared-loss agreement with the FDIC that covered, at
fair value, on the November 6, 2009 acquisition date, approximately $5.66 billion and $38.0 million of United Commercial Bank's loans and other real estate owned, respectively.
East West Bank will share in the losses, which begins with the first dollar of loss occurred, of the loan pools (including single family residential mortgage loans, commercial loans, foreclosed loan
collateral and other real estate owned) covered ("covered loans") under the shared-loss agreement. Pursuant to the terms of the shared-loss agreement, the FDIC is obligated to
reimburse East West Bank 80% of eligible losses of up to $2.05 billion with respect to covered loans. The FDIC will reimburse East West Bank for 95% of eligible losses in excess of
$2.05 billion with respect to covered loans. East West Bank has a corresponding obligation to reimburse the FDIC for 80% or 95%, as applicable, of eligible recoveries with respect to covered
loans.
The
shared-loss agreement for commercial and single family residential mortgage loans is in effect for 5 years and 10 years, respectively, from the
November 6, 2009 acquisition date and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. On January 14, 2020,
East West Bank is required to pay to the FDIC 50% of the excess, if any of (i) $410 million over (ii) the sum of (A) 25% of the asset discount plus (B) 25% of the
Cumulative Shared-Loss Payments plus (C) the Cumulative Servicing Amount if net losses on covered loans subject to the stated threshold is not reached. Although we have substantial
expertise in asset resolution, we cannot guarantee that we will be able to adequately manage the loan portfolio within the limits of the loss protection provided by the FDIC.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company currently neither owns nor leases any real or personal property. The Company uses the premises, equipment, and furniture
of the Bank. The Agency also currently conducts its operations in one of the administrative offices of the Bank. The Company is currently reimbursing the Bank for the Agency's use of this facility.
34
Table of Contents
The
Bank owns the buildings and land at 24 of its retail branch offices. Nine of these retail branch locations are either attached or adjacent to offices that are being used by the Bank
to house various administrative departments. All other branch and administrative locations are leased by the Bank, with lease expiration dates ranging from 2009 to 2020, exclusive of renewal options.
Subsequent
to year end, we assumed approximately forty-eight leases and agreed to purchase approximately $72.6 million in fair value of real property from the FDIC as part of the
FDIC-assisted transaction of United Commercial Bank.
The
Company believes that its existing facilities are adequate for its present purposes. The Company believes that, if necessary, it could secure alternative facilities on similar terms
without adversely affecting its operations.
At
December 31, 2009, the Bank's consolidated investment in premises and equipment, net of accumulated depreciation and amortization, totaled $59.1 million. Total
occupancy expense, inclusive of rental payments and furniture and equipment expense, for the year ended December 31, 2009 was $30.2 million. Total annual rental expense (exclusive of
operating charges and real property taxes) was approximately $15.0 million during 2009.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2009.
35
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
East West Bancorp, Inc. commenced trading on the NASDAQ Global Select Market on February 8, 1999 under the symbol
"EWBC." The following table sets forth the range of sales prices for the Company's common stock for the years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First quarter
|
|
$
|
16.14
|
|
$
|
3.24
|
|
$
|
25.75
|
|
$
|
16.96
|
|
Second quarter
|
|
|
10.45
|
|
|
4.35
|
|
|
18.74
|
|
|
6.94
|
|
Third quarter
|
|
|
11.37
|
|
|
5.75
|
|
|
17.65
|
|
|
6.77
|
|
Fourth quarter
|
|
|
17.39
|
|
|
8.05
|
|
|
18.40
|
|
|
9.85
|
|
The
foregoing reflects information available to the Company and does not necessarily include all trades in the Company's stock during the periods indicated. The closing price of our
common stock on January 31, 2010 was $16.43 per share, as reported by the NASDAQ Global Select Market.
Issuance of Preferred Stock
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. In conjunction with this issuance, the Company received $194.1 million of additional
Tier 1 qualifying capital, net of stock issuance costs. The shares are quoted on the Over-the-Counter Bulletin board under the symbol "EWBCP.PK" on an exchange. The
holders of the Series A preferred shares will have the right at any time to convert each share of Series A into 64.9942 shares of the Company's common stock, plus cash in lieu of
fractional shares. This represented 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 Company's common stock
on April 23, 2008 of $12.56 per share. On or after May 1, 2013, the Company has the right to cause the Series A preferred shares to be converted into shares of the Company's
common stock, subject to conversion provisions. 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.
During
July 2009, the Company exchanged 9,968,760 shares of the Company's common stock for 110,764 shares of the Company's 8.00% Non-Cumulative Perpetual Convertible
Preferred Stock, Series A.
On
December 5, 2008, the Company issued 306,546 shares of Fixed Rate Cumulative Perpetual Senior Preferred Stock, Series B ("Series B preferred shares"), with a
liquidation preference of $1,000 per share in conjunction with its participation in the U.S. Treasury's TARP CPP. The Company received $306.5 million of additional Tier 1 qualifying
capital as a result of this issuance. The shares are not listed on an exchange. The Series B preferred shares are senior to common stock and pari passu with existing preferred shares (including
shares of our Series A preferred stock discussed above) other than preferred shares which by their terms rank junior to any existing preferred shares. The Series B preferred shares will
pay cumulative dividends at a rate of 5% per annum until the fifth anniversary of
36
Table of Contents
the
investment date and thereafter at a rate of 9% per annum. Dividends will be payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year.
For as long as any Series B preferred shares are outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Series B
preferred shares, or common shares (other than in the case of pari passu preferred shares, in which case, dividends are paid on a pro rata basis with the Series B preferred shares), nor may the
Company repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Series B preferred shares or common shares, unless all accrued and unpaid dividends for
all past dividend periods on the Series B preferred shares are fully paid. Series B preferred shares are transferable by the U.S. Treasury at any time. Subject to approval from the FRB,
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 in excess of $76,636,500, and
(ii) the aggregate redemption price does not exceed the aggregate net proceeds from such Qualified Equity Offerings. Except for certain specified transactions, Series B preferred shares
shall be non-voting in nature.
In
connection with the Series B offering, the Company issued warrants to purchase 3,035,109 shares of common stock with an initial price of $15.15 per share of common stock for
which the TARP Warrant may be exercised. The TARP Warrant may be exercised at any time on or before December 5, 2018. During the fourth quarter of 2009, the Company received a 50% reduction in
the TARP Warrant we issued to the U.S. treasury in conjunction with the Series B preferred shares issued. As of December 31, 2009, the new share count of the warrant is 1,517,555. This
adjustment to the TARP Warrant was due to the fact that within one year of issuance, the Company raised new capital in excess of the TARP capital issued in December 2008.
Private Sales of Common Stock
In July 2009, in private placement transactions, two customers of the Bank purchased 5 million shares of our common stock at a
price of $5.50 per share. We received net proceeds of approximately $26.0 million, net of stock issuance costs, in conjunction with this common stock offering. We have registered these shares
for resale to the public.
Public Offering of Common Stock
In July 2009, we completed a public offering of 11 million shares of our common stock priced at $6.35. The underwriter also
exercised its option to purchase an additional 1.65 million shares of our common stock. We received net proceeds of approximately $76.7 million, net of stock issuance costs, in
conjunction with this common stock offering.
Private Placement
On November 6, 2009, the Company raised $500.0 million in a private placement of 18,247,012 shares of common stock,
$0.001 par value, and 335,047 shares of newly authorized Mandatory Convertible Cumulative Non-Voting Perpetual Preferred Stock, Series C, ("Series C preferred shares") to
certain qualified institutional buyers and accredited investors (collectively, the "Investors") with a liquidation preference of $1,000 per share. The common stock sold represented 19.9% of the
Company's common stock outstanding. In connection with the Series C preferred shares offering, the shares are mandatorily convertible upon shareholder approval and subject to any applicable
regulatory approvals. For as long as any Series C preferred shares are outstanding, the cumulative dividends are payable semi-annually in arrears on May 1 and
November 1 of each year in cash and in kind in
37
Table of Contents
additional
shares of Series C preferred shares if, when and as declared by the Board of Directors or a committee thereof. The Series C preferred shares will pay an annual rate as high as
13% plus dividends payable at an annual rate equal to 5%. The Series C preferred shares rank in parity with respect to dividend rights and rights on liquidation, winding up and dissolution with
the Company's outstanding series of preferred stock and senior to the Company's common stock. The Series C preferred shares have no voting rights, except as required by law and with respect to
certain limited matters, non-redeemable by the holders, but redeemable by the Company following the fifth anniversary of issuance, no preemptive rights, a 9.9% ownership limitation and has
the customary anti-dilution adjustment provisions.
Because
the Company's common stock is listed on the NASDAQ Global Select Market, the Company is subject to the NASDAQ Rules. NASDAQ Rule 5635(d) requires stockholder approval
prior to the issuance of securities in connection with a transaction, other than a public offering, involving the sale, issuance or potential issuance by a company of common stock, or securities
convertible into or exercisable for common stock, equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book value or
market value of the stock. The 37,062,721 shares of common stock issuable upon conversion of the Series C preferred shares together with the common stock issued at the closing of the private
placement will exceed 19.99% of the number of shares of our common stock and voting power outstanding prior to the private placement. The $9.04 per share conversion price for the Series C
preferred shares is less than the book value per share of our common stock. Accordingly, the issuance of the common stock upon conversion of the Series C preferred shares is subject to
stockholder approval.
Shares
of Series C preferred are subject to rights preferences and privileges set forth in the Company's Certificate of Designations which has been filed with the Secretary of
State of the State of Delaware.
Common Stock Holders
As of January 31, 2010, 110,498,101 shares of the Company's common stock were held by 1,861 shareholders of record.
Common Dividends
We declared and paid cash dividends of $0.10 per share during each of the four quarters of 2008 and $0.02 per share for the first
quarter of 2009 and $0.01 per share for the second, third and fourth quarters of 2009. Refer to "Item 1. BUSINESS Supervision and Regulation Dividends
and Other Transfers of Funds" for information regarding dividend payment restrictions.
38
Table of Contents
Stock Performance Graph
The following graph shows a comparison of stockholder return on the Company's common stock based on the market price of the common
stock assuming the reinvestment of dividends, with the cumulative total returns for the companies in the Standard & Poor's 500 Index and the SNL Western Bank Index for the 5-year
period beginning on December 31, 2004 through December 31, 2009. This graph is historical only and may not be indicative of possible future performance of the Company's common stock. The
information set forth under the heading "Stock Performance Graph" shall not be deemed "soliciting material" or to be "filed" with the Commission except to the extent we specifically request that such
information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as
amended.
Total Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
Index
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
|
East West Bancorp, Inc.
|
|
|
100.00
|
|
|
87.45
|
|
|
85.34
|
|
|
59.02
|
|
|
39.88
|
|
|
39.66
|
|
SNL Western Bank
|
|
|
100.00
|
|
|
104.11
|
|
|
117.48
|
|
|
98.12
|
|
|
95.54
|
|
|
87.73
|
|
SNL Bank and Thrift
|
|
|
100.00
|
|
|
101.57
|
|
|
118.68
|
|
|
90.50
|
|
|
52.05
|
|
|
51.35
|
|
S&P 500
|
|
|
100.00
|
|
|
104.91
|
|
|
121.48
|
|
|
128.16
|
|
|
80.74
|
|
|
102.11
|
|
Source:
SNL Financial LC, Charlottesville, VA, (434) 977-1600, www.snl.com
39
Table of Contents
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On January 23, 2007, the Company's Board of Directors authorized a new stock repurchase program to buy back up to
$30.0 million of the Company's common stock. On March 20, 2007, the Company's Board of Directors authorized an increase in the stock repurchase program to buy back up to an additional
$50.0 million of the Company's common stock in 2007. This new authorization is in addition to the $30.0 million stock repurchase authorized on January 23, 2007. The Company
completed the repurchase of 1,392,176 shares at a weighted average price of $38.69 during 2007. There were no repurchases of equity securities during the years ended December 31, 2009 and 2008.
The Company had $26.2 million in authorized share repurchases remaining as of December 31, 2009. Under the terms of the U.S. Treasury's Capital Purchase Program, the Company is
prohibited from making certain repurchases of equity securities see Note 24 under Series B Preferred Stock Offering.
Repurchases
of the Company's securities during the fourth quarter of 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month Ended
|
|
Total
Number
of Shares
Purchased (1)
|
|
Weighted
Average
Price Paid
per Share
|
|
Total Number
of Shares
Purchased as
Part of Publicly
Announced Programs
|
|
Approximate Dollar
Value in Millions of Shares
that May Yet Be
Purchased Under
the Programs (2)
|
|
October 31, 2009
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
26.2
|
|
November 30, 2009
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
26.2
|
|
December 31, 2009
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Excludes
113,982 in repurchased shares totaling $2.3 million due to granting of unrestricted stock awards as well as forfeitures and vesting of
restricted stock awards pursuant to the Company's 1998 Stock Incentive Plan.
-
(2)
-
During
the first quarter of 2007, the Company's 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 have been purchased under this program.
40
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the Company's consolidated financial statements and the
accompanying notes presented elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
722,818
|
|
$
|
664,858
|
|
$
|
773,607
|
|
$
|
660,050
|
|
$
|
411,399
|
|
Interest expense
|
|
|
239,499
|
|
|
309,694
|
|
|
365,613
|
|
|
292,568
|
|
|
131,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
483,319
|
|
|
355,164
|
|
|
407,994
|
|
|
367,482
|
|
|
280,115
|
|
Provision for loan losses
|
|
|
528,666
|
|
|
226,000
|
|
|
12,000
|
|
|
6,166
|
|
|
15,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
(45,347
|
)
|
|
129,164
|
|
|
395,994
|
|
|
361,316
|
|
|
264,245
|
|
Noninterest income (loss) (1)
|
|
|
396,553
|
|
|
(25,062
|
)
|
|
49,520
|
|
|
33,920
|
|
|
29,649
|
|
Noninterest expense
|
|
|
246,484
|
|
|
201,270
|
|
|
183,255
|
|
|
161,455
|
|
|
123,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
104,722
|
|
|
(97,168
|
)
|
|
262,259
|
|
|
233,781
|
|
|
170,361
|
|
Provision (benefit) for income taxes
|
|
|
22,714
|
|
|
(47,485
|
)
|
|
101,092
|
|
|
90,412
|
|
|
61,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before extraordinary item
|
|
|
82,008
|
|
|
(49,683
|
)
|
|
161,167
|
|
|
143,369
|
|
|
108,380
|
|
Extraordinary item, net of tax
|
|
|
(5,366
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
76,642
|
|
$
|
(49,683
|
)
|
$
|
161,167
|
|
$
|
143,369
|
|
$
|
108,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED STOCK DIVIDENDS AND AMORTIZATION OF PREFERRED STOCK DISCOUNT
|
|
|
49,115
|
|
|
9,474
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
27,527
|
|
$
|
(59,157
|
)
|
$
|
161,167
|
|
$
|
143,369
|
|
$
|
108,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.35
|
|
$
|
(0.94
|
)
|
$
|
2.63
|
|
$
|
2.40
|
|
$
|
2.03
|
|
Diluted earnings per share
|
|
$
|
0.33
|
|
$
|
(0.94
|
)
|
$
|
2.60
|
|
$
|
2.35
|
|
$
|
1.97
|
|
Common dividends per share
|
|
$
|
0.05
|
|
$
|
0.40
|
|
$
|
0.40
|
|
$
|
0.20
|
|
$
|
0.20
|
|
Average number of shares outstanding, basic
|
|
|
78,770
|
|
|
62,673
|
|
|
61,180
|
|
|
59,605
|
|
|
53,454
|
|
Average number of shares outstanding, diluted
|
|
|
84,523
|
|
|
62,673
|
|
|
62,093
|
|
|
60,909
|
|
|
55,034
|
|
At Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,559,212
|
|
$
|
12,422,816
|
|
$
|
11,852,212
|
|
$
|
10,823,711
|
|
$
|
8,278,256
|
|
Loans receivable
|
|
|
8,218,671
|
|
|
8,069,377
|
|
|
8,750,921
|
|
|
8,182,172
|
|
|
6,724,320
|
|
Covered loans
|
|
|
5,598,155
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Investment securities
|
|
|
2,564,081
|
|
|
2,162,511
|
|
|
1,887,136
|
|
|
1,647,080
|
|
|
869,837
|
|
Deposits
|
|
|
14,987,613
|
|
|
8,141,959
|
|
|
7,278,914
|
|
|
7,235,042
|
|
|
6,258,587
|
|
Federal Home Loan Bank advances
|
|
|
1,805,387
|
|
|
1,353,307
|
|
|
1,808,419
|
|
|
1,136,866
|
|
|
617,682
|
|
Stockholders' equity
|
|
|
2,284,659
|
|
|
1,550,766
|
|
|
1,171,823
|
|
|
1,019,390
|
|
|
734,138
|
|
Common shares outstanding
|
|
|
109,963
|
|
|
63,746
|
|
|
63,137
|
|
|
61,431
|
|
|
56,519
|
|
Book value per common share
|
|
$
|
14.37
|
|
$
|
16.92
|
|
$
|
18.56
|
|
$
|
16.59
|
|
$
|
12.99
|
|
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.55
|
%
|
|
(0.42
|
)%
|
|
1.45
|
%
|
|
1.46
|
%
|
|
1.55
|
%
|
Return on average common equity
|
|
|
2.37
|
|
|
(5.41
|
)
|
|
14.89
|
|
|
15.78
|
|
|
18.27
|
|
Return on average total equity
|
|
|
4.69
|
|
|
(3.99
|
)
|
|
14.89
|
|
|
15.78
|
|
|
18.27
|
|
Common dividend payout ratio
|
|
|
13.03
|
|
|
N/A
|
|
|
15.27
|
|
|
8.35
|
|
|
9.88
|
|
Average stockholders' equity to average assets
|
|
|
11.81
|
|
|
10.55
|
|
|
9.77
|
|
|
9.26
|
|
|
8.48
|
|
Net interest margin
|
|
|
3.75
|
|
|
3.19
|
|
|
3.94
|
|
|
3.98
|
|
|
4.22
|
|
Efficiency Ratio (2)
|
|
|
48.89
|
|
|
45.94
|
|
|
37.44
|
|
|
37.07
|
|
|
36.53
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net chargeoffs (recoveries) to average non-covered loans
|
|
|
5.69
|
%
|
|
1.64
|
%
|
|
0.08
|
%
|
|
(0.01
|
)%
|
|
0.08
|
%
|
Nonperforming assets to total assets
|
|
|
0.91
|
|
|
2.12
|
|
|
0.57
|
|
|
0.18
|
|
|
0.36
|
|
Allowance for loan losses to total gross non-covered loans
|
|
|
2.81
|
|
|
2.16
|
|
|
1.00
|
|
|
0.95
|
|
|
1.01
|
|
-
(1)
-
2009
and 2008 include other-than-temporary ("OTTI") charges relating to investment securities of $107.7 million and
$73.2 million, respectively and pre-tax gain of $471.0 million during 2009.
-
(2)
-
Represents
noninterest expense, excluding the amortization of intangibles, amortization and impairment writedowns of premiums on deposits acquired,
impairment writedown on goodwill, and investments in affordable housing partnerships, divided by the aggregate of net interest income before provision for loan losses and noninterest income, excluding
impairment writedowns on investment securities and other equity investment.
41
Table of Contents
ITEM 7. MANAGEMENT'S 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 consolidated financial statements and the accompanying notes presented elsewhere in this report.
On
November 6, 2009 the Bank acquired United Commercial Bank from the FDIC in an FDIC-assisted transaction. This acquisition nearly doubled our asset size and
contributed $23.3 million to our total pre-tax income for the period from November 6, 2009 to December 31, 2009. A pre-tax gain of $471.0 million
was recorded as a result of the acquisition.
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. All of our significant accounting policies are described in Note 1 of our consolidated financial statements
presented elsewhere in this report and are essential to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 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.
The Company adopted Financial Accounting Standards Board Accounting Standards Codification ("ASC") 820 (previously SFAS
No. 157,
Fair Value Measurements
), on January 1, 2008. This standard provides a definition of fair value, establishes a framework for
measuring fair value, and requires expanded disclosures about fair value measurements. Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. Based on the observability of the inputs used in the valuation techniques, we classify our financial assets and liabilities measured and disclosed at fair
value in accordance within the three-level hierarchy (e.g., Level 1, Level 2 and Level 3). Fair value determination requires that we make a number of significant judgments.
In determining the fair value of financial instruments, we use market prices of the same or similar instruments whenever such prices are available. We do not use prices involving distressed sellers in
determining fair value. If observable market prices are unavailable or impracticable to obtain, then fair value is estimated using modeling techniques such as discounted cash flow analyses. These
modeling techniques incorporate our assessments regarding assumptions that
42
Table of Contents
market
participants would use in pricing the asset or the liability, including assumptions about the risks inherent in a particular valuation technique and the risk of nonperformance.
Fair
value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a
non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes in accordance with ASC 825 (previously SFAS No. 107,
Disclosures About Fair Value of Financial Instruments
).
The classification and accounting for investment securities are discussed in detail in Note 1 of the consolidated financial
statements presented elsewhere in this report. Investment securities generally must be classified as held-to-maturity, available-for-sale, or trading.
The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management's intentions with respect to either holding or selling the securities. The
classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities flow
directly through earnings during the periods in which they arise. Investment securities that are classified as held-to-maturity are recorded at amortized cost. Unrealized gains
and losses on available-for-sale securities are recorded as a separate component of stockholders' equity (accumulated other comprehensive income or loss) and do not affect
earnings until realized or are deemed to be
other-than-temporarily impaired. The fair values of investment securities are generally determined by reference to the average of at least two quoted market prices obtained
from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the
Company has evaluated the methodologies used to develop the resulting fair values. The Company performs a monthly analysis on the broker quotes received from third parties to ensure that the prices
represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of third party pricing methodologies, review of pricing
trends, and monitoring of trading volumes. The Company ensures 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.
For
current broker prices obtained on certain investment securities that we believe are based on forced liquidation or distressed sale values in very inactive markets, we have modified
our approach in determining the fair values of these securities. We have determined that each of these securities will be individually examined for the appropriate valuation methodology based on a
combination of the market approach reflecting current broker prices and 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 taking into consideration broker discount rates in determining the discount rate. The values resulting from each approach (i.e. market and
income approaches) are weighted to derive the final fair value for each security trading in an inactive market.
43
Table of Contents
We
are obligated to assess, at each reporting date, whether there is an "other-than-temporary" impairment to our 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. Noncredit-related impairment losses are charged
to other comprehensive income. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. We examine all
individual securities that are in an unrealized loss position at each reporting date for other-than-temporary impairment. Specific investment-related factors we examine to
assess impairment include the nature of the investment, severity and duration of the loss, the probability that we will be unable to collect all amounts due, an analysis of the issuers of the
securities and whether there has been any cause for default on the securities and any change in the rating of the securities by the various rating agencies. Additionally, we evaluate whether the
creditworthiness of the issuer calls the realization of contractual
cash flows into question. We reexamine the financial resources, intent and the overall ability of the Company to hold the securities until their fair values recover. Management does not believe that
there are any investment securities, other than those identified in the current and previous periods, which are deemed to be "other-than-temporarily" impaired as of
December 31, 2009. Investment securities are discussed in more detail in Note 6 to the Company's consolidated financial statements presented elsewhere in this report.
The
Company considers all available information relevant to the collectibility of the security, including information about past events, current conditions, and reasonable and
supportable forecasts, when developing the estimate of future cash flows and making its other-than-temporary impairment assessment for our portfolio of residual securities and
trust preferred securities. The Company considers factors such as remaining payment terms of the security, prepayment speeds, the financial condition of the issuer(s), expected defaults, and the value
of any underlying collateral.
Acquired loans are valued as of acquisition date in accordance with ASC 805
Business
Combinations,
formerly FAS 141R
Business Combinations.
Loans purchased with evidence of credit deterioration since
origination for which it is probable that all contractually required payments will not be collected are accounted for under ASC 310-30,
Loans and Debt Securities
Acquired with Deteriorated Credit Quality
, formerly SOP 03-3
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
. Further, the Company elected to account for all other acquired loans within the scope of ASC 310-30 using the same methodology.
Under
ASC 805 and ASC 310-30, loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan.
Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. In situations where loans have similar risk characteristics, loans were aggregated into pools to
estimate cash flows under ASC 310-30. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The Company aggregated all of
the loans acquired in the FDIC-assisted acquisition of United Commercial Bank in fifty two different pools, based on common risk characteristics.
The
cash flows expected over the life of the pools are estimated using an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields,
effective interest income and impairment, if any, based on pool level events. Assumptions as to cumulative loss rates, loss curves and prepayment speeds are utilized to calculate the expected cash
flows.
Under
ASC 310-30, the excess of the expected cash flows at acquisition over the fair value is considered to be the accretable yield and is recognized as interest income over
the life of the loan or pool. The excess of the contractual cash flows over the expected cash flows is considered to be the
44
Table of Contents
nonaccretable
difference. Subsequent to the acquisition date, any increases in cash flow over those expected at purchase date in excess of fair value are recorded as an adjustment to accretable
difference on a prospective basis. Any subsequent decreases in cash flow over those expected at purchase date are recognized by recording an allowance for loan losses. Any disposals of loans,
including sales of loans, payments in full or foreclosures result in the removal of the loan from the ASC 310-30 portfolio at the carrying amount.
The majority of the loans acquired in the FDIC-assisted acquisition of United Commercial Bank are included in a FDIC
shared-loss agreement and are referred to as covered loans. Covered loans are reported exclusive of the expected cash flow reimbursements expected from the FDIC. At the date of
acquisition, all covered loans were accounted for under ASC 805 and ASC 310-30. Subsequent to acquisition all covered loans are accounted for under ASC 310-30.
All other real estate owned acquired in the FDIC-assisted acquisition of United Commercial Bank are included in a FDIC
shared-loss agreement and are referred to as covered other real estate owned. Covered other real estate owned is reported exclusive of expected reimbursement cash flows from the FDIC. Upon
transferring covered loan collateral to covered other real estate owned status, acquisition date fair value discounts on the related loan are also transferred to covered other real estate owned. Fair
value adjustments on covered other real estate owned result in a reduction of the covered other real estate carrying amount and a corresponding increase in the estimated FDIC reimbursement, with the
estimated net loss to the Bank charged against earnings.
In conjunction with the FDIC-assisted acquisition of United Commercial Bank, the Bank entered into a
shared-loss agreement with the FDIC for amounts receivable under the shared-loss agreement. At the date of the acquisition the Company elected to account amounts receivable
under the shared-loss agreement as an indemnification asset in accordance with ASC 805. Subsequent to the acquisition the indemnification asset is tied to the loss in the covered loans and
is not being accounted for under fair value. The FDIC indemnification asset is accounted for on the same basis as the related covered loans and is the present value of the cash flows the Company
expects to collect from the FDIC under the shared-loss agreement. The difference between the present value and the undiscounted cash flow the Company expects to collect from the FDIC is
accreted into noninterest income over the life of the FDIC indemnification asset. The FDIC indemnification asset is adjusted for any changes in expected cash flows based on the loan performance. Any
increases in cash flow of the loans over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the loans over those expected will increase the FDIC
indemnification asset. Increase and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.
Our allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in
establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experience, delinquency and chargeoff trends,
collateral values, changes in nonperforming loans, and other factors. Qualitative factors include the general economic environment in our markets and, in particular, the
45
Table of Contents
state
of certain industries. Size and complexity of individual credits, loan structure, and pace of portfolio growth are other qualitative factors that are considered in our methodologies.
A
detailed discussion of our allowance for loan loss methodology can be found in "Management's Discussion and Analysis of Consolidated Financial Condition and Results of
Operations Allowance for Loan Losses." As we add new products, increase the complexity of our loan portfolio, and expand our geographic coverage, we continue to enhance our
methodology to keep pace with the size and complexity of the loan portfolio and changing credit environment. Changes in any of the factors cited above could have a significant impact on the loan loss
calculation. We believe that our methodologies continue to be appropriate given our size and level of complexity. This discussion should also be read in conjunction with the Company's consolidated
financial statements and the
accompanying notes presented elsewhere in this report including the section entitled "Loans and Allowance for Loan Losses."
Other real estate owned ("OREO") represents properties acquired through foreclosure or through full or partial satisfaction of loans,
is considered held for sale, and is recorded at the lower of cost or estimated fair value at the time of foreclosure. Loan balances in excess of fair value of the real estate acquired at the date of
foreclosure are charged against the allowance for loan losses. After foreclosure, valuations are periodically performed as deemed necessary by management and the real estate is carried at the lower of
carrying value or fair value less costs to sell. Subsequent declines in the fair value of the OREO below the carrying value are recorded through the use of a valuation allowance by charges to
noninterest expense. Any subsequent operating expenses or income of such properties are charged to non-interest expense. If the OREO is sold shortly after it is received in a foreclosure
(i.e., the holding period was deemed minimal), the Company substitutes the value received in the sale (net of costs to sell) for the fair value (less costs to sell). Any adjustment made to the
loss originally recognized at the time of foreclosure is then charged against or credited to the allowance for loan and lease losses, if deemed material. Otherwise, any declines in value after
foreclosure are recorded as gains or losses from the sale or disposition of the real estate. Revenue recognition upon disposition of a property is dependent on the sale having met certain criteria
relating to the buyer's initial investment in the property sold.
The Bank is able and willing to provide financing for entities purchasing loans or OREO assets from the Bank. Our general guideline is
to seek a 30% down payment (as a percentage of the purchase price) from the buyer. We will consider lower down payments when this is not possible, however, accounting rules require certain minimum
down payments if these new seller-financing loans are to be considered accrual loans on our books. The minimum down payment varies by the type of underlying real estate collateral. For note sales
where we provide financing, in addition to the required adequate down payment, the sales agreements generally call for guarantees or other forms of borrower recourse.
Under ASC 350 (previously SFAS No. 142,
Goodwill and Other Intangibles
),
goodwill must be allocated to reporting units and tested for impairment. The Company tests goodwill for impairment at least annually or more frequently if events or circumstances, such as adverse
changes in the business, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting-unit level (which is the same level as
the Company's two major operating segments identified in Note 26 to the Company's consolidated financial statements presented elsewhere in this
46
Table of Contents
report).
The first part of the test is a comparison, at the reporting unit level, of the fair value of each reporting unit to its carrying value, including goodwill. In order to determine the fair
value of the reporting units, a combined income approach and market approach was used. Under the income approach, the Company provided a net income projection and 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. If the fair value is less than the carrying value, then the second part of the test is needed to
measure the amount of goodwill impairment. The implied fair value of the reporting unit goodwill is calculated and compared to the actual carrying value of goodwill recorded within the reporting unit.
If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, then the Company would recognize an impairment loss for the amount of the difference, which would be
recorded as a charge against net income. For additional information regarding goodwill, see Note 12 to the Company's consolidated financial statements presented elsewhere in this report.
We account for share-based awards to employees, officers, and directors in accordance with the provisions of ASC 505 and ASC 718
(previously SFAS No. 123(R),
Share-Based Payment
). Share-based compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized as expense over the employee's requisite service period. We adopted these standards, as required, on January 1, 2006. Prior to 2006, we recognized stock-based
compensation expense for employee share-based awards based on their intrinsic value on the date of grant pursuant to Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
, and followed the disclosure requirements of SFAS No. 123,
Accounting for
Stock-Based Compensation
.
We
adopted ASC 505 and ASC 718 using the modified prospective approach. Under the modified prospective approach, prior periods are not restated for comparative purposes. The valuation
provisions of these standards apply to new awards and to awards that are outstanding on the effective date and subsequently modified, repurchased or cancelled. Compensation expense, net of estimated
forfeitures, for awards outstanding at the effective date is recognized over the remaining service period using the compensation cost calculated for pro forma disclosures under the original SFAS
No. 123.
We
grant nonqualified stock options and restricted stock. Most of our stock option and restricted stock awards include a service condition that relates only to vesting. The stock option
awards generally vest in one to four years from the grant date, while the restricted stock awards generally vest in three to five years from the date of grant. Compensation expense is amortized on a
straight-line basis over the requisite service period for the entire award, which is generally the maximum vesting period of the award.
We
use an option-pricing model to determine the grant-date fair value of our stock options which is affected by assumptions regarding a number of complex and subjective
variables. These methods used to determine these variables are generally similar to the methods used prior to 2006 for the purposes of our pro forma disclosures under SFAS No. 123. We make
assumptions regarding expected term, expected volatility, expected dividend yield, and risk-free interest rate in determining the fair value of our stock options. The expected term
represents the weighted-average period that stock options are expected to remain outstanding. The expected term assumption is estimated based on the
47
Table of Contents
stock
options' vesting terms and remaining contractual life and employees' historical exercise behavior. The expected volatility is based on the historical volatility of our common stock over a period
of time equal to the expected term of the stock options. The dividend yield assumption is based on the Company's current dividend payout rate on its common stock. For the risk-free
interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant appropriate for the term of the employee stock options.
For
restricted share awards, the grant-date fair value is measured at the fair value of the Company's common stock as if the restricted share was vested and issued on the
date of grant.
As
share-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation is discussed in more detail in Notes 1 and 22 to the Company's consolidated
financial statements presented elsewhere in this report.
UCB Acquisition
On November 6, 2009 the Bank acquired certain assets and assumed certain liabilities of United Commercial Bank from the FDIC in
an FDIC-assisted transaction. As part of the Purchase and Assumption Agreement, the Bank and the FDIC entered into a shared-loss agreement, whereby the FDIC will cover a
substantial portion of any future losses on loans (and related unfunded loan commitments), OREO and accrued interest on loans for up to 90 days. We refer to the acquired loans and OREO subject
to the shared-loss agreement collectively as "covered assets." Under the terms of the our shared-loss agreement, the FDIC will absorb 80% of losses and share in 80% of loss
recoveries on the first $2.05 billion on covered loans and absorb 95% of losses and share in 95% of loss recoveries exceeding $2.05 billion. The shared-loss agreement for
commercial and single family residential mortgage loans is in effect for 5 years and 10 years, respectively, from the November 6, 2009 acquisition date and the loss recovery
provisions are in effect for 8 years and 10 years, respectively, from the acquisition date.
The
Bank purchased assets with fair value of approximately $5.90 billion in loans, $599.0 million of cash and cash equivalents, $147.4 million in securities
purchased under sale agreements, $1.56 billion in investment securities and $207.6 million of other assets of United Commercial Bank from the FDIC. The Bank also assumed liabilities with
fair values of $6.53 billion of deposits, $1.84 billion in Federal Home Loan Bank advances, $858.2 million of securities sold under repurchase agreements, other borrowings of
$90.6 million and $254.2 million of other liabilities of United Commercial Bank from the FDIC. United Commercial Bank was a full service commercial bank headquartered in San Francisco,
California that operated 63 branch locations in the U.S. We made this acquisition to expand our presence domestically, primarily in the State of California.
The
assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible
and intangible, were recorded at their estimated fair values as of the November 6, 2009 acquisition date. The application of the acquisition method of accounting resulted in a net
after-tax gain of $291.5 million.
See
Note 2,
Business Combinations
, to the Company's consolidated financial statements presented elsewhere in this report.
48
Table of Contents
Overview
The Company returned to profitability in 2009, with net earnings for the full year of $76.6 million. The Company's return to
profitability came as a result of a pre-tax gain of $471.0 million recorded in the fourth quarter of 2009 from the acquisition of United Commercial Bank in November 2009 and despite
the year-to-date loan loss provision of $528.7 million. Our return to profitability for 2009 follows a single loss year in 2008 the only loss year
for East West in nearly 30 years. Prior to 2008, East West achieved record earnings every year for over a decade, with net income of $161.2 million in 2007 and $143.4 million in
2006.
In
2009, we raised a total $588.6 million, net of costs in capital primarily through the issuance of $335.0 million in Series C Preferred Shares and
$272.8 million in common stock. These issuances of preferred and common stock have bolstered our capital ratios well above regulatory minimum as well as "well-capitalized"
thresholds for banks. As of December 31, 2009, our total risk-based capital ratio was 19.8% or $1.1 billion more than the 10.0% regulatory requirement for
well-capitalized banks. Our Tier 1 risk-based capital ratio of 17.9% and our Tier 1 leverage ratio of 11.7% as of December 31, 2009 also significantly
exceeded regulatory guidelines for "well-capitalized" banks. Our tangible equity to tangible assets ratio was 9.2% at December 31, 2009, compared to 9.9% as of December 31,
2008.
Similarly,
our liquidity position has also been considerably strengthened. At December 31, 2009, we increased our total borrowing capacity and holdings of cash and
short-term investments to $4.24 billion, compared to $3.34 billion at December 31, 2008. As of December 31, 2009, we had $1.34 billion in cash and
short-term investments and approximately $2.9 billion in available borrowing capacity from various sources including the FHLB, the FRB, repurchase agreements, and federal funds
facilities with several financial institutions. Our combined borrowing capacity and cash holdings represent 20.6% of total assets and 28.3% of total deposits as of December 31, 2009. Due
primarily to our acquisition of United Commercial Bank, we also experienced an 84%, or $6.85 billion, increase in deposits during 2009, with total deposits increasing to $14.99 billion
as of December 31, 2009, compared with $8.14 billion as of December 31, 2008. Our continued efforts to deleverage our balance sheet resulted in a lower loan to deposit ratio of
93.8% at December 31, 2009, compared to 96.8% at September 30, 2009 and 101% at December 31, 2008. We believe that our liquidity position is sufficient to meet our operating
expenses, borrowing needs and other obligations.
Non-covered
nonperforming assets totaled $296.1 million representing 1.44% of total assets at December 31, 2009. This is a decrease from $230.2 million
or 1.84% of total assets at September 30, 2009 and $263.9 million or 2.12% of total assets at December 31, 2008. Nonperforming assets as of December 31, 2009 are comprised
of nonaccrual loans totaling $173.2 million, OREO totaling $13.8 million, and loans modified or restructured amounting to $109.1 million.
Covered
nonperforming assets totaled $719.9 million, representing 3.50% of total assets at December 31, 2009. These covered nonperforming assets are subject to the
shared-loss agreement with the FDIC.
During
2009, we continued to build on measures and initiatives that we undertook throughout 2008 in order to identify, quantify, and reduce our exposure to problem loans. During 2009,
we lowered total commitments on land and construction loans by $1.31 billion, significantly reducing our overall exposure to these sectors of our loan portfolio which have been most impacted by
the downturn in the real estate market. As of December 31, 2009, outstanding balances on land and construction loans totaled only 9.5% of total gross loans.
49
Table of Contents
At
December 31, 2009, our allowance for loan losses amounted to $238.9 million or 2.81% of total gross non-covered loans. In comparison, the allowance for loan
losses totaled $178.0 million or 2.16% of total gross loans as of December 31, 2008. Partly as a consequence of the actions that we took to identify and manage our problem loans, we
recorded $528.7 million in loan loss provisions during 2009. Total net chargeoffs amounted to $475.3 million during 2009, representing 5.69% of average non-covered loans
during 2009. This compares to $141.4 million, representing 1.64% of average loans during 2008. Approximately 65%, or $309.5 million, of the total net chargeoffs recorded during 2009 were
related to land and construction loans.
The
allowance for loan loss increased during the year due to the significant increase in the loan loss provision during 2009, especially during the first three quarters of 2009
reflecting our elevated charge-off levels as we continue to manage down our exposure to nonaccrual loans, delinquent loans and OREO. We continued to sustain higher charge-off
activities and loan loss provision in our land and residential construction loans that were caused by the sustained weakness in the real estate market.
Also,
as we continued to reduce our exposure to problem loans, we had to sell problem loans which resulted in charges against the allowance for loan losses and therefore increases in
our loan loss provision. However, both the provision and net charge-offs peaked in the third quarter of 2009 resulting in a lower loan loss provision during the fourth quarter of 2009 as
compared to the third quarter of 2009. Given the trend we are seeing in the loan portfolio, it is expected that the provision for loan losses and net charge-offs will continue to decrease
throughout 2010.
Based
on management's evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe the allowance for loan losses is adequate for losses inherent in
the loan portfolio as of December 31, 2009.
Despite
a sizeable loss provision recorded during 2009, the Company was profitable during the year. The $76.6 million net income that we recorded during 2009 includes
$528.7 million in loan loss provisions, $107.7 million in OTTI charges on investment securities and a pre-tax gain of $471.0 million from the UCB Acquisition.
Net
interest income increased 36.1% to $483.3 million during 2009, compared with $355.2 million in 2008. Our net interest margin increased 56 basis points to 3.75% during
2009. This compares with 3.19% during the same period in 2008. Relative to 2008, our net interest margin during 2009 increased primarily as the result of the yield adjustment on covered loans during
the fourth quarter of 2009. Excluding the yield adjustment related to the FDIC covered loans, our net interest margin decreased 29 basis points compared to 2008, primarily due to the sharp decline in
interest rates prompted by several consecutive Federal Reserve rate cuts, reversal of interest from nonaccrual loans and increases in our core deposit base.
Excluding
the non-cash OTTI charges on investment securities, gain from the UCB Acquisition, and decrease in FDIC indemnification asset amounting to $340 million,
total noninterest income increased 18% to $56.6 million during 2009, compared with $48.1 million for 2008. This increase is primarily due to net gain on investment securities
available-for-sale and loan fees. These increases were complemented by higher net gain on sale of investment securities and branch-related revenues earned during 2009. Core
noninterest income, which excludes the impact of non-cash OTTI charges, as well as net gains on sales of investment securities, loans and the gain on the UCB Acquisition, was
$44.6 million during 2009, compared to $36.8 million during the same period last year. Core noninterest income is a non-GAAP disclosure. The Company uses certain
non-GAAP financial measures to provide supplemental information regarding the Company's performance to provide additional disclosure. The Company believes that presenting core noninterest
income provides more
50
Table of Contents
clarity
to the users of financial statements regarding the Company's core business operations. See table below.
Table 1:
Non-GAAP Table Core Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
December 31, 2009
|
|
December 31, 2008
|
|
|
|
(In thousands)
|
|
Noninterest Income
|
|
|
|
|
$
|
396,553
|
|
|
|
|
$
|
(25,062
|
)
|
Less: Gain on acquisition of United Commercial Bank
|
|
|
(471,009
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Impairment loss on other investment securities
|
|
|
107,671
|
|
|
|
|
|
73,165
|
|
|
|
|
|
|
|
Decrease in FDIC indemnification asset and FDIC receivable
|
|
|
23,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Adjustments
|
|
|
|
|
|
(340,000
|
)
|
|
|
|
|
73,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Normalized noninterest income
|
|
|
|
|
|
56,553
|
|
|
|
|
|
48,103
|
|
Less: Gain on investment securities
|
|
|
(11,923
|
)
|
|
|
|
|
(9,005
|
)
|
|
|
|
|
|
|
Gain on sales of loans
|
|
|
-
|
|
|
|
|
|
(2,275
|
)
|
|
|
|
|
|
|
Net Adjustments
|
|
|
|
|
|
(11,923
|
)
|
|
|
|
|
(11,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Core noninterest income (Non-GAAP)
|
|
|
|
|
$
|
44,630
|
|
|
|
|
$
|
36,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest expense increased 22% to $246.5 million during 2009, compared with $201.3 million for the same period in 2008. The increase in total noninterest expense
during 2009, relative to 2008, can be attributed predominantly to higher deposit insurance premiums and regulatory assessments, higher OREO expenses, increase in amortization of investments in
affordable housing partnerships and higher outside professional service expenses. Our efficiency ratio, which represents noninterest expense (excluding amortization and impairment writedowns on
intangible assets and amortization of investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income, was
48.89% during 2009 compared with 45.94% for 2008.
Total
consolidated assets at December 31, 2009 increased 65% to a record $20.56 billion, compared with $12.42 billion at December 31, 2008. The net increase
in total assets is comprised predominantly of an increase in covered loans receivable of $5.60 billion and an FDIC indemnification asset and receivable of $1.26 billion resulting from
the UCB Acquisition. In addition, there were increases in cash and due from banks of $440.5 million, securities purchased under resale agreements of $177.4 million, and
available-for-sale investment securities of $523.9 million. Total liabilities increased 69% to $18.32 billion as of December 31, 2009, compared to
$10.87 billion as of December 31, 2008. The net increase in liabilities is primarily due to increases in total deposits of $6.85 billion and FHLB advances of
$452.1 million.
Total
average assets increased 17% to $13.84 billion in 2009, compared to $11.80 billion in 2008 due primarily to the growth in average short-term investments,
average investment securities and average loans. The increase in average short-term investments and investment securities can be attributed to proceeds received in conjunction with our
issuance of Series B preferred stock during December 2008. The increase in average loans is due to the covered loans acquired in the United Commercial Bank acquisition. Total average deposits
rose 30% during 2009 to $7.98 billion, compared to $6.14 billion for 2008, with the most significant contribution coming from time deposits and money market accounts.
On
January 26, 2010, the Board of Directors declared first quarter 2010 dividends on our common stock and Series A preferred stock. The common stock dividend of $0.01 per
share is payable
51
Table of Contents
on
or about February 24, 2010 to stockholders of record on February 10, 2010. The dividend on the Series A Preferred Stock of $20 per share is payable on February 1, 2010
to shareholders of record on January 15, 2010.
Results of Operations
Net income after extraordinary items for 2009 totaled $76.6 million, compared with a net loss of $49.7 million for 2008
and net income of $161.2 million for 2007. Results in 2009 include the acquisition of United Commercial Bank on November 6, 2009. See table below for United Commercial Bank's
contribution to the Company's 2009 results of operations. These amounts exclude the pre-tax bargain purchase gain of $471.0 million and the discount accretion related to both the
covered loans and FDIC indemnification asset recorded during the fourth quarter. On a per diluted share basis, net income (loss) was $0.33, ($0.94) and $2.60 for 2009, 2008 and 2007, respectively.
During 2009, our operating results were significantly impacted by $528.7 million in loan loss provisions, $107.7 million in total non-cash OTTI investment securities charges
and a pre-tax gain of $471.0 million from the FDIC assisted acquisition of United Commercial Bank. Our return on average total assets increased to 0.55% in 2009, compared with
(0.42%) in 2008 and 1.45% in 2007. Our return on average total stockholders' equity also increased to 4.69% in 2009, compared with (3.99%) in 2008 and 14.89% in 2007.
Table 2:
United Commercial Bank Results
|
|
|
|
|
|
|
|
|
UCB
|
|
|
|
November 7, 2009
December 31, 2009
|
|
|
|
(In thousands)
|
|
Interest Income
|
|
$
|
52,442
|
|
Interest Expense
|
|
|
13,427
|
|
|
|
|
|
Net Interest Margin
|
|
|
39,015
|
|
|
|
|
|
Noninterest Income
|
|
|
6,390
|
|
Noninterest Expense:
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
12,232
|
|
|
|
Other noninterest expense
|
|
|
9,895
|
|
|
|
|
|
|
Total Noninterest expense
|
|
|
22,127
|
|
|
|
|
|
Income before income taxes
|
|
$
|
23,278
|
|
|
|
|
|
52
Table of Contents
Table 3:
Components of Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
Net interest income
|
|
$
|
483.3
|
|
$
|
355.2
|
|
$
|
408.0
|
|
Provision for loan losses
|
|
|
(528.7
|
)
|
|
(226.0
|
)
|
|
(12.0
|
)
|
Noninterest income (loss)
|
|
|
396.6
|
|
|
(25.1
|
)
|
|
49.5
|
|
Noninterest expense
|
|
|
(246.5
|
)
|
|
(201.3
|
)
|
|
(183.2
|
)
|
(Provision) benefit for income taxes
|
|
|
(22.7
|
)
|
|
47.5
|
|
|
(101.1
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) before extraordinary items
|
|
|
82.0
|
|
|
(49.7
|
)
|
|
161.2
|
|
|
Extraordinary item
|
|
|
5.4
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) after extraordinary items
|
|
$
|
76.6
|
|
$
|
(49.7
|
)
|
$
|
161.2
|
|
|
|
|
|
|
|
|
|
Return on average total assets
|
|
|
0.55
|
%
|
|
-0.42
|
%
|
|
1.45
|
%
|
|
|
|
|
|
|
|
|
Return on average common equity
|
|
|
2.37
|
%
|
|
-5.41
|
%
|
|
14.89
|
%
|
|
|
|
|
|
|
|
|
Return on average total equity
|
|
|
4.69
|
%
|
|
-3.99
|
%
|
|
14.89
|
%
|
|
|
|
|
|
|
|
|
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 in 2009 totaled $483.3 million, a 36% increase over net
interest income of $355.2 million in 2008. Comparing 2008 to 2007, net interest income decreased 13% to $355.2 million, as compared to $408.0 million in 2007.
Net
interest margin, defined as net interest income divided by average earning assets, increased 56 basis points to 3.75% during 2009, from 3.19% during 2008. The increase in the net
interest margin was primarily the result of the yield adjustment on covered loans during the fourth quarter of 2009.
Excluding the one time yield adjustment, our net interest margin decreased 2 basis points compared to 2008, primarily due to the decline in interest rates prompted by several Federal Reserve rate
cuts, reversal of interest from nonaccrual loans, and increase in our core deposit base. Comparing 2008 to 2007, our net interest margin decreased by 75 basis points to 3.19% during 2008, compared to
3.94% during 2007.
53
Table of Contents
The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by
asset and liability component for the years ended December 31, 2009, 2008 and 2007:
Table 4:
Summary of Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield
Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield
Rate
|
|
|
|
(Dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
881,282
|
|
$
|
9,047
|
|
|
1.03
|
%
|
$
|
286,650
|
|
$
|
7,029
|
|
|
2.45
|
%
|
$
|
7,748
|
|
$
|
375
|
|
|
4.84
|
%
|
|
Securities purchased under resale agreements
|
|
|
89,883
|
|
|
7,985
|
|
|
8.76
|
%
|
|
70,246
|
|
|
6,811
|
|
|
9.67
|
%
|
|
192,883
|
|
|
15,593
|
|
|
8.08
|
%
|
|
Investment securities (3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,541,832
|
|
|
115,446
|
|
|
4.54
|
%
|
|
2,001,089
|
|
|
98,217
|
|
|
4.91
|
%
|
|
1,693,236
|
|
|
100,218
|
|
|
5.92
|
%
|
|
|
Tax-exempt (1)
|
|
|
27,960
|
|
|
1,242
|
|
|
4.44
|
%
|
|
44,708
|
|
|
3,256
|
|
|
7.28
|
%
|
|
34,725
|
|
|
2,923
|
|
|
8.42
|
%
|
|
Loans receivable (3)(5)
|
|
|
8,355,825
|
|
|
452,019
|
|
|
5.41
|
%
|
|
8,601,825
|
|
|
545,260
|
|
|
6.32
|
%
|
|
8,354,989
|
|
|
650,717
|
|
|
7.79
|
%
|
|
Loans receivable covered (2)
|
|
|
877,029
|
|
|
135,144
|
|
|
15.41
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
FHLB and FRB stock
|
|
|
137,001
|
|
|
2,337
|
|
|
1.71
|
%
|
|
115,370
|
|
|
5,175
|
|
|
4.47
|
%
|
|
84,470
|
|
|
4,581
|
|
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
12,910,812
|
|
|
723,220
|
|
|
5.60
|
%
|
|
11,119,888
|
|
|
665,748
|
|
|
5.97
|
%
|
|
10,368,051
|
|
|
774,407
|
|
|
7.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
147,694
|
|
|
|
|
|
|
|
|
137,730
|
|
|
|
|
|
|
|
|
156,081
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(216,775
|
)
|
|
|
|
|
|
|
|
(144,154
|
)
|
|
|
|
|
|
|
|
(80,161
|
)
|
|
|
|
|
|
|
|
Other assets
|
|
|
997,214
|
|
|
|
|
|
|
|
|
689,323
|
|
|
|
|
|
|
|
|
635,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,838,945
|
|
|
|
|
|
|
|
$
|
11,802,787
|
|
|
|
|
|
|
|
$
|
11,079,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
398,619
|
|
$
|
1,507
|
|
|
0.38
|
%
|
$
|
404,404
|
|
$
|
3,226
|
|
|
0.80
|
%
|
$
|
412,550
|
|
$
|
6,646
|
|
|
1.61
|
%
|
|
Money market accounts
|
|
|
2,035,821
|
|
|
25,583
|
|
|
1.26
|
%
|
|
1,099,576
|
|
|
25,805
|
|
|
2.34
|
%
|
|
1,302,898
|
|
|
53,021
|
|
|
4.07
|
%
|
|
Savings deposits
|
|
|
506,706
|
|
|
3,322
|
|
|
0.66
|
%
|
|
452,259
|
|
|
4,148
|
|
|
0.91
|
%
|
|
412,272
|
|
|
4,400
|
|
|
1.07
|
%
|
|
Time deposits less than $100,000
|
|
|
1,499,076
|
|
|
32,073
|
|
|
2.14
|
%
|
|
1,164,622
|
|
|
35,061
|
|
|
3.00
|
%
|
|
956,203
|
|
|
37,164
|
|
|
3.89
|
%
|
|
Time deposits $100,000 or greater
|
|
|
3,538,046
|
|
|
66,992
|
|
|
1.89
|
%
|
|
3,018,876
|
|
|
109,820
|
|
|
3.63
|
%
|
|
2,862,017
|
|
|
139,804
|
|
|
4.88
|
%
|
|
Federal funds purchased
|
|
|
2,379
|
|
|
9
|
|
|
0.37
|
%
|
|
89,309
|
|
|
2,217
|
|
|
2.48
|
%
|
|
173,103
|
|
|
8,779
|
|
|
5.07
|
%
|
|
FHLB advances
|
|
|
1,333,846
|
|
|
52,310
|
|
|
3.92
|
%
|
|
1,592,125
|
|
|
70,661
|
|
|
4.43
|
%
|
|
1,230,940
|
|
|
61,710
|
|
|
5.01
|
%
|
|
Securities sold under repurchase agreements
|
|
|
1,027,665
|
|
|
49,725
|
|
|
4.77
|
%
|
|
1,000,332
|
|
|
46,062
|
|
|
4.59
|
%
|
|
978,739
|
|
|
38,485
|
|
|
3.93
|
%
|
|
Long-term debt
|
|
|
235,570
|
|
|
7,816
|
|
|
3.27
|
%
|
|
235,570
|
|
|
12,694
|
|
|
5.37
|
%
|
|
211,364
|
|
|
15,603
|
|
|
7.38
|
%
|
|
Other borrowings
|
|
|
12,311
|
|
|
162
|
|
|
1.32
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
10,590,039
|
|
|
239,499
|
|
|
2.26
|
%
|
|
9,057,073
|
|
|
309,694
|
|
|
3.41
|
%
|
|
8,540,086
|
|
|
365,612
|
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonnterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
1,459,871
|
|
|
|
|
|
|
|
|
1,362,617
|
|
|
|
|
|
|
|
|
1,312,709
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
154,138
|
|
|
|
|
|
|
|
|
137,320
|
|
|
|
|
|
|
|
|
144,414
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
1,634,897
|
|
|
|
|
|
|
|
|
1,245,777
|
|
|
|
|
|
|
|
|
1,082,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
13,838,945
|
|
|
|
|
|
|
|
$
|
11,802,787
|
|
|
|
|
|
|
|
$
|
11,079,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin
|
|
|
|
|
$
|
483,721
|
|
|
3.75
|
%
|
|
|
|
$
|
356,054
|
|
|
3.19
|
%
|
|
|
|
$
|
408,795
|
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Amounts
calculated on a full taxable equivalent basis using the current statutory federal tax rate. Total interest income and average yield rate on an
unadjusted basis for tax-exempt investment securities available-for-sale is $842 thousand and 3.0% for the twelve months ended December 31, 2009.
Total interest income and average yield rate on an unadjusted basis for tax-exempt investment securities available-for-sale is $2.4 million and 5.3% for the
twelve months ended December 31, 2008. Total interest income and average yield rate on an unadjusted basis for tax-exempt investment securities
available-for-sale is $2.1 million and 6.1% for the twelve months ended December 31, 2007.
-
(2)
-
Amounts
include yield adjustment of $74,439 from discount accretion on early prepayments.
-
(3)
-
Includes
amortization of premiums and accretion of discounts on investment securities and loans receivable totaling $(5.5) million, $(7.4) million, and
$(3.3) million for the years ended December 31, 2009, 2008, and 2007, respectively. Also includes the amortization of deferred loan fees totaling $255 thousand and $5.4 million
for the years ended December 31, 2008 and 2007, respectively. There was no amortization of deferred loan fees for 2009.
-
(4)
-
Average
balances exclude unrealized gains or losses on available-for-sale securities.
-
(5)
-
Average
balances include nonperforming loans.
54
Table of Contents
Analysis of Changes in Net Interest Income
Changes in our 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 years 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.
Table 5:
Analysis of Changes in Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009 vs. 2008
|
|
2008 vs. 2007
|
|
|
|
|
|
Changes Due to
|
|
|
|
Changes Due to
|
|
|
|
Total
Change
|
|
Total
Change
|
|
|
|
Volume (1)
|
|
Rate (1)
|
|
Volume (1)
|
|
Rate (1)
|
|
|
|
(In thousands)
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
2,017
|
|
$
|
7,933
|
|
$
|
(5,916
|
)
|
$
|
6,654
|
|
$
|
6,929
|
|
$
|
(275
|
)
|
Securities purchased under resale agreements
|
|
|
1,174
|
|
|
1,765
|
|
|
(591
|
)
|
|
(8,782
|
)
|
|
(11,419
|
)
|
|
2,637
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
17,229
|
|
|
34,465
|
|
|
(17,236
|
)
|
|
(2,001
|
)
|
|
16,794
|
|
|
(18,795
|
)
|
|
Tax-exempt (2)
|
|
|
(2,014
|
)
|
|
(409
|
)
|
|
(1,605
|
)
|
|
333
|
|
|
763
|
|
|
(430
|
)
|
Loans receivable
|
|
|
(93,241
|
)
|
|
(15,426
|
)
|
|
(77,815
|
)
|
|
(105,457
|
)
|
|
18,734
|
|
|
(124,191
|
)
|
Loans receivable covered
|
|
|
135,144
|
|
|
135,144
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
FHLB and FRB stock
|
|
|
(2,838
|
)
|
|
825
|
|
|
(3,663
|
)
|
|
594
|
|
|
1,479
|
|
|
(885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
$
|
57,471
|
|
$
|
164,297
|
|
$
|
(106,826
|
)
|
$
|
(108,659
|
)
|
$
|
33,280
|
|
$
|
(141,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts
|
|
$
|
(1,719
|
)
|
$
|
(46
|
)
|
$
|
(1,673
|
)
|
$
|
(3,420
|
)
|
$
|
(129
|
)
|
$
|
(3,291
|
)
|
Money market accounts
|
|
|
(222
|
)
|
|
15,294
|
|
|
(15,516
|
)
|
|
(27,216
|
)
|
|
(7,331
|
)
|
|
(19,885
|
)
|
Savings deposits
|
|
|
(826
|
)
|
|
453
|
|
|
(1,279
|
)
|
|
(252
|
)
|
|
402
|
|
|
(654
|
)
|
Time deposits less than $100,000
|
|
|
(2,988
|
)
|
|
8,551
|
|
|
(11,539
|
)
|
|
(2,103
|
)
|
|
7,203
|
|
|
(9,306
|
)
|
Time deposits $100,000 or greater
|
|
|
(42,828
|
)
|
|
16,373
|
|
|
(59,201
|
)
|
|
(29,984
|
)
|
|
7,317
|
|
|
(37,301
|
)
|
Federal funds purchased
|
|
|
(2,208
|
)
|
|
(1,181
|
)
|
|
(1,027
|
)
|
|
(6,562
|
)
|
|
(3,194
|
)
|
|
(3,368
|
)
|
FHLB advances
|
|
|
(18,351
|
)
|
|
(10,780
|
)
|
|
(7,571
|
)
|
|
8,951
|
|
|
16,614
|
|
|
(7,663
|
)
|
Securities sold under repurchase agreements
|
|
|
3,663
|
|
|
1,235
|
|
|
2,428
|
|
|
7,577
|
|
|
866
|
|
|
6,711
|
|
Subordinated debt and trust preferred securities
|
|
|
(4,878
|
)
|
|
-
|
|
|
(4,878
|
)
|
|
(2,909
|
)
|
|
1,643
|
|
|
(4,552
|
)
|
Other borrowings
|
|
|
162
|
|
|
162
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
(70,195
|
)
|
$
|
30,061
|
|
$
|
(100,256
|
)
|
$
|
(55,918
|
)
|
$
|
23,391
|
|
$
|
(79,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN NET INTEREST INCOME
|
|
$
|
127,666
|
|
$
|
134,236
|
|
$
|
(6,570
|
)
|
$
|
(52,741
|
)
|
$
|
9,889
|
|
$
|
(62,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Changes
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 is $(1.5) million, and total changes due to volume and rates on an unadjusted basis for tax-exempt investment securities is
$(357) thousand and $(1.2) million for 2009 vs. 2008. For 2008 vs. 2007, total change on an unadjusted basis for tax-exempt investment securities
available-for-sale is $242 thousand, and total changes due to volume and rates on an unadjusted basis for tax-exempt investment securities
available-for-sale is $554 thousand and $(312) thousand.
Provision for Loan Losses
The provision for loan losses amounted to $528.7 million for 2009, compared to $226.0 million for 2008 and
$12.0 million for 2007. The increase in loan loss provisions during 2009 reflects our
55
Table of Contents
elevated
chargeoff levels as we managed down our problem assets with sizable reductions in nonaccrual loans, delinquent loans, and OREO. We sustained higher chargeoff activity and increased loan loss
provisions on our land, residential construction, and commercial construction loans during 2009 due to the continued weakness in the real estate market. Total net chargeoffs amounted to
$475.3 million during 2009, representing 5.69% of average non-covered loans during 2009. This compares to $141.4 million, representing 1.64% of average loans during 2008.
Approximately 65%, or $309.5 million, of total net chargeoffs recorded during 2009 were related to land and construction loans. During 2009, we took proactive measures to reduce our exposure to
land and construction loans. As a result of these efforts, total construction loan commitments and land loans declined by $1.31 billion as of December 31, 2009 relative to
year-end 2008. We continue to aggressively monitor delinquencies and proactively review the credit risk exposure of our loan portfolio to minimize and mitigate potential losses. Also
during the year we had note sale proceeds of $358.4 million on notes with a carrying value of $473.7 million. The difference between the carrying value and the sale amount was charged
against the allowance for loan losses.
Comparing
2008 to 2007, the increase in loan loss provisions during 2008 reflects our increased chargeoff levels, 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 recessionary pressures in the overall economic environment.
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 (Loss)
Table 6:
Components of Noninterest Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
Gain on acquisition of UCB
|
|
$
|
471.01
|
|
$
|
-
|
|
$
|
-
|
|
Impairment writedown on investment securities
|
|
|
(107.67
|
)
|
|
(73.17
|
)
|
|
(0.41
|
)
|
Decrease in FDIC indemnification assets
|
|
|
(23.34
|
)
|
|
-
|
|
|
-
|
|
Branch fees
|
|
|
22.32
|
|
|
16.97
|
|
|
15.07
|
|
Net gain on investment securities available-for-sale
|
|
|
11.92
|
|
|
9.01
|
|
|
7.83
|
|
Letters of credit fees and commissions
|
|
|
8.34
|
|
|
9.74
|
|
|
10.25
|
|
Ancillary loan fees
|
|
|
6.29
|
|
|
4.65
|
|
|
5.77
|
|
Income from life insurance policies
|
|
|
4.37
|
|
|
4.15
|
|
|
4.16
|
|
Net gain on sale of loans
|
|
|
-
|
|
|
2.28
|
|
|
1.57
|
|
Other operating income
|
|
|
3.31
|
|
|
1.31
|
|
|
5.28
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
396.55
|
|
$
|
(25.06
|
)
|
$
|
49.52
|
|
|
|
|
|
|
|
|
|
Noninterest
income (loss) 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 writedowns on investment securities and other assets, and other noninterest-related revenues.
56
Table of Contents
Our
recorded noninterest income of $396.6 million during 2009 was primarily due to a pre-tax gain of $471.0 million from the FDIC-assisted
acquisition of United Commercial Bank partially offset by non-cash OTTI charges on our available-for-sale securities portfolio. In comparison, we recorded a
noninterest loss of $(25.1) million during 2008. Excluding the pre-tax gain of $471.0 million from the FDIC-assisted acquisition, the $23.3 decrease in the FDIC
indemnification asset and the non-cash OTTI charges on investment securities totaling $107.7 million in 2009 and $73.2 million in 2008, total noninterest income increased to
$56.5 million during 2009, compared with $48.1 million for the corresponding period in 2008. The $107.7 impairment charge recorded during 2009 was related to credit-related impairment
loss on our trust preferred securities recorded pursuant to the provisions of ASC 320-10-65 which the Company implemented during the first quarter of 2009.
Branch
fees, which represent revenues derived from branch operations, totaled $22.3 million in 2009, representing a 32% increase from the $17.0 million earned in 2008. The
increase in branch-related fee income during 2009 can be attributed primarily to higher revenues from service and transaction charges on deposit accounts.
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 14% to $8.3 million in 2009, from $9.7 million in 2008. The decrease in letters of credit fees and commissions for both periods 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.
Net
gain on sales of investment securities available-for-sale increased to $11.9 million during 2009 compared with $9.0 million in 2008. The
proceeds from the sale of investment securities during 2009 provided additional liquidity to purchase additional high credit quality investment securities and short-term investments as
well as pay down our borrowings.
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 35% to $6.3 million in 2009, compared to $4.6 million in 2008. The increase in ancillary loan fees during 2009 is primarily due to the
impairment provision on mortgage servicing assets that amounted to $1.1 million in 2009, as compared to $2.4 million impairment writedown in 2008.
Other
operating income, which includes insurance commissions and insurance-related service fees, rental income, and other miscellaneous income, increased 152% to $3.3 million in
2009, compared to $1.3 million in 2008.
Comparing
2008 to 2007, our recorded noninterest loss of $(25.1) million during 2008 was primarily due to non-cash OTTI charges on our
available-for-sale securities portfolio. In comparison, we recorded noninterest income of $49.5 million during 2007. Excluding the non-cash OTTI charges on
investment securities totaling $73.2 million in 2008 and $405 thousand in 2007, total noninterest income slightly decreased to $48.1 million during 2008, compared with
$49.9 million for the corresponding period in 2007. A large portion of the OTTI charges
recorded during 2008, or approximately $55.3 million, was related to Fannie Mae and Freddie Mac preferred securities, with the remaining $17.9 million related to certain trust preferred
debt and equity securities. The $405 thousand impairment charge recorded during 2007 was related to a trust preferred debt security.
57
Table of Contents
Noninterest Expense
Table 7:
Components of Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In millions)
|
|
Compensation and employee benefits
|
|
$
|
79.47
|
|
$
|
82.24
|
|
$
|
85.93
|
|
Occupancy and equipment expense
|
|
|
30.22
|
|
|
26.99
|
|
|
25.58
|
|
Amortization and impairments of investments in affordable housing partnerships
|
|
|
13.05
|
|
|
7.27
|
|
|
4.96
|
|
Amortization and impairment writedowns of premiums on deposits acquired
|
|
|
5.90
|
|
|
7.27
|
|
|
6.85
|
|
Deposit insurance premiums and regulatory assessments
|
|
|
28.07
|
|
|
7.22
|
|
|
1.40
|
|
Loan related expense
|
|
|
7.58
|
|
|
6.37
|
|
|
3.05
|
|
Other real estate owned expense (income)
|
|
|
19.10
|
|
|
6.01
|
|
|
(1.24
|
)
|
Legal expense
|
|
|
8.02
|
|
|
5.58
|
|
|
3.20
|
|
Data processing
|
|
|
5.64
|
|
|
4.49
|
|
|
4.82
|
|
Deposit-related expenses
|
|
|
3.91
|
|
|
4.41
|
|
|
6.77
|
|
Consulting expense
|
|
|
8.14
|
|
|
4.40
|
|
|
3.32
|
|
Other operating expenses
|
|
|
37.38
|
|
|
39.02
|
|
|
38.62
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
246.48
|
|
$
|
201.27
|
|
$
|
183.26
|
|
|
|
|
|
|
|
|
|
|
Efficiency Ratio (1)
|
|
|
48.89
|
%
|
|
45.94
|
%
|
|
37.44
|
%
|
|
|
|
|
|
|
|
|
-
(1)
-
Represents
noninterest expense, excluding the amortization of intangibles, amortization and impairment writedowns of premiums on deposits acquired,
impairment writedown on goodwill, and investments in affordable housing partnerships, divided by the aggregate of net interest income before provision for loan losses and noninterest income, excluding
impairment writedowns on investment securities.
Noninterest
expense, which is comprised primarily of compensation and employee benefits, occupancy and other operating expenses increased 22% to $246.5 million during 2009,
compared to $201.3 million during 2008.
Compensation
and employee benefits decreased 3% to $79.5 million in 2009, compared to $82.2 million in 2008, primarily due to the impact of initiatives undertaken by the
Company throughout the year to reduce overall staffing levels and lower compensation related expenses.
Occupancy
and equipment expenses increased 12% to $30.2 million during 2009, compared with $27.0 million during 2008. The increase in occupancy and equipment expenses
during 2009 is primarily due to the additional occupancy and equipment expenses from the United Commercial Bank acquisition.
The
amortization and impairment writedowns of premiums on deposits acquired decreased 19% to $5.9 million during 2009, compared with $7.3 million in 2008. During 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. In comparison, we did not record any impairment losses on deposit premiums during 2009. Additionally, the amortization expense on deposit premiums related to the United National Bank and
Standard Bank acquisitions decreased during 2009, relative to the same period in 2008.
58
Table of Contents
Deposit-related
expenses decreased 11% to $3.9 million during 2009, compared with $4.4 million during 2008. Deposit-related expenses represent various business-related
expenses paid by the Bank on behalf of its commercial account customers. The decrease in deposit-related expenses can be correlated to the decline in the volume of title and escrow deposit balances
during 2009 relative to the prior year. This segment of our deposit base has been adversely impacted by the overall slowing in the housing market both in production and sale.
The
amortization of investments in affordable housing partnerships increased to $13.1 million in 2009, from $7.3 million in 2008. The increase in amortization expense is
primarily due to a $5.6 million impairment charge on one investment property. Total investments in affordable housing partnerships increased to $84.8 million at December 31, 2009,
compared to $48.1 million at December 31, 2008, of which $31.6 million of the increase was due to the UCB Acquisition.
Deposit
insurance premiums and regulatory assessments increased $20.9 million to $28.1 million during 2009, compared with $7.2 million in 2008. This is due to an
increase in the FDIC deposit assessment rate during 2009 in addition to the special assessment imposed on each insured depository institution to maintain confidence in the federal deposit insurance
system. On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution's total assets minus Tier 1 capital as of
June 30, 2009. This special assessment resulted in a $5.7 million impact to our pretax earnings during 2009. Also, during the fourth quarter of 2009, an additional deposit insurance
premium of $2.9 million was recorded relating to the acquired deposits of United Commercial Bank.
We
recorded OREO expenses, net of OREO revenues and gains, totaling $19.1 million during 2009, compared with $6.0 million during 2008. As of December 31, 2009,
total net non-covered OREO amounted to $13.8 million, compared to $38.3 million as of December 31, 2008. The $19.1 million in total OREO expenses during 2009 is
comprised of $6.0 million in various operating and maintenance expenses related to our OREO properties, $7.8 million in valuation losses, and $5.3 million in net OREO losses from
the sale of 158 OREO properties consummated in 2009.
Loan
related expenses increased to $7.6 million in 2009, compared to $6.4 million 2008. The increase in loan related expenses is primarily due to new appraisals ordered
during 2009 to obtain current valuations of collateral securing our land, residential construction, and commercial construction loan portfolios.
Other
operating expenses include advertising and public relations, telephone and postage, stationery and supplies, bank and item processing charges, insurance expenses, and other
professional fees, and charitable contributions. Other operating expenses slightly decreased 4% to $37.4 million in 2009, compared with $39.0 million in 2008.
Comparing
2008 to 2007, noninterest expense increased $18.0 million, or 10%, to $201.3 million. The increase is comprised primarily of the following: (1) OREO
expenses, net of OREO revenues and gains, totaling $6.0 million during 2008, compared with $1.2 million in net OREO income during 2007 representing the net gain on sale of one OREO
property sold during the first quarter of 2007. The $6.0 million in total OREO expenses incurred during 2008 is comprised of $2.8 million in various operating and maintenance expenses
related to our higher volume of OREO properties, $2.4 million in valuation writedowns, and $852 thousand in net losses from the sale of 29 OREO properties consummated in 2008;
(2) an increase in deposit insurance premiums and discounts of $5.8 million, or 414%, primarily due to increases in the FDIC deposit assessment rate during 2008; and (3) an
increase in loan related expenses of $3.3 million, or 109%, primarily due to new appraisals ordered during 2008 to obtain current valuations of collateral securing our land, residential
construction, and commercial
59
Table of Contents
construction
loan portfolios; and (4) an increase in amortization of investments in affordable housing partnerships of $2.3 million, or 47%, partly due to additional purchases of
investments in affordable housing partnerships during 2008.
The
Company's efficiency ratio increased to 48.89% in 2009, compared to 45.94% in 2008 and 37.44% in 2007. The increase in our efficiency ratio during 2009 can be attributed to higher
deposit insurance premiums, higher credit cycle expenses associated with OREO/foreclosure transactions as well as higher amortization of investments in affordable housing partnership and legal and
consulting expenses. Comparing 2008 to 2007, the increase in our efficiency ratio can be attributed largely to higher deposit insurance premiums, as well as higher credit cycle expenses associated
with OREO/foreclosure transactions and legal expenses.
Income Taxes
The income tax provision totaled $22.7 million in 2009, representing an effective tax rate of 21.7%. In comparison, the income
tax benefit of $47.5 million represented an effective tax benefit rate of 48.9% for 2008. The income tax provision recognized during 2009 reflects the utilization of $7.1 million in tax
credits and no tax on the gain recognized from the acquisition of the foreign operations from the UCB Acquisition. The income tax benefit recognized during 2008 reflects the utilization of
$7.4 million in tax credits.
Comparing
2008 to 2007, the income tax benefit totaled $47.5 million in 2008, representing an effective tax benefit rate of 48.9%, compared to a provision for income taxes of
$101.1 million in 2007, representing an effective tax rate of 38.6%. The income tax benefit recognized during 2008 reflects the utilization of $7.4 million in tax credits, compared to
$5.2 million utilized in 2007.
Pursuant
to the adoption of FIN 48 on January 1, 2007, the Company increased its existing unrecognized tax benefits by $7.1 million by recognizing a
one-time cumulative effect adjustment to retained earnings on January 1, 2007 related to the Company's dissolved regulated investment company ("RIC"), East West Securities
Company, Inc. During the second quarter of 2008, the Company determined that the remaining $4.6 million, net of tax benefit, would not "more likely than not" be sustained upon
examination by tax authorities. As a result, this charge was recorded against the provision for income taxes during the second quarter of 2008. See Note 20 to the Company's consolidated
financial statements presented elsewhere in this report.
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 Company's
business operations and assesses its economic performance. For the Bank the chief operating decision maker is the Chief Executive Officer ("CEO"). 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 segments
Treasury 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. During the fourth quarter of 2009, a fourth operating segment, the United Commercial
Bank segment (the "UCB segment") was identified as a result of the UCB Acquisition. The UCB segment is currently identified as a segment due to the significant size of the transaction and meets the
other requirements of a segment, that is, the segment engages in business activities from which it earns
60
Table of Contents
revenues
and incur expenses and whose operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segment and
assess its performance and for which discrete financial information is available. Management will continue to evaluate the UCB segment going forward and make any required realignment as it fully
integrates with the Company's other business operations.
The
Retail Banking segment focuses primarily on retail operations through the Bank's 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 Bank's northern and southern California production offices. Furthermore, the Commercial Banking 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 UCB
segment focuses primarily on the contribution towards the Company's overall business operations resulting from the acquired loan and
deposit portfolio of United Commercial Bank. 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 Company's 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 Company's 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 2008 since these changes were adopted
on a prospective basis. 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 full year impact of these changes was not significant overall, and would have been favorable to the segment pre-tax profit (loss) results for the Retail Banking and
Commercial Banking segments but unfavorable to the Other segment during 2008. 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 December 31, 2008, had these assumptions been retroactively implemented during 2008.
For
more information about our segments, including information about the underlying accounting and reporting process, please see Note 26 to the Company's consolidated financial
statements presented elsewhere in this report.
61
Table of Contents
Retail Banking
The Retail Banking segment reported a $50.8 million pre-tax loss during 2009, compared to a $17.4 million
pre-tax loss for 2008, an increase of $33.4 million. The pre-tax loss for this segment during 2009 is primary derived from a $82.6 million or 89% increase in loan
loss provision associated with the $528.7 million provision for loan loss in 2009. The loss is also driven by a $16.0 million or an 8% increase in net interest income, offset against a
$11.3 million or 30% decrease in noninterest income and a $23.6 million or 22% increase in noninterest expense.
Net
interest income for this segment increased 8% to $215.3 million during 2009, compared to $199.2 million for 2008. The increase in net interest income during the 2009
is attributable to the interest rate floors on newly originated variable-rate loans, which partially offsets the steep decline in interest rates. The sizeable increase in loan loss
provisions for this segment during 2009, relative to 2008, was due to increased charge-off activity resulting from the continued 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 30%, to $26.1 million for 2009, from $37.4 million in 2008. The decrease in noninterest income is primarily due to lower loan
fee income resulting from a decrease in our loan origination activities and lower net gain on sale of loans, partially offset by an increase in branch-related revenues.
Noninterest
expense for this segment increased 22% to $130.7 million during 2009, compared with $107.1 million during 2008. The increase in noninterest expense is
primarily due to higher FDIC insurance premiums, amortization of intangibles, and OREO operations. This was partially offset by a decrease in compensation and employee benefits.
Comparing
2008 to 2007, the retail banking segment reported a pre-tax loss of $17.4 million during 2008, representing a 110.3% decrease, as compared to the
$168.6 million pre-tax income recorded for the same period in 2007. The decrease in pre-tax income for this segment during 2008 is comprised of a 23%, or
$59.9 million, decrease in net interest income to $199.2 million, a $85.0 million increase in loan loss provisions, and increases in noninterest expense and corporate overhead
expense allocations. The decrease in net interest income during 2008 is primarily due to the steep 400 basis point decrease in interest rates since December 2007. The increase in loan loss provisions
for this segment during 2008, relative to 2007, was due to increased chargeoff activity, as well as higher levels of nonperforming and classified assets resulting from the downturn in the real estate
housing market.
Commercial Banking
The Commercial Banking segment reported a pre-tax loss of $254.8 million during 2009, compared with a
pre-tax loss of $3.0 million for 2008, a change of $251.8 million. The pre-tax loss for this segment is due to a significant increase in loan loss provisions,
$220.1 million, resulting from increased charge-off activity. The loss was also driven by an $8.6 million or a 5% decrease in net interest income, a $6.3 million or
26% decrease in noninterest income, and a $6.7 million or 14% increase in noninterest expense. Year over year, loan loss provisions increased to $352.8 million or 166% during 2009,
compared with $132.7 million for 2008.
Net
interest income for this segment decreased 5% to $179.5 million during 2009, compared to $188.1 million for 2008. The slight decrease in net interest income is
primarily due to a decrease in interest income on loans in response to declining interest rates.
62
Table of Contents
Noninterest income for this segment decreased 26% to $18.2 million during 2009, compared with $24.5 million recorded in 2008. The decrease in
noninterest income is primarily due to an increase in fee waivers 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 overall condition of the economy.
Noninterest
expense for this segment increased 14% to $53.2 million during 2009, compared with $46.5 million recorded during 2008. The increase in noninterest expense
during 2009 is due to an increase in the FDIC insurance premiums and a real estate investment impairment partially offset by a decrease in compensation and employee benefits for this segment.
Comparing
2008 to 2007, the commercial banking segment reported a pre-tax loss of $3.0 million during 2008, or a 102.9% decrease, compared with pre-tax
income of $102.6 million for 2007. The primary driver of the decrease in pre-tax income for this segment for both periods is a significant increase in loan loss provisions resulting
from increased chargeoff activity as well as higher levels of nonperforming and classified assets and an increase in corporate overhead allocations, partially offset by the increase in net interest
income.
Other
This segment reported a pre-tax profit of $302.4 million during 2009, compared with a pre-tax loss of
$76.8 million recorded in 2008, a change of $379.2 million. The profit was driven by a $432.5 million increase in noninterest income primarily from the $471.0 million
pre-tax gain recorded on the United Commercial Bank acquisition during the fourth quarter.
Net
interest loss for this segment amounted to $37.4 million during 2009, compared to net interest loss of $32.2 million recorded in 2008. Since this segment now includes
the treasury function, which is responsible for the liquidity and interest rate risk management of the Bank, it bears the cost of adverse movements in interest rates affecting our net interest margin
and supports the Retail Banking and Commercial Banking segments through funds transfer pricing.
Noninterest
income for this segment amounted to $345.6 million during 2009, compared with $86.9 million in noninterest loss recorded during 2008. The 2009 noninterest
income for this segment is primarily due to $471.0 million associated with the gain on the acquisition of United Commercial Bank. The gain was offset by $107.7 in securities impairments
recorded in 2009, as compared to $73.2 million recorded in 2008.
Noninterest
expense for this segment decreased 20% to $37.9 million for 2009, compared with $47.6 million recorded during 2009. The decrease in noninterest expense is
primarily due to a decrease in core deposit intangibles and employee compensation/benefits, partially offset by higher FDIC insurance premiums.
Comparing
2008 to 2007, the other segment's pre-tax income decreased to a pre-tax loss of $76.8 million in 2008, compared to a pre-tax loss of
$9.0 million in 2007. The primary driver of the decrease in pre-tax income for this segment in 2008 are OTTI charges recorded on government-sponsored entities preferred stock and
trust preferred debt and equity securities.
UCB Segment
The UCB segment reported a pre-tax profit of $107.9 million primarily due to the yield adjustment of
$74.4 million on covered loans partially offset by the decrease in the FDIC
63
Table of Contents
indemnification
asset of $23.3 million. The pre-tax profit also includes net interest income of $65.2 million which represents net interest income for the period
November 7, 2009 to December 31, 2009.
Balance Sheet Analysis
Total assets increased $8.14 billion, or 65%, to $20.56 billion as of December 31, 2009. The increase is
comprised predominantly of increases in securities purchased under resale agreements of $177.4 million, available-for-sale investment securities of
$523.9 million, net loans of $5.75 billion, FDIC indemnification asset and receivable of $1.26 billion and other assets of $138.0 million. The increases in total assets
were funded primarily through increases in deposit growth of $6.85 billion and FHLB advances of $452.1 million. Total asset and liability growth was predominantly the result of the
November 6, 2009 acquisition of United Commercial Bank.
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 increased to $227.4 million as of December 31, 2009, compared with $50.0 million at December 31, 2008. The increase as of December 31, 2009 reflects an
additional resale agreement for $30.0 million entered into during 2009 and the assumption of $150.0 million in resale agreements, less a discount of $2.6 million, resulting from
the UCB Acquisition.
Purchases
of securities under resale agreements are overcollateralized to ensure against unfavorable market price movements. We monitor the market value of the underlying securities
which collateralize
the related receivable on resale agreements, including accrued interest. In the event that the fair market value of the securities decreases below the carrying amount of the related repurchase
agreement, our counterparty is required to designate an equivalent value of additional securities. The counterparties to these agreements are nationally recognized investment banking firms that meet
credit eligibility criteria and with whom a master repurchase agreement has been duly executed.
Investment Securities
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.
We
had no held-to-maturity investment securities as of December 31, 2009 compared to $122.3 million at December 31, 2008. During 2009 and
subsequent to the UCB Acquisition, we transferred $681.4 million held-to-maturity investment securities to available-for-sale.
Total
investment securities available-for-sale increased 25% to $2.56 billion as of December 31, 2009, compared with $2.04 billion at
December 31, 2008. The increase in investment securities was
64
Table of Contents
funded
by deposit growth, capital raised during 2009, and the government assisted acquisition of United Commercial Bank. Total repayments/maturities and proceeds from sales of
available-for-sale securities amounted to $1.48 billion and $1.65 billion, respectively, during 2009. Proceeds from repayments, maturities, sales, and redemptions
were applied towards additional investment securities purchases totaling $4.08 billion. We recorded net gains totaling $11.9 million and $9.0 million on sales of
available-for-sale securities during 2009 and 2008, respectively. At December 31, 2009, investment securities available-for-sale with a par value
of $1.51 billion were pledged to secure public deposits, FHLB advances, repurchase agreements, FRB discount window, and for other purposes required or permitted by law.
We
perform regular impairment analyses on the investment securities. If we determine that a decline in fair value is other-than-temporary, an impairment
writedown is recognized in current earnings. Other-than-temporary declines in fair value are assessed based on factors including the duration the security has been in a
continuous unrealized loss position, the severity of the decline in value, the rating of the security, 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. 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 ensures whether prices received from independent brokers represent a reasonable estimate of fair value through the use of
internal and external cash flow models developed based on spreads, and when available, market indices. As a result of this analysis, if the Company determines there is a more appropriate fair value
based upon available market data, the price received from the third party is adjusted accordingly.
Prices
from third party pricing services are often unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain
securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent
broker quotations are non-binding.
As
a result of the global financial crisis and illiquidity in the U.S. markets, we believe the current broker prices that we have obtained on our private label mortgage-backed
securities and trust preferred debt and equity securities are based on forced liquidation or distressed sale values in very inactive markets that are not representative of the economic value of these
securities. The fair values of private label mortgage-backed securities and 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 ASC 820. However, in light of these circumstances, we have modified our approach in
determining the fair values of these securities. We have determined that each of these securities will be individually examined for the appropriate valuation methodology based on a combination of the
market approach reflecting current broker prices and the income approach based on discounted cash flows. 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 are taken into consideration in determining the discount rate. The values resulting from each approach (i.e. market and
income approaches) are weighted to derive the final fair value on each private label mortgage-backed and trust preferred security.
65
Table of Contents
The
majority of unrealized losses in the available-for-sale portfolio at December 31, 2009 are related to trust preferred debt securities. As of
December 31, 2009, the Company had $14.5 million in trust preferred debt securities available-for-sale, representing less than 1% of the total investment
securities available-for-sale portfolio. During the year, except for one security that maintained its rating and one security which was downgraded but remained at investment
grade status, the ratings for the other fourteen trust preferred securities were downgraded to non-investment grade status due to increased deferral and default activity from the issuers
of the underlying debt collateralizing these instruments. As of December 31, 2009, these debt instruments had gross unrealized losses amounting to $17.4 million, or 66% of the total
amortized cost basis of these securities, comprised of $3.3 million in gross unrealized losses and $14.1 million, or $8.2 million on a net of tax basis, in noncredit-related
impairment losses recorded during the year ended December 31, 2009 pursuant to the provisions of ASC 320-10-65. As a result of the previously discussed diminishing
collateral values, deteriorating cash flows, and increasing estimates of future deferrals and defaults, we recorded an impairment loss of $120.8 million on our portfolio of trust preferred
securities during the year of which $106.7 million was a pre-tax credit loss recorded through earnings. Included in the $106.7 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.
In
addition, $41.6 million of non-investment grade mortgage backed securities, representing 1.6% of the total investment securities have an unrealized loss of
$9.6 million or 18.9% of the aggregate amortized cost basis of these securities as of December 31, 2009.
We
have seven individual securities that have been in a continuous unrealized loss position for twelve months or longer as of December 31, 2009. These securities are comprised of
six trust preferred securities with a total fair value of $9.8 million and one mortgage-backed security with a total fair value of $12.7 million. As of December 31, 2009, there
were also seventy one 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. However, we have the ability and the intention to hold these securities until
their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily impaired.
In
September 2008, the liquidity and credit concerns led the U.S. Federal Government to assume a conservatorship role in Fannie Mae and Freddie Mac. The rating on Fannie Mae and Freddie
Mac preferred securities was downgraded from BBB- to C reflecting the cessation of dividend payments on these securities. These securities are non-cumulative perpetual
preferred stock in which unpaid dividends do not accumulate. The purchase agreement between the U.S. Treasury and these government-sponsored entities contains a covenant prohibiting the payment of
dividends on existing preferred stock. As the assessment on the status of any resumption in dividend payments on these securities was uncertain, in accordance with ASC 320-10, we recorded
$55.3 million in OTTI charges on Fannie Mae and Freddie Mac preferred stock securities in 2008. In December 2009, we recorded an additional $1.0 million in OTTI charges. As of
December 31, 2009, the fair value of these preferred securities was $1.8 million. Gross unrealized losses on these securities amounted to $216 thousand as of December 31,
2009, or 11% of the aggregate amortized cost basis of these securities. The value of these preferred securities have been very volatile and in the month preceding and subsequent to
year-end, these securities have traded above their carrying values. The Company has the ability and the
66
Table of Contents
intention
to hold these securities until their fair values recover to cost. As such, the Company does not deem these securities to be other-than-temporarily impaired.
The
following table sets forth the amortized cost of investment securities held-to-maturity and the fair values of investment securities
available-for-sale at December 31, 2009, 2008 and 2007:
Table 8:
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
Held-to-maturity (at amortized cost)
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
-
|
|
|
5,772
|
|
|
-
|
|
Corporate debt securities
|
|
|
-
|
|
|
116,545
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total investment securities held-to-maturity
|
|
$
|
-
|
|
$
|
122,317
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Available-for-sale (at fair value)
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
303,472
|
|
$
|
2,513
|
|
$
|
2,492
|
|
U.S. Government agency securities and U.S Government sponsored enterprise debt securities
|
|
|
832,025
|
|
|
1,023,934
|
|
|
426,490
|
|
U.S. Government sponsored enterprise mortgage-backed securities
|
|
|
750,703
|
|
|
380,051
|
|
|
535,276
|
|
Other mortgage-backed securities
|
|
|
137,126
|
|
|
537,326
|
|
|
680,598
|
|
Municipal securities
|
|
|
60,193
|
|
|
-
|
|
|
-
|
|
Residual securities
|
|
|
-
|
|
|
50,062
|
|
|
40,716
|
|
Corporate debt securities (1)
|
|
|
469,757
|
|
|
42,544
|
|
|
119,627
|
|
U.S. Goverment sponsored enterprise equity securities (2)
|
|
|
1,782
|
|
|
1,184
|
|
|
75,055
|
|
Other securities (3)
|
|
|
9,023
|
|
|
2,580
|
|
|
6,882
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
$
|
2,564,081
|
|
$
|
2,040,194
|
|
$
|
1,887,136
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
2,564,081
|
|
$
|
2,162,511
|
|
$
|
1,887,136
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Balances
presented net of OTTI charge of $106.7 million, $13.6 million and $405 thousand as of December 31, 2009, 2008 and 2007,
respectively.
-
(2)
-
Balances
presented net of OTTI charge of $1.0 million and $55.3 million as of December 31, 2009 and 2008, respectively.
-
(3)
-
Balances
presented net of OTTI charge of $4.3 million as of December 31, 2008.
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 December 31, 2009. Securities with no stated maturity dates, such as equity
securities, are included in the "indeterminate maturity" category.
67
Table of Contents
Table 9:
Yields and Maturities of Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
U.S. Treasury securities
|
|
$
|
183,910
|
|
|
0.23
|
%
|
$
|
119,562
|
|
|
1.02
|
%
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
303,472
|
|
|
0.54
|
%
|
U.S. Government agency and U.S. Government sponsored enterprise debt securities
|
|
|
494,838
|
|
|
3.31
|
%
|
|
209,476
|
|
|
2.62
|
%
|
|
49,035
|
|
|
3.54
|
%
|
|
78,676
|
|
|
5.36
|
%
|
|
-
|
|
|
-
|
|
|
832,025
|
|
|
3.34
|
%
|
U.S Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
-
|
|
|
-
|
|
|
2,702
|
|
|
5.69
|
%
|
|
8,249
|
|
|
4.56
|
%
|
|
15,404
|
|
|
4.71
|
%
|
|
-
|
|
|
-
|
|
|
26,355
|
|
|
4.76
|
%
|
|
Residential mortgage-backed securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
59,447
|
|
|
4.88
|
%
|
|
664,901
|
|
|
4.96
|
%
|
|
-
|
|
|
-
|
|
|
724,348
|
|
|
4.96
|
%
|
Municipal securities
|
|
|
8,983
|
|
|
2.80
|
%
|
|
32,507
|
|
|
4.23
|
%
|
|
16,839
|
|
|
6.57
|
%
|
|
1,864
|
|
|
7.62
|
%
|
|
-
|
|
|
-
|
|
|
60,193
|
|
|
4.77
|
%
|
Other residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,301
|
|
|
5.54
|
%
|
|
47,216
|
|
|
6.41
|
%
|
|
-
|
|
|
-
|
|
|
95,517
|
|
|
5.31
|
%
|
|
Non-investment grade
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
41,610
|
|
|
8.64
|
%
|
|
-
|
|
|
-
|
|
|
41,610
|
|
|
3.32
|
%
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
|
108,163
|
|
|
5.78
|
%
|
|
333,424
|
|
|
5.16
|
%
|
|
19,308
|
|
|
5.22
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
460,895
|
|
|
5.31
|
%
|
|
Non-investment grade
|
|
|
1,347
|
|
|
3.80
|
%
|
|
608
|
|
|
6.05
|
%
|
|
-
|
|
|
-
|
|
|
6,906
|
|
|
0.86
|
%
|
|
-
|
|
|
-
|
|
|
8,861
|
|
|
3.32
|
%
|
U.S. Government sponsored enterprise equity securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,782
|
|
|
0.36
|
%
|
|
1,782
|
|
|
0.36
|
%
|
Other securities
|
|
|
7,090
|
|
|
0.10
|
%
|
|
1,933
|
|
|
0.47
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,023
|
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
$
|
804,331
|
|
|
2.91
|
%
|
$
|
700,212
|
|
|
3.62
|
%
|
$
|
201,179
|
|
|
4.86
|
%
|
$
|
856,577
|
|
|
5.21
|
%
|
$
|
1,782
|
|
|
0.36
|
%
|
$
|
2,564,081
|
|
|
4.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. At December 31, 2009, no
residual securities are maintained due to the desecuritizations earlier in the year. As of December 31, 2008, the fair value of residual securities totaling $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%.
Covered Assets
Covered assets are loans receivable and real estate owned "REO" that were acquired in the UCB Acquisition in November 6, 2009
for which the Company entered into a shared-loss agreement (the "shared-loss agreement") with the FDIC. The shared-loss agreement covered all the loans originated
by United Commercial Bank in the domestic U.S. and Hong Kong. Loans originated by United Commercial Bank in China under its United Commercial Bank China (Limited) subsidiary were not included in the
shared-loss agreement. The Company will share in the losses, which begins with the first dollar of loss occurred, ofssss the loan pools (including single family residential mortgage loans,
commercial loans "covered loans" and foreclosed loan collateral and other real estate owned), together covered ("covered assets") under the shared-loss agreement.
68
Table of Contents
Pursuant
to the terms of the shared-loss agreement, the FDIC is obligated to reimburse the Company 80% of eligible losses of up to $2.05 billion with respect to
covered assets. The FDIC will reimburse the Company for 95% of eligible losses in excess of $2.05 billion with respect to covered loans. The Company has a corresponding obligation to reimburse
the FDIC for 80% or 95%, as applicable, of eligible recoveries with respect to covered loans. The shared-loss agreement for commercial and single family residential mortgage loans is in
effect for 5 years and 10 years, respectively, from the November 6, 2009 acquisition date and the loss recovery provisions are in effect for 8 years and 10 years,
respectively, from the acquisition date.
On
January 14, 2020, the Company is required to pay to the FDIC 50% of the excess, if any of (i) $410 million over (ii) the sum of (A) 25% of the
asset discount plus (B) 25% of the Cumulative Shared-Loss Payments plus (C) the Cumulative Servicing Amount if net losses on covered loans subject to the stated threshold is
not reached. As of December 31, 2009, the estimate for this liability is zero.
At
the November 6, 2009 acquisition date, we accounted for the loan portfolio acquired from United Commercial Bank under the fair value accounting requirements as stated in ASC
805 and estimated that the fair value of the loan portfolio subject to the shared-loss agreement at $5.66 billion. This represents the expected cash flows from the portfolio. In
estimating the nonaccretable difference, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and
(b) estimated the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The amount by which the undiscounted expected cash flows
exceed the estimated fair value (the "accretable
yield") is accreted into interest income over the life of the loans. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable
difference. The nonaccretable difference represents our estimate of the credit losses expected and was written off as of the acquisition date. In the determination of contractual cash flows and cash
flows expected to be collected, we assumed no prepayment on the SOP 03-3 nonaccrual loan pools as we do not anticipate any significant prepayments on credit impaired loans. For the
SOP 03-3 accrual loans for single-family, multi-family and commercial real estate, we used a third party vendor to obtain the prepayment speed. The third party vendor is recognized
in the mortgage-industry for the delivery of prepayment and default models for the secondary market to identify loan level prepayment, delinquency, default, and loss propensities. The prepayment rates
for the construction, land, commercial and consumer pools have historically been low and so we applied the prepayment assumptions of our current portfolio using our internal modeling. The Company has
elected to account for all loans acquired in the FDIC-assisted acquisition of United Commercial Bank under ASC 310-30 as the accounting treatment subsequent to acquisition date
fair value.
United
Commercial Bank's loan portfolio included unfunded commitments for commercial lines of credit, constructions draws and other lending activity. Any additional advances on these
loans subsequent to November 6, 2009 are not accounted for under ASC 310-30. The total commitment outstanding as of the acquisition date is included under the
shared-loss agreement. As such, any additional advances, up to the total commitment outstanding at the time of acquisition are covered loans.
The
covered loans acquired are and will continue to be subject to the Bank's internal and external credit review and monitoring. If credit deterioration is experienced subsequent to the
November 6, 2009 acquisition fair value amount, such deterioration will be measured through our loss reserving methodology and a provision for credit losses will be charged to earnings with a
partially offsetting noninterest income item reflecting the increase to the FDIC indemnification asset or receivable.
69
Table of Contents
The carrying amounts and the composition of the covered loans as of December 31, 2009 are as follows:
Table 10:
Covered Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
Credit Impaired
|
|
Other Loans
|
|
Total
|
|
|
|
(In thousands)
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
Residential single family
|
|
$
|
22,325
|
|
$
|
621,742
|
|
$
|
644,067
|
|
|
Residential multifamily
|
|
|
158,452
|
|
|
1,010,413
|
|
|
1,168,865
|
|
|
Commercial and industrial real estate
|
|
|
900,165
|
|
|
1,515,284
|
|
|
2,415,449
|
|
|
Contruction and land
|
|
|
1,236,228
|
|
|
155,500
|
|
|
1,391,728
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate
|
|
|
2,317,170
|
|
|
3,302,939
|
|
|
5,620,109
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
603,507
|
|
|
580,260
|
|
|
1,183,767
|
|
|
Other consumer
|
|
|
422
|
|
|
100,377
|
|
|
100,799
|
|
|
|
|
|
|
|
|
|
|
|
Total other loans
|
|
|
603,929
|
|
|
680,637
|
|
|
1,284,566
|
|
|
|
|
|
|
|
|
|
Total principal balance
|
|
|
2,921,099
|
|
|
3,983,576
|
|
|
6,904,675
|
|
|
Covered discount
|
|
|
(1,033,720
|
)
|
|
(474,948
|
)
|
|
(1,508,668
|
)
|
|
|
|
|
|
|
|
|
Net valuation of loans
|
|
|
1,887,379
|
|
|
3,508,628
|
|
|
5,396,007
|
|
|
Subsequent acquisition loan advances
|
|
|
-
|
|
|
202,148
|
|
|
202,148
|
|
|
|
|
|
|
|
|
|
Total covered loans
|
|
$
|
1,887,379
|
|
$
|
3,710,776
|
|
$
|
5,598,155
|
|
|
|
|
|
|
|
|
|
At
December 31, 2009, $675.6 million of the credit impaired loans were considered to be nonperforming loans.
The
following table shows the carrying amounts and estimated fair value for the covered loans as of acquisition date November 6, 2009 and year ended December 31, 2009:
Table 11:
Carrying Amounts and Estimated Fair Value for the Covered Loans
|
|
|
|
|
|
|
|
Description
|
|
At Acquisition
November 6, 2009
|
|
Year End
December 31, 2009
|
|
|
|
(In thousands)
|
|
Contractually required payments of interest and principal
|
|
$
|
8,407,745
|
|
$
|
7,976,064
|
|
Nonaccretable difference
|
|
|
(1,705,626
|
)
|
|
(1,596,950
|
)
|
|
|
|
|
|
|
Cash flows expected to be collected (1)
|
|
|
6,702,119
|
|
|
6,379,114
|
|
Accretable difference
|
|
|
(1,041,687
|
)
|
|
(983,107
|
)
|
|
|
|
|
|
|
Carrying value of covered loans
|
|
$
|
5,660,432
|
|
$
|
5,396,007
|
|
|
|
|
|
|
|
-
(1)
-
Represents
undiscounted expected principal and interest cash flows.
70
Table of Contents
Changes
in the accretable yield for the covered loans for the year ended December 31, 2009 is as follows:
Table 12:
Accretable Yield for Covered Loans
|
|
|
|
|
Description
|
|
Accretable Yield
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
-
|
|
Acquisition
|
|
|
1,041,687
|
|
Accretion
|
|
|
(9,731
|
)
|
Disposals
|
|
|
(48,849
|
)
|
|
|
|
|
Balance at end of period
|
|
$
|
983,107
|
|
|
|
|
|
The
excess of cash flows expected to be collected over the initial fair value of acquired loans is referred to as the accretable yield and is accreted into interest income over the
estimated life of the acquired loans using the effective yield method. The accretable yield will change due to:
-
-
estimate of the remaining life of acquired loans which may change the amount of future interest income
-
-
estimate of the amount of contractually required principal and interest payments over the estimated life that will not be
collected (the nonaccretable difference); and
-
-
indices for acquired loans with variable rates of interest.
From
the acquisition date of November 6, 2009 to December 31, 2009, excluding scheduled principal payments, a total of $333.8 million of loans were removed from the
covered loans accounted under ASC 310-30 due to loans paid in full, sold, transferred to covered REO. The payoff activity
during this period of time was higher than anticipated and what was modeled, however management does not believe this activity suggests the need for a change in the original prepayment assumptions at
this time. The loan discount related to these prepayments of $74.4 million was recorded as a yield adjustment to interest income. No impairment write-downs were recorded in 2009.
FDIC Indemnification Asset
As of November 6, 2009, we recorded an FDIC indemnification asset of $1.1 billion, consisting of the present value of
the amounts the Company expects to receive from the FDIC under the shared-loss agreement. The difference between the present value and the undiscounted cash flow the Company expects to
collect from the FDIC is accreted into noninterest income over the life of the FDIC indemnification asset. From the period of time from November 7, 2009 through December 31, 2009, the
Company recorded $8.3 million of accretion into income. Additionally, because of the high prepayment activity during this timeframe, the Company reduced the FDIC indemnification asset by
$31.7 million and recorded the adjustment as noninterest income. As of December 31, 2009, the recorded FDIC indemnification asset was $1.1 billion.
Non-Covered Loans
We offer a broad range of products designed to meet the credit needs of our borrowers. Our lending activities consist of residential
single family loans, residential multifamily loans, commercial real estate loans, construction loans, commercial business loans, trade finance loans, and consumer loans. Net non-covered
loans receivable increased $149.3 million, or 2%, to $8.22 billion at December 31, 2009.
71
Table of Contents
The
following table sets forth the composition of the loan portfolio as of the dates indicated:
Table 13:
Composition of Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential, single family
|
|
$
|
930,392
|
|
|
10.9
|
%
|
$
|
491,315
|
|
|
6.0
|
%
|
$
|
433,337
|
|
|
4.9
|
%
|
$
|
365,407
|
|
|
4.4
|
%
|
$
|
509,151
|
|
|
7.5
|
%
|
|
Residential, multifamily
|
|
|
1,022,383
|
|
|
12.0
|
%
|
|
677,989
|
|
|
8.2
|
%
|
|
690,941
|
|
|
7.8
|
%
|
|
1,584,674
|
|
|
19.2
|
%
|
|
1,239,836
|
|
|
18.3
|
%
|
|
Commercial and industrial real estate
|
|
|
3,964,622
|
|
|
46.6
|
%
|
|
4,048,564
|
|
|
49.1
|
%
|
|
4,183,473
|
|
|
47.3
|
%
|
|
3,766,634
|
|
|
45.6
|
%
|
|
3,321,520
|
|
|
48.9
|
%
|
|
Construction
|
|
|
455,142
|
|
|
5.4
|
%
|
|
1,260,724
|
|
|
15.3
|
%
|
|
1,547,082
|
|
|
17.5
|
%
|
|
1,154,339
|
|
|
14.0
|
%
|
|
640,654
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
$
|
6,372,539
|
|
|
74.9
|
%
|
$
|
6,478,592
|
|
|
78.6
|
%
|
$
|
6,854,833
|
|
|
77.5
|
%
|
$
|
6,871,054
|
|
|
83.2
|
%
|
$
|
5,711,161
|
|
|
84.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
1,283,182
|
|
|
15.1
|
%
|
$
|
1,210,260
|
|
|
14.6
|
%
|
$
|
1,314,068
|
|
|
14.8
|
%
|
$
|
960,375
|
|
|
11.6
|
%
|
$
|
643,296
|
|
|
9.5
|
%
|
|
Trade finance
|
|
|
220,528
|
|
|
2.6
|
%
|
|
343,959
|
|
|
4.2
|
%
|
|
491,690
|
|
|
5.6
|
%
|
|
271,795
|
|
|
3.3
|
%
|
|
230,771
|
|
|
3.4
|
%
|
|
Automobile
|
|
|
6,817
|
|
|
0.1
|
%
|
|
9,870
|
|
|
0.1
|
%
|
|
23,946
|
|
|
0.3
|
%
|
|
9,481
|
|
|
0.1
|
%
|
|
8,543
|
|
|
0.1
|
%
|
|
Other consumer
|
|
|
617,967
|
|
|
7.3
|
%
|
|
206,772
|
|
|
2.5
|
%
|
|
160,572
|
|
|
1.8
|
%
|
|
152,527
|
|
|
1.8
|
%
|
|
200,254
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loans
|
|
$
|
2,128,494
|
|
|
25.1
|
%
|
$
|
1,770,861
|
|
|
21.4
|
%
|
$
|
1,990,276
|
|
|
22.5
|
%
|
$
|
1,394,178
|
|
|
16.8
|
%
|
$
|
1,082,864
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
|
8,501,033
|
|
|
100.0
|
%
|
|
8,249,453
|
|
|
100.0
|
%
|
|
8,845,109
|
|
|
100.0
|
%
|
|
8,265,232
|
|
|
100.0
|
%
|
|
6,794,025
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned fees, premiums, and discounts, net
|
|
|
(43,529
|
)
|
|
|
|
|
(2,049
|
)
|
|
|
|
|
(5,781
|
)
|
|
|
|
|
(4,859
|
)
|
|
|
|
|
(1,070
|
)
|
|
|
|
Allowance for loan losses
|
|
|
(238,833
|
)
|
|
|
|
|
(178,027
|
)
|
|
|
|
|
(88,407
|
)
|
|
|
|
|
(78,201
|
)
|
|
|
|
|
(68,635
|
)
|
|
|
|
Loans held for sale
|
|
|
28,014
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
8,246,685
|
|
|
|
|
$
|
8,069,377
|
|
|
|
|
$
|
8,750,921
|
|
|
|
|
$
|
8,182,172
|
|
|
|
|
$
|
6,724,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Family Residential Loans.
We offer mortgage loans secured by one-to-four unit residential properties
located in our
primary lending areas. At December 31, 2009, $930.4 million or 11% of the loan portfolio was secured by one-to-four family residential real estate properties,
compared to $491.3 million or 6% at December 31, 2008. Residential single family loan balances increased year over year due to the desecuritization of our private-label mortgage backed
securities in the second quarter of 2009 and new originations. The desecuritizations in the second quarter of 2009 resulted in a $330.7 million increase in single family loans receivable with a
corresponding decrease to available for sale securities. Residential single family loan origination activity increased in 2009, with $226.6 million in new loan originations during 2009,
compared with $131.3 million in 2008. This increase in the loan origination was primarily due to market improvements.
Further,
we sold approximately $36.1 million in conforming and non-conforming residential single family loans through our secondary marketing efforts during 2009,
compared to $31.2 million sold in 2008.
We
offer both fixed and adjustable rate ("ARM") single family residential mortgage loan programs. We primarily offer ARM loan programs that have six-month,
three-year, five-year, or seven-year initial fixed periods. We originate single family residential mortgage loans under three different types of programs:
full/alternative documentation, reduced documentation and no documentation loans. The underwriting criteria for these loan programs vary in income and asset documentation levels. Our underwriting
criteria for all the loans in our single family residential mortgage loan programs include minimum Fair Isaac Corporation ("FICO") credit scores and maximum loan-to-value
("LTV") ratios. Additionally, our full/alternative documentation loan program requires verification of employment and income. Reduced documentation loans are primarily intended for borrowers who are
self-employed. Generally, we require reduced documentation borrowers to have more equity in the property and higher amounts of liquid reserves. Finally, our no documentation loan program
is designed for borrowers who demonstrate excellent credit quality and have the ability to
72
Table of Contents
place
a large down payment or have high equity in the property. We still do reduced and no documentation loans, but the risk is minimal due to our stringent underwriting criteria.
Of
the $226.6 million in residential single family mortgage loans originated during 2009, 22% or $50.1 million were full/alternative documentation loans, 16% or
$35.5 million were reduced documentation loans, 27% or $62.1 million were no documentation loans, and 35% or $78.9 million were limited document loans. In comparison, of the
$131.3 million in residential single family mortgage loans originated during 2008, 7% or $8.8 million were full/alternative documentation loans, 35% or $46.0 million were reduced
documentation loans and 58% or $76.6 million were no documentation loans. Based on management's evaluation and analysis of the portfolio credit quality and prevailing economic conditions, we
believe the loan loss provision is adequate for losses inherent in the portfolio as of December 31, 2009.
Multifamily Real Estate Loans.
At December 31, 2009, $1.0 billion or 12% of the loan portfolio was
secured by multifamily real estate
properties, compared to $678.0 million or 8% at December 31, 2008. Multifamily loan balances increased year over year primarily due to the desecuritization of our private-label mortgage
backed securities in the second quarter of 2009. The desecuritizations in the second quarter of 2009 resulted in a $304.9 million increase in multifamily loans receivable with a corresponding
decrease to available for sale securities. We originated $27.6 million multifamily loans in 2009, as compared to $27.8 million in 2008. Although real estate lending activities are
collateralized by real property, these transactions are subject to similar credit evaluation, underwriting and monitoring standards as those applied to commercial business loans. Multifamily real
estate loans accounted for $1.02 billion or 12%, and $678.0 million or 8%, of our loan portfolio at December 31, 2009 and 2008, respectively.
Additionally,
we own single family and multifamily residential mortgage loans that have contractual features that may increase our credit exposure. These mortgage loans include
adjustable rate mortgage
loans that may subject borrowers to significant future payment increases or create the potential for negative amortization of the principal balance.
Interest-only
mortgage loans allow interest-only payments for a fixed period of time. At the end of the interest-only period, the loan payment
includes principal payments and increases significantly. The borrower's new payment once the loan becomes amortizing (i.e., includes principal payments) will be greater than if the borrower had
been making principal payments since the origination of the loan. The longer the interest-only period, the larger the amortizing payment will be when the interest-only period
ends. There were $21.3 million and $40.4 million in interest-only loans held in the Bank's portfolio as of December 31, 2009 and 2008, respectively. Historically,
losses experienced from interest-only loans have been minimal and we do not believe potential losses from these loans will be significant.
The
Bank has purchased adjustable rate mortgage loans which permit different repayment options. The monthly payment for adjustable rate mortgage loans with negative amortization
features is set as the initial interest rate for the first year of the loan. After that point, the borrower can make a minimum payment that is limited to a 7.5% increase in payment. If the minimum
payment is not adequate to cover the interest amount due on the mortgage loan, the loan would have negative amortization, which will result in an increase in the mortgage loans' principal balance.
These loans completely re-amortize every five years and the monthly payment is reset at that point. None of the adjustable rate mortgages held in the Bank's loan portfolio that have the
potential to negatively amortize were negatively amortizing as of December 31, 2009 and 2008. We do not believe potential losses from these loans will be significant.
73
Table of Contents
Our
total exposure related to these products in our loan portfolio for the years ended December 31, 2009 and 2008 is summarized as follows:
Table 14:
Nontraditional Mortgage Products
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance as of December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In thousands)
|
|
Interest only mortgage loans
|
|
$
|
16,306
|
|
$
|
40,399
|
|
Adjustable rate mortgages with negative amortization features:
|
|
|
|
|
|
|
|
|
Residential single family loans
|
|
|
853
|
|
|
1,181
|
|
|
Residential multifamily loans
|
|
|
17,198
|
|
|
9,399
|
|
All
of the loans we originate are subject to our underwriting guidelines and loan origination standards. Generally, loans obtained from third party originators, including the higher
risk loans in the preceding table, are closed and funded in our name and are also subject to our same underwriting guidelines and loan origination standards. We believe our strict underwriting
criteria and procedures adequately consider the unique risks which may come from these products. We conduct a variety of quality control procedures and periodic audits to ensure compliance with our
origination standards, including our criteria for lending and legal requirements.
Commercial Real Estate Loans.
We continue to place emphasis in the origination of commercial real estate loans.
Although real estate lending
activities are collateralized by real property, these transactions are subject to similar credit evaluation, underwriting and monitoring standards as those applied to commercial business loans.
Commercial real estate loans accounted for $3.97 billion or 47%, and $4.05 billion or 49%, of our non-covered loan portfolio at December 31, 2009, and 2008,
respectively.
Since
substantially all of our real estate loans are secured by properties located in California, declines in the California economy and in real estate values could have a significant
effect on the collectibility of our loans and on the level of allowance for loan losses required.
Construction Loans.
We offer loans to finance the construction of income-producing or owner-occupied buildings.
At December 31, 2009,
construction loans accounted for $455.1 million or 5% of our non-covered loan portfolio. This compares with $1.26 billion or 15% of the non-covered loan portfolio
at December 31, 2008. Total unfunded commitments related to construction loans decreased to $87.8 million at December 31, 2009, compared to $344.4 million at
December 31, 2008. At December 31, 2009, the total commitment for residential construction loans was approximately $343.7 million. The current residential construction loan
balance was $288.4 million, representing 63% of total construction loans and 3% of total gross loans. During 2009, we reduced our total commitment on residential construction loans by 66% from
$1.01 billion as of December 31, 2008. Additionally, all construction disbursements are being carefully monitored and reviewed to address key risks and factors in this portfolio, such as
interest reserves remaining, number of homes sold, geographic area and concentration of loans.
Commercial Business Loans.
We finance small and middle-market businesses in a wide spectrum of industries
throughout California. Included in
commercial business loans are loans for working capital, accounts receivable lines, inventory lines, SBA guaranteed small business loans and lease financing. At December 31, 2009, commercial
business loans accounted for a total of $1.28 billion or 15% of our loan portfolio, compared to $1.21 billion or 15% at December 31, 2008. Total unfunded
74
Table of Contents
commitments
related to commercial business loans decreased 17% to $455.4 million at December 31, 2009, compared to $548.9 million at year-end 2008.
Trade Finance Products.
We offer a variety of international finance and trade services and products, including
letters of credit, revolving lines of
credit, import loans, bankers' acceptances, working capital lines, domestic purchase financing, and pre-export financing. At December 31, 2009, these loans to finance international
trade totaled $220.5 million or 3% of our loan portfolio, compared to $344.0 million or 4% at December 31, 2008. Although most of our trade finance activities are related to trade
with Asian countries, a significant majority of our loans are made to companies domiciled in the United States. A substantial portion of this business involves California-based customers engaged in
import activities. In addition, we also offer Export-Import financing to various domestic and foreign exporters. These loans are guaranteed by the Export-Import Bank of the United States. Our trade
finance portfolio as of December 31, 2009 primarily represents loans made to borrowers that import goods into the U.S. These financings are generally made through letters of credit ranging from
$100 thousand to $1 million. At December 31, 2009, total unfunded commitments related to trade finance loans decreased 11% to $252.7 million, compared to
$283.9 million at December 31, 2008.
Other Consumer Loans.
Other consumer loans increased from $206.8 million at December 31, 2008 to
$618.0 million at
December 31, 2009, an increase of 199%, primarily due to the purchase of fully guaranteed student loans during the year.
Affordable Housing.
We are engaged in a variety of lending and credit enhancement programs to finance the
development of affordable housing
projects, which are generally eligible for federal low income housing tax credits. As of December 31, 2009, we had outstanding $329.5 million of letters of credit, which were issued to
enhance the ratings of revenue bonds used to finance affordable housing projects. This compares to $345.0 million as of year-end 2008. Credit facilities for individual projects
generally range from $5 million to $15 million.
Foreign Outstandings.
Foreign outstandings include loans, acceptances, interest bearing deposits with other
banks, other interest bearing
investments and related accrued interest receivable. Foreign assets are subject to the general risks of conducting business in each foreign country, including economic uncertainty and government
regulations. In addition, foreign assets may be impacted by changes in demand or pricing resulting from movements in exchange rates or other factors. The Company's cross-border exposure primarily
relate to our branch operations in Hong Kong, China. As of December 31, 2009, our cross-border exposure exceeded 1.00% of our total assets. The increase in total assets of the Company's
operations in Hong Kong as of December 31, 2009 was due to growth in cash and investments. The total assets do not include the Hong Kong branch from the UCB Acquisition as a significant amount
of the assets are covered assets under the FDIC-assisted transaction.
Contractual Maturity of Loan Portfolio.
The following table presents the maturity schedule of our loan
portfolio at December 31, 2009. All
loans are shown maturing based upon contractual maturities, and include scheduled repayments but not potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due within one year. Loan balances have not been reduced for undisbursed loan proceeds, unearned discounts, and the allowance for loan losses.
Non-covered nonaccrual loans of $173.2 million are included in the following table by their contractual maturity date.
75
Table of Contents
Table 15:
Maturity of Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
One Year
|
|
After One
But Within
Five Years
|
|
More Than
Five Years
|
|
Total
|
|
|
|
(In thousands)
|
|
Residential, single family
|
|
$
|
14,338
|
|
$
|
54,263
|
|
$
|
861,791
|
|
$
|
930,392
|
|
Residential, multifamily
|
|
|
52,043
|
|
|
167,316
|
|
|
803,024
|
|
|
1,022,383
|
|
Commercial and industrial real estate
|
|
|
554,937
|
|
|
1,481,057
|
|
|
1,928,628
|
|
|
3,964,622
|
|
Construction
|
|
|
393,721
|
|
|
61,421
|
|
|
-
|
|
|
455,142
|
|
Commercial business
|
|
|
773,061
|
|
|
376,850
|
|
|
133,271
|
|
|
1,283,182
|
|
Trade finance
|
|
|
214,569
|
|
|
5,959
|
|
|
-
|
|
|
220,528
|
|
Automobile and other consumer
|
|
|
410,406
|
|
|
5,913
|
|
|
208,465
|
|
|
624,784
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,413,075
|
|
$
|
2,152,779
|
|
$
|
3,935,179
|
|
$
|
8,501,033
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2009, outstanding loans, including projected prepayments, scheduled to be repriced within one year, after one but within five years, and in more than five
years, excluding nonaccrual loans, are as follows:
Table 16:
Loans Scheduled to be Repriced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
One Year
|
|
After One
But Within
Five Years
|
|
More Than
Five Years
|
|
Total
|
|
|
|
(In thousands)
|
|
Total fixed rate
|
|
$
|
79,085
|
|
$
|
391,136
|
|
$
|
488,340
|
|
$
|
958,561
|
|
Total variable rate
|
|
|
6,255,053
|
|
|
1,006,721
|
|
|
107,518
|
|
|
7,369,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,334,138
|
|
$
|
1,397,857
|
|
$
|
595,858
|
|
$
|
8,327,853
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Servicing Assets
As of December 31, 2009, we had $13.4 million in mortgage servicing assets, which is net of $2.6 million in total
valuation allowances. Mortgage servicing assets are initially recorded at fair value. The fair value of servicing assets is determined based on the present value of estimated net future cash flows
related to contractually specified servicing fees. The primary determinants of the fair value of mortgage servicing assets are prepayment speeds and discount rates. Published industry standards are
used to derive market-based assumptions. Changes in the assumptions
used may have a significant impact on the valuation of mortgage servicing assets. Evaluation of impairment is performed on a quarterly basis. We record mortgage servicing assets for loans sold or
securitized for which servicing has been retained by the Bank.
We
recorded an impairment of $1.1 million in mortgage servicing assets during 2009, compared with $2.4 million in impairment writedown in 2008. The decline in interest
rates as well as the overall increases in borrower refinancing and prepayment rates related to the underlying sold or securitized loans have caused the value of mortgage servicing assets to decrease.
For more information about mortgage servicing assets, see Note 13 to the Company's consolidated financial statements presented elsewhere in this report.
76
Table of Contents
Non-Covered Nonperforming Assets
Loans are continually monitored by management and the Board of Directors. Generally, our policy is to place a loan on nonaccrual
status if either (i) principal or interest payments are past due in excess of 90 days; or (ii) the full collection of principal or interest becomes uncertain, regardless of the
length of past due status. When a loan reaches nonaccrual status, any interest accrued on the loan is reversed and charged against current income. In general, subsequent payments received are applied
to the outstanding principal balance of the loan. Nonaccrual loans that demonstrate a satisfactory payment trend for several months are returned to full accrual status subject to management's
assessment of the full collectibility of the account.
Non-covered
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. Non-covered nonperforming assets as a percentage of total assets were 0.91% and 2.04% at December 31, 2009 and 2008, respectively. Nonaccrual loans totaled
$173.2 million and $214.6 million at December 31, 2009 and 2008, respectively. Loans totaling $761.1 million were placed on nonaccrual status during 2009. As part of our
comprehensive loan review process, loans totaling $95.2 million which were not 90 days past due as of December 31, 2009 were included in nonaccrual loans as of December 31,
2009. Additions to nonaccrual loans during 2009 were offset by $288.7 million in payoffs and principal paydowns, $133.1 million in loans brought current, $214.9 million in net
chargeoffs, and $119.0 million in loans transferred to OREO. Additions to nonaccrual loans during the year ended December 31, 2009 were comprised of $257.5 million in construction
loans, $307.9 million in commercial real estate loans, $79.7 million in commercial business loans including SBA loans, $60.7 million in single family loans, $47.9 million
in multifamily loans, $1.3 million in automobile and other consumer loans, and $6.1 million in trade finance loans.
All
loans that were past due 90 days or more were on nonaccrual status at December 31, 2009 and 2008.
The
Company had $109.1 million and $11.0 million in restructured loans as of December 31, 2009 and 2008, respectively. As of December 31, 2009, restructured
loans were comprised of $15.6 million in single family loans, $56.8 million in multifamily loans, $16.9 million in commercial real estate loans, $6.9 million in commercial
business loans, $60 thousand in SBA loans, and $12.8 million in construction loans.
Non-covered
other real estate owned includes properties acquired through foreclosure or through full or partial satisfaction of loans. We had 28 OREO properties at
December 31, 2009, with a combined aggregate carrying value of $13.8 million. The majority of these properties were related to our land, residential construction and single family
residence portfolios. Approximately 53% of OREO properties as of December 31, 2009 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 2009, we foreclosed on 130 properties with an aggregate carrying value of
$119.0 million as of the foreclosure date. During 2009, we sold 142 OREO properties with a carrying value before charge-offs of $140.3 million and transferred one OREO to
Affordable Housing Investments for $3.2 million resulting in a total net loss of $5.4 million. During 2008, we foreclosed on 70 properties with an aggregate carrying value of
$83.6 million as of the foreclosure date. During 2008, we sold 29 OREO properties with a carrying value of $44.5 million resulting in a total net loss on sale of $852 thousand.
77
Table of Contents
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:
Table 17:
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans
|
|
$
|
173,180
|
|
$
|
214,607
|
|
$
|
63,882
|
|
$
|
17,101
|
|
$
|
24,149
|
|
Loans past due 90 days or more but not on nonaccrual
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
173,180
|
|
|
214,607
|
|
|
63,882
|
|
|
17,101
|
|
|
29,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned, net
|
|
|
13,832
|
|
|
38,302
|
|
|
1,500
|
|
|
2,786
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
187,012
|
|
$
|
252,909
|
|
$
|
65,382
|
|
$
|
19,887
|
|
$
|
30,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets to total assets
|
|
|
0.91
|
%
|
|
2.04
|
%
|
|
0.55
|
%
|
|
0.18
|
%
|
|
0.36
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
137.91
|
%
|
|
82.95
|
%
|
|
138.39
|
%
|
|
457.29
|
%
|
|
230.17
|
%
|
Nonperforming loans to total gross covered loans
|
|
|
2.04
|
%
|
|
2.60
|
%
|
|
0.72
|
%
|
|
0.21
|
%
|
|
0.44
|
%
|
Performing restructured loans
|
|
|
114,013
|
|
|
10,992
|
|
|
2,081
|
|
|
-
|
|
|
-
|
|
Covered
nonperforming assets totaled $719.9 million, representing 3.50% of total assets at December 31, 2009. These covered nonperforming assets are subject to the
shared-loss agreement with the FDIC.
We
evaluate loan impairment according to the provisions of ASC 310-10-35 (previously SFAS No. 114). Under ASC 310-10-35, 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 loan's effective interest rate or, as an expedient, at the
loan's 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 ASC
310-10-35, 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
December 31, 2009, the Company's total recorded investment in impaired loans was $191.5 million, compared with $232.1 million at December 31, 2008. The
decrease in impaired loans is largely due to a decrease in nonperforming residential construction loans. All nonaccrual and doubtful loans are included in impaired loans. Impaired loans at
December 31, 2009 are comprised of single family loans totaling $3.3 million, multifamily loans totaling $10.6 million, commercial real estate loans totaling
$105.6 million, construction loans totaling $34.3 million, commercial business loans totaling $37.4 million, SBA loans totaling $11 thousand, and automobile and other
consumer loans totaling $260 thousand. As of December 31, 2009, the allowance for loan losses included $19.6 million for impaired loans with a total recorded balance of
$47.6 million. As of December 31, 2008, the allowance for loan losses included $23.4 million for impaired loans with a total recorded balance of $69.2 million.
Our
average recorded investment in impaired loans during 2009 and 2008 totaled $227.2 million and $266.5 million, respectively. During 2009 and 2008, gross interest income
that would have been recorded on impaired loans, had they performed in accordance with their original terms, totaled
78
Table of Contents
$13.7 million
and $19.0 million, respectively. Of this amount, actual interest recognized on impaired loans, on a cash basis, was $10.2 million and $11.6 million,
respectively.
In
light of the credit and mortgage crisis affecting the entire financial industry and its impact on our borrowers, the Company has taken a more proactive approach to assess 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 December 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, management performs an ongoing assessment of the risks inherent in the loan portfolio. While
we believe that the allowance for loan losses is adequate at December 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 year. At December 31, 2009, the allowance for loan losses amounted
to $238.8 million, or 2.81% of total loans, compared with $178.0 million, or 2.16% of total loans, at December 31, 2008. The $60.8 million increase in the allowance for
loan losses at December 31, 2009, from year-end 2008, reflects $528.7 million in additional loss provisions, less $475.3 million in net chargeoffs during the year. 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
$8.1 million at December 31, 2009, compared to $6.3 million at December 31, 2008. The increase in the off-balance sheet allowance amount was primarily due to
the increase in loss percentage allocated for loans sold/securitized with recourse and unfunded commitments at December 31, 2009 relative to year-end 2008.
We
recorded $528.7 million in loan loss provisions during 2009, as compared to $226.0 million in loss provisions recorded during 2008. The increase in loss provisions
recorded during 2009, compared to 2008, was brought on by the sustained downturn in the real estate market and continued instability
79
Table of Contents
in
the overall economy. During 2009, we recorded $475.3 million in net chargeoffs representing 5.69% of average non-covered loans outstanding during the year. In comparison, we
recorded net chargeoffs totaling $141.4 million, or 1.64% of average loans outstanding, during 2008. Also during the year we had note sale proceeds of $358.4 million on notes with a
carrying value of $473.7 million. The difference between the carrying value and the sale amount was charged against the allowance for loan losses. Given the trends we are seeing in the loan
portfolio, it is expected that provision for loan losses and net charge-offs will continue to decrease throughout 2010.
The
following table summarizes activity in the allowance for loan losses for the periods indicated:
Table 18:
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Allowance balance, beginning of year
|
|
$
|
178,027
|
|
$
|
88,407
|
|
$
|
78,201
|
|
$
|
68,635
|
|
$
|
50,884
|
|
Allowance from acquisitions
|
|
|
-
|
|
|
-
|
|
|
4,125
|
|
|
4,084
|
|
|
9,290
|
|
Allowance for unfunded loan commitments and letters of credit
|
|
|
(1,778
|
)
|
|
5,044
|
|
|
841
|
|
|
(1,168
|
)
|
|
(2,738
|
)
|
Provision for loan losses
|
|
|
528,666
|
|
|
226,000
|
|
|
12,000
|
|
|
6,166
|
|
|
15,870
|
|
Impact of desecuritization
|
|
|
9,262
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gross chargeoffs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential single family
|
|
|
33,778
|
|
|
3,522
|
|
|
335
|
|
|
3
|
|
|
168
|
|
|
Multifamily real estate
|
|
|
20,153
|
|
|
1,966
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Commercial and industrial real estate
|
|
|
159,969
|
|
|
53,459
|
|
|
-
|
|
|
-
|
|
|
1,899
|
|
|
Construction
|
|
|
206,732
|
|
|
57,629
|
|
|
2,810
|
|
|
-
|
|
|
-
|
|
|
Commercial business
|
|
|
53,152
|
|
|
24,639
|
|
|
3,740
|
|
|
236
|
|
|
1,428
|
|
|
Trade finance
|
|
|
6,868
|
|
|
5,707
|
|
|
249
|
|
|
205
|
|
|
2,821
|
|
|
Automobile
|
|
|
85
|
|
|
268
|
|
|
30
|
|
|
46
|
|
|
97
|
|
|
Other consumer
|
|
|
4,519
|
|
|
261
|
|
|
42
|
|
|
25
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross chargeoffs
|
|
|
485,256
|
|
|
147,451
|
|
|
7,206
|
|
|
515
|
|
|
6,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential single family
|
|
|
771
|
|
|
37
|
|
|
-
|
|
|
2
|
|
|
23
|
|
|
Residential multifamily
|
|
|
617
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
90
|
|
|
Commercial and industrial real estate
|
|
|
2,213
|
|
|
2,467
|
|
|
7
|
|
|
749
|
|
|
34
|
|
|
Construction
|
|
|
3,312
|
|
|
2,654
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Commercial business
|
|
|
2,684
|
|
|
835
|
|
|
419
|
|
|
238
|
|
|
380
|
|
|
Trade finance
|
|
|
237
|
|
|
9
|
|
|
-
|
|
|
-
|
|
|
1,124
|
|
|
Automobile
|
|
|
50
|
|
|
25
|
|
|
20
|
|
|
5
|
|
|
119
|
|
|
Other consumer
|
|
|
28
|
|
|
-
|
|
|
-
|
|
|
5
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross recoveries
|
|
|
9,912
|
|
|
6,027
|
|
|
446
|
|
|
999
|
|
|
1,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net chargeoffs (recoveries)
|
|
|
475,344
|
|
|
141,424
|
|
|
6,760
|
|
|
(484
|
)
|
|
4,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance balance, end of year
|
|
$
|
238,833
|
|
$
|
178,027
|
|
$
|
88,407
|
|
$
|
78,201
|
|
$
|
68,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
|
|
$
|
8,355,825
|
|
$
|
8,601,825
|
|
$
|
8,354,989
|
|
$
|
7,828,579
|
|
$
|
5,886,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans outstanding, end of year
|
|
$
|
8,501,033
|
|
$
|
8,249,453
|
|
$
|
8,845,109
|
|
$
|
8,265,232
|
|
$
|
6,794,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net chargeoffs (recoveries) to average loans
|
|
|
5.69
|
%
|
|
1.64
|
%
|
|
0.08
|
%
|
|
(0.01
|
)%
|
|
0.08
|
%
|
Allowance for loan losses to total gross loans at end of year
|
|
|
2.81
|
%
|
|
2.16
|
%
|
|
1.00
|
%
|
|
0.95
|
%
|
|
1.01
|
%
|
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. In determining the loss
rates, we review our historical loss rates for the past twelve
80
Table of Contents
quarters.
This loss horizon was shortened during 2009 to better reflect the current environment and the Bank's current loan portfolio and loss trends. 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.
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 eighteen 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 eighteen 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 the Company's 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.
Table 19:
Allowance for Loan Losses by Loan Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
Residential single family
|
|
$
|
18,693
|
|
|
10.9
|
%
|
$
|
6,178
|
|
|
5.9
|
%
|
Residential multifamily
|
|
|
19,332
|
|
|
12.0
|
%
|
|
6,811
|
|
|
8.2
|
%
|
Commercial and industrial real estate
|
|
|
110,628
|
|
|
46.6
|
%
|
|
49,567
|
|
|
49.1
|
%
|
Construction
|
|
|
36,963
|
|
|
5.4
|
%
|
|
60,478
|
|
|
15.3
|
%
|
Commercial business
|
|
|
43,774
|
|
|
15.1
|
%
|
|
40,843
|
|
|
14.7
|
%
|
Trade finance
|
|
|
6,713
|
|
|
2.6
|
%
|
|
12,721
|
|
|
4.2
|
%
|
Automobile
|
|
|
75
|
|
|
0.1
|
%
|
|
282
|
|
|
0.1
|
%
|
Consumer and other
|
|
|
2,655
|
|
|
7.3
|
%
|
|
1,147
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
238,833
|
|
|
100.0
|
%
|
$
|
178,027
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
81
Table of Contents