-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kkjq9KKiPBnMTSxzoyvvnIcq0dVhGKXWA8fQQwIAU1+7an2Dax6OOvfZBHQEC8ek qovJNbZ7wlo0QNtay6XW+g== 0000944209-99-000714.txt : 19990506 0000944209-99-000714.hdr.sgml : 19990506 ACCESSION NUMBER: 0000944209-99-000714 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAST WEST BANCORP INC CENTRAL INDEX KEY: 0001069157 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 954703316 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-63605 FILM NUMBER: 99611563 BUSINESS ADDRESS: STREET 1: 415 HUNTINGTON DRIVE CITY: SAN MARINO STATE: CA ZIP: 91108 BUSINESS PHONE: 6267995700 MAIL ADDRESS: STREET 1: EAST WEST BANCORP INC STREET 2: 415 HUNTINGTON DRIVE CITY: SAN MARINO STATE: CA ZIP: 91108 10-Q 1 FORM 10-Q FOR PERIOD ENDED 3/31/1999 As filed with the Securities and Exchange Commission on May 5, 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q Mark One [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 000-24939 ---------------- EAST WEST BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 95-4703316 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 415 Huntington Drive, San Marino, California 91108 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 799-5700 ---------------- Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- NONE NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value (Title of class) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares of common stock of the registrant outstanding as of April 30, 1999: 22,925,000 shares - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS PART I--FINANCIAL INFORMATION............................................. 3 Item 1. Interim Consolidated Financial Statements....................... 4-7 Notes to Interim Consolidated Financial Statements.............. 8 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations.................. 9-25 Item 3. Quantitative and Qualitative Disclosures of Market Risks........ 25 PART II--OTHER INFORMATION................................................ 26 Item 1. Legal Proceedings............................................... 26 Item 2. Changes in Securities and Use of Proceeds....................... 26 Item 3. Defaults upon Senior Securities................................. 26 Item 4. Submission of Matters to a Vote of Security Holders............. 26 Item 5. Other Information............................................... 26 Item 6. Exhibits and Reports on Form 8-K................................ 26 SIGNATURES................................................................ 27
2 PART I--FINANCIAL INFORMATION ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3 EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
March 31, December 31, 1999 1998 ----------- ------------ (unaudited) ASSETS - ------- Cash and cash equivalents........................... $ 80,954 $ 161,131 Investment securities available for sale, at fair value (with amortized cost of $638,391 in 1999 and $683,355 in 1998).................................. 637,074 682,436 Loans receivable, net of allowance for loan losses of $17,560 in 1999 and $16,506 in 1998............. 1,167,721 1,100,579 Investment in Federal Home Loan Bank stock, at cost............................................... 33,288 32,874 Other real estate owned............................. 3,585 4,600 Investment in affordable housing partnerships....... 21,605 18,602 Premises and equipment, net......................... 23,064 23,406 Premiums on deposits acquired, net.................. 2,387 2,648 Excess of purchase price over fair value of net assets acquired, net............................... 3,541 3,590 Accrued interest receivable and other assets........ 27,839 28,294 ---------- ---------- TOTAL........................................... $2,001,058 $2,058,160 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------- Customer deposit accounts........................... $1,307,805 $1,292,937 Securities sold under agreements to repurchase...... 21,078 33,000 Federal Home Loan Bank advances..................... 500,000 563,000 Notes payable....................................... 3,952 1,820 Accrued expenses and other liabilities.............. 15,900 12,871 Deferred income taxes............................... 1,071 1,259 ---------- ---------- Total liabilities................................. 1,849,806 1,904,887 ---------- ---------- FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE PRICE, NET................................ 2,340 2,443 STOCKHOLDERS' EQUITY Common stock (par value of $0.001 per share) Authorized -- 50,000,000 shares Issued and outstanding -- 23,050,000 shares and 23,775,000 shares in 1999 and 1998, respectively.. 23 24 Additional paid in capital.......................... 102,968 109,976 Accumulated other comprehensive loss: Unrealized losses on securities available for sale, net of tax................................. (1,095) (888) Retained earnings................................... 47,016 41,718 ---------- ---------- Total stockholders' equity........................ 148,912 150,830 ---------- ---------- TOTAL........................................... $2,001,058 $2,058,160 ========== ==========
See accompanying notes to interim consolidated financial statements. 4 EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (unaudited)
For the Three Months Ended March 31, ---------------------- 1999 1998 ---------- ---------- INTEREST AND DIVIDEND INCOME Loans receivable, including fees...................... $23,259 $20,368 Investment securities available for sale.............. 9,778 4,693 Short-term investments................................ 1,205 3,332 Federal Home Loan Bank stock.......................... 420 189 ---------- ---------- Total interest and dividend income................... 34,662 28,582 ---------- ---------- INTEREST EXPENSE Customer deposit accounts............................. 11,495 12,505 Short-term borrowings................................. 348 1,649 Federal Home Loan Bank advances....................... 6,588 2,030 ---------- ---------- Total interest expense............................... 18,431 16,184 ---------- ---------- NET INTEREST INCOME.................................... 16,231 12,398 PROVISION FOR LOAN LOSSES.............................. 1,200 1,742 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 15,031 10,656 ---------- ---------- NONINTEREST INCOME Loan fees............................................. 528 507 Branch fees........................................... 728 577 Letters of credit fees and commissions................ 982 463 Net gains on sales of investment securities........... 398 137 Net gains on sales of investment in affordable housing partnerships......................................... 402 -- Amortization of fair value of net assets acquired in excess of purchase price............................. 103 103 Other operating income................................ 191 132 ---------- ---------- Total noninterest income............................. 3,332 1,919 ---------- ---------- NONINTEREST EXPENSE Compensation and employee benefits.................... 4,674 4,403 Net occupancy......................................... 1,364 1,236 Data processing....................................... 332 308 Amortization of premiums on deposits acquired and excess of purchase price over fair value of net assets acquired...................................... 310 310 Amortization of investment in affordable housing partnerships......................................... 410 226 Deposit insurance premiums and regulatory assessments.......................................... 208 210 Other real estate owned operations, net............... (284) (81) Other operating expenses.............................. 1,803 1,445 ---------- ---------- Total noninterest expense............................ 8,817 8,057 ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES............... 9,546 4,518 PROVISION FOR INCOME TAXES............................. 3,534 1,502 ---------- ---------- NET INCOME............................................. $ 6,012 $ 3,016 ========== ========== BASIC AND DILUTED EARNINGS PER SHARE................... $ 0.26 $ 0.13 AVERAGE NUMBER OF SHARES OUTSTANDING................... 23,559 23,775
See accompanying notes to interim consolidated financial statements. 5 EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Accumulated Additional Other Total Common Paid-In Comprehensive Retained Comprehensive Stockholders' Stock Capital Income (Losses) Earnings Income Equity ------ ---------- --------------- -------- ------------- ------------- (In thousands) BALANCE, JANUARY 1, 1998.................. Comprehensive income... $24 $109,976 $ (1,138) $23,690 $132,552 Net income for the year................. 18,028 $18,028 18,028 Other comprehensive income, net of tax... Net change in unrealized losses on securities, net of tax................. 250 250 250 --- -------- -------- ------- ------- -------- Comprehensive income... $18,278 ======= BALANCE, DECEMBER 31, 1998.................. 24 109,976 (888) 41,718 150,830 Comprehensive income... Net income for the period............... 6,012 $ 6,012 6,012 Other comprehensive income, net of tax... Net change in unrealized losses on securities, net of tax................. (207) (207) (207) ------- Comprehensive income... $ 5,805 ======= Repurchase of common stock................. (1) (7,008) (7,009) Dividends declared on common stock.......... (714) (714) --- -------- -------- ------- -------- BALANCE, MARCH 31, 1999.................. $23 $102,968 $(1,095) $47,016 $148,912 === ======== ======== ======= ========
For the Three Months For the Ended Year Ended March 31, December 31, 1999 1998 ------------ ------------ (In thousands) Disclosure of reclassification amounts: Unrealized holding gains arising during period, net of tax expense of $26 in 1999 and $595 in 1998..... $ 44 $1,109 Less: Reclassification adjustment for gains included in net income, net of tax expense of $147 in 1999 and $461 in 1998................................... (251) (859) ----- ------ Net change in unrealized losses on securities, net of tax benefit (expense) of $122 in 1999 and $(134) in 1998............................................ $(207) $ 250 ===== ======
See accompanying notes to interim consolidated financial statements. 6 EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the Three Months Ended March 31, ---------------------- 1999 1998 ----------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................ $ 6,012 $ 3,016 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of premiums.......................... 197 222 Depreciation and amortization......................... 537 539 Net loan fees deferred................................ 462 508 Deferred tax provision................................ (49) (1,271) Provision for other real estate owned losses.......... 8 10 Provision for loan losses............................. 1,200 1,742 Net gains on sales of investment securities and other assets............................................... (1,405) (463) Federal Home Loan Bank stock dividends................ (414) (180) Proceeds from sale of loans held for sale............. 21,624 23,078 Originations of loans held for sale................... (17,495) (20,526) Decrease (increase) in accrued interest receivable and other assets......................................... 455 (2,489) Increase in accrued expenses and other liabilities.... 3,029 151 ----------- --------- Total adjustments.................................... 8,149 1,321 ----------- --------- Net cash provided by operating activities............ 14,161 4,337 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net disbursements of loans............................ (31,289) (52,295) Purchases of: Premises and equipment................................ (204) (193) Loans receivable...................................... (40,223) (2,599) Investment securities available for sale.............. (259,800) (36,039) Investment in affordable housing partnerships......... (3,247) (475) Proceeds from sale, maturity, redemption or repayment of: Investment securities available for sale.............. 304,942 108,016 Investment in affordable housing partnerships......... 3,267 -- Premises and equipment................................ 2 -- Other real estate owned............................... 890 801 ----------- --------- Net cash (used in) provided by investing activities.. (25,662) 17,216 ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits................................ $ 14,869 $ (9,494) Proceeds from Federal Home Loan Bank advances......... 2,695,300 403,608 Repayment of Federal Home Loan Bank advances.......... (2,758,300) (502,608) Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase....... (11,922) 32,575 Repayments of notes payable on affordable housing investments.......................................... (900) -- Repurchase of common stock............................ (7,009) -- Dividends paid on common stock........................ (714) -- ----------- --------- Net cash used in financing activities................ (68,676) (75,919) ----------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (80,177) (54,366) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 161,131 347,601 ----------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 80,954 $ 293,235 =========== ========= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid......................................... $ 17,897 $ 17,087 Income tax payments, net.............................. 1,400 -- Noncash investing and financing activities: Other real estate acquired through foreclosure........ 270 3,516 Loans made to facilitate sales of other real estate owned................................................ 650 -- Investment in affordable housing partnerships acquired through notes payable................................ 3,033 -- Net change in unrealized losses on securities available for sale, net of tax....................... (207) 613
See accompanying notes to interim consolidated financial statements. 7 EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended March 31,1999 and 1998 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of East West Bancorp, Inc. (the "Company") and its wholly-owned subsidiary bank, East West Bank and subsidiaries (the "Bank"). All material intercompany transactions and accounts have been eliminated. The interim consolidated financial statements are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the period ended March 31, 1999 are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's annual report for the year ended December 31, 1998. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. 2.STOCKHOLDERS' EQUITY Earnings Per Share The actual number of shares outstanding at March 31, 1999, was 23,050,000. Basic earnings per share are calculated on the basis of the weighted number of shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period plus shares issuable upon the assumed exercise of outstanding common stock options and warrants. All 1998 per share information in the financial statements and in Management's Discussion and Analysis has been restated to give retroactive effect to the 118,875 for 550,000 reverse stock split effective June 11, 1998. The basic earnings per share is equal to the diluted earnings per share due to the fact that the average market price of the options and warrants is less than their exercise price for the three months ended March 31, 1999. Quarterly Dividends A quarterly cash dividend of $0.03 per share totaling $714 thousand was paid on or about February 16, 1999 to shareholders of record at February 2, 1999. Stock Repurchase Program On January 25, 1999, the Company's Board of Directors authorized the Company to repurchase up to $7.0 million of its common stock. As of the quarter ended March 31, 1999, 725,000 shares of the Company's common stock were repurchased totaling approximately $7.0 million which completed the first stock repurchase program. On March 29, 1999, the Company's Board of Directors initiated a second stock repurchase program, authorizing the repurchase of up to an additional $7.0 million of its common stock. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED 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 (the "Company"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the financial condition of the Company and the results of its operations. This discussion and analysis should be read in conjunction with the Company's 1998 annual report on Form 10-K for the year ended December 31, 1998, and the accompanying interim unaudited consolidated financial statements and notes thereto. In addition to historical information, this discussion includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which involve inherent risks and uncertainties. A number of important factors could cause the Company's actual results to differ materially from those discussed in such forward-looking statements. These factors include, but are not limited to, economic conditions and competition in the geographic and business areas in which the Company operates, demographic changes, inflation or deflation, fluctuations in interest rates, changes in business strategy or development plans, and changes in legislation and governmental regulation. Given these uncertainties, the reader is cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward- looking statements contained herein to reflect future events or developments. Quarterly Cash Dividend On January 20, 1999, the Company announced that the Board of Directors had initiated a regular quarterly cash dividend of $0.03 per share. The first dividend payment was made on or about February 16, 1999 to shareholders of record at February 2, 1999. Stock Repurchase Programs On January 25, 1999, the Company announced that the Board of Directors had authorized the Company to repurchase up to $7.0 million of its common stock. As of March 31, 1999, the Company has completed its initial stock repurchase program, repurchasing 725,000 shares for a total of $7.0 million. On March 29, 1999, the Company announced that the Board of Directors had authorized a second stock repurchase program, authorizing the Company to repurchase an additional $7.0 million of its common stock. As of April 30, 1999, the Company had repurchased $1.2 million or 125,000 shares of the total $7.0 million authorized in the second repurchase program. Commencement of Stock Trading On February 8, 1999, the Company commenced trading of its common stock on the National Association of Securities Dealers Automated Quotations (NASDAQ) National Market under the ticker symbol EWBC. Results of Operations East West Bancorp, Inc, parent company of East West Bank (the "Bank") reported first quarter 1999 net income of $6.0 million or $0.26 basic and diluted earnings per share. These results represent a twofold increase when compared to the $3.0 million or $0.13 basic and diluted earnings per share reported during the first quarter of 1998. 9 Components of Net Income
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- (In millions) Net interest income................................... $ 16.2 $ 12.4 Provision for loan losses............................. (1.2) (1.7) Noninterest income.................................... 3.3 1.9 Noninterest expense................................... (8.8) (8.1) Provision for income taxes............................ (3.5) (1.5) --------- --------- Net income.......................................... $ 6.0 $ 3.0 ========= ========= Net income as a percentage of average total assets.... 1.19% 0.74% ========= =========
Pre-tax income amounted to $9.5 million for the first quarter of 1999, compared with $4.5 million for the same period a year ago, representing an increase of $5.0 million or 111%. The increase in 1999 pre-tax income was primarily attributed to a $3.8 million increase in net interest income before provision for loan losses and a $1.4 million increase in noninterest income. The Company's annualized return on average total assets and return on average stockholders' equity was 1.19% and 15.98% for the three months ended March 31, 1999, compared with 0.74% and 9.06%, respectively, for the same period in 1998. Net Interest Income The Bank's primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income for the first quarter of 1999 totaled $16.2 million, a 31% increase over net interest income of $12.4 million for the same period in 1998. Total interest and dividend income during the first three months of 1999 increased 21% to $34.7 million compared to $28.6 million during the first three months of 1998. This increase is derived primarily from a 24% growth in average interest-earning assets to $1,939.1 million during the first quarter of 1999, compared to $1,567.8 million during the same period a year ago. The $371.3 million net growth in average earning assets was primarily attributed to a $337.3 million increase in mortgage-backed securities and a $156.9 million increase in loans receivable partially offset by a $142.1 decrease in average short-term investments. The net growth in average earning assets was funded almost entirely by an increase of $383.1 million in average FHLB advances. Although the Bank's prevailing reference rate declined 75 basis points from the first quarter of 1998 to the first quarter of 1999, the overall yield on earning assets during the first three months of 1999 only declined 14 basis points to 7.15% from 7.29% for the same period a year ago. Higher yields on mortgage-backed securities from 5.34% a year ago to 5.68% for the current period more than offset the decrease in yields for all other categories of earning assets. Overall, the impact of interest rate changes on total interest and dividend income was marginal when comparing the two periods. Total interest expense during the first quarter of 1999 increased $2.2 million or 14% to $18.4 million compared to $16.2 million for the same period a year ago. The increase is primarily attributable to the 260% increase in average FHLB advances to $530.2 million for the 1999 first quarter. This is partially offset by a 77% decrease in average short-term borrowings and a decrease in the cost of funds for all categories of interest-bearing liabilities. The overall cost of funds decreased 36 basis points from 4.56% a year ago to 4.20% for the current period. Net interest margin, defined as taxable equivalent net interest income to average earning assets, increased 19 basis points from 3.16% to 3.35% between the first quarter of 1998 and 1999. 10 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:
Three Months Ended March 31, ----------------------------------------------------------- 1999 1998 ----------------------------- ---------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) --------------------- ------- ---------- -------- ------- (Dollars in thousands) ASSETS Interest-earning assets: Short-term investments.. $ 85,691 $ 1,205 5.62% $ 227,781 $ 3,332 5.85% Taxable investment securities (2)(3)...... 688,515 9,778 5.68 351,224 4,693 5.34 Loans receivable, net (2)(4)................. 1,131,692 23,259 8.22 974,749 20,368 8.36 FHLB stock.............. 33,177 420 5.06 14,003 189 5.40 ----------- ------- ---------- ------- Total interest-earning assets................ 1,939,075 34,662 7.15 1,567,757 28,582 7.29 ------- ---- ------- ---- Noninterest-earning assets: Cash and due from banks.................. 28,304 24,353 Allowance for loan losses................. (16,815) (12,263) Other assets............ 66,999 54,012 ----------- ---------- Total assets........... $ 2,017,563 $1,633,859 =========== ========== LIABILITIES AND STOCKHOLDERS EQUITY Interest-bearing liabilities: Checking accounts....... $ 79,684 $ 225 1.13 $ 76,556 $ 279 1.46 Money market accounts... 38,070 274 2.88 22,224 211 3.80 Savings deposits........ 221,342 1,020 1.84 204,558 1,252 2.45 Time deposits........... 857,831 9,976 4.65 853,721 10,763 5.04 Short-term borrowings... 26,713 348 5.21 115,471 1,649 5.71 FHLB advances........... 530,226 6,588 4.97 147,168 2,030 5.52 ----------- ------- ---------- ------- Total interest-bearing liabilities........... 1,753,866 18,431 4.20 1,419,698 16,184 4.56 ------- ---- ------- ---- Noninterest-bearing liabilities: Demand deposits......... 98,837 67,075 Other liabilities....... 14,388 13,888 Stockholders' equity.... 150,472 133,198 ----------- ---------- Total liabilities and stockholders' equity.. $ 2,017,563 $1,633,859 =========== ========== Interest rate spread..... 2.95% 2.73% ==== ==== Net interest income and net interest margin..... $16,231 3.35% $12,398 3.16% ======= ==== ======= ====
- ------- (1) Annualized. (2) Includes amortization of premiums and accretion of discounts on loans receivable and investment securities. Also includes the amortization of deferred loan fees. (3) Average balances exclude unrealized gains or losses on available for sale securities. (4) Average balances include nonperforming loans. 11 Analysis of Changes in Net Interest Margin Changes in the Bank's 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.
Three Months Ended March 31, 1999 vs. 1998 ---------------------------- Total Changes Due to Change Volume (1) Rates (1) ------- --------- -------- (In thousands) INTEREST-EARNING ASSETS: Short-term investments......................... $(2,127) $(2,079) $ (48) Taxable investment securities.................. 5,085 4,507 578 Loans receivable, net.......................... 2,891 3,279 (388) FHLB stock..................................... 231 260 (29) ------- ------- ------- Total interest income........................ $ 6,080 $ 5,967 $ 113 ======= ======= ======= INTEREST-BEARING LIABILITIES: Checking accounts.............................. $ (54) $ 11 $ (65) Money market accounts.......................... 63 150 (87) Savings deposits............................... (232) 103 (335) Time deposits.................................. (787) 52 (839) Short-term borrowings.......................... (1,301) (1,268) (33) FHLB advances.................................. 4,558 5,285 (727) ------- ------- ------- Total interest expense....................... $ 2,247 $ 4,333 $(2,086) ======= ======= ======= CHANGE IN NET INTEREST INCOME.................. $ 3,833 $ 1,634 $ 2,199 ======= ======= =======
- -------- (1) Changes in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume. Provision for Loan Losses The provision for loan losses was $1.2 million for the first quarter of 1999 compared to $1.7 million for the same period in 1998. The decrease of $542 thousand or 31% from 1998 reflects favorable trends in the Bank's asset quality. The Bank has ongoing efforts to improve loan quality through the implementation of more stringent underwriting parameters and administration procedures, and aggressively pursuing collection efforts with troubled debtors. These efforts have resulted in lower net chargeoffs and a continued decline in nonperforming loans. For further information regarding net credit losses and the allowance for loan losses, see the "Allowance for Loan Losses" section of this report. 12 Noninterest Income Components of Noninterest Income
Three Months Ended March 31, ------------------- 1999 1998 --------- --------- (In millions) Loan fees............................................... $ 0.53 $ 0.51 Branch fees............................................. 0.73 0.58 Letters of credit fees and commissions.................. 0.98 0.46 Net gains on sales of securities........................ 0.40 0.14 Gain on sale of affordable housing investments.......... 0.40 -- Amortization of negative intangibles.................... 0.10 0.10 Other................................................... 0.19 0.13 --------- --------- Total................................................. $3.33 $1.92 ========= =========
Noninterest income includes revenues earned from sources other than interest income. These sources include: ancillary fees on loans, service charges and fees on deposit accounts, fees and commissions generated from trade finance activities and the issuance of letters of credit, and net gains on sales of investment securities and affordable housing investments. Noninterest income totaled $3.3 million for the three months ended March 31, 1999. This represented an increase of $1.4 million or 74% from noninterest income of $1.9 million for the three months ended March 31, 1998. Branch fees for the first quarter of 1999 amounted to $728 thousand, an increase of $151 thousand or 26% from the $577 thousand earned during the same period last year. This was primarily due to higher revenues derived from analysis charges on commercial deposit accounts, increased ATM surcharge income, and increased fees related to transaction accounts. Letters of credit fees and commissions amounted to $982 thousand for the first three months of 1999 compared to $463 thousand for the same period in 1998. This increase of $519 thousand or 112% is attributed primarily to a $393 thousand increase in revenues from the issuance of standby letters of credit, reflecting a 72% growth in volume to $137.3 million as of March 31, 1999 from $79.7 million as of March 31, 1998. The remainder of the increase was attributed to trade finance activities which experienced a 39% growth in the number of transactions processed for the three months ended March 31, 1999 in comparison to the same period a year ago. Other contributions to noninterest income for the 1999 first quarter include a $402 thousand gain on sale of an investment in affordable housing partnerships, as well as a $261 thousand, or 191%, increase in gains on sales of investment securities when compared to the same period in 1998. Noninterest Expense Components of Noninterest Expense
Three Months Ended March 31, -------------------- 1999 1998 --------- --------- (In millions) Compensation and other employee benefits............. $ 4.68 $ 4.40 Net occupancy........................................ 1.36 1.24 Data processing...................................... 0.33 0.31 Amortization of positive intangibles................. 0.31 0.31 Amortization of affordable housing investments....... 0.41 0.23 Deposit insurance premiums and regulatory assessments......................................... 0.21 0.21 Other real estate owned operations, net.............. (0.28) (0.08) Other................................................ 1.80 1.44 --------- --------- Total.............................................. $ 8.82 $ 8.06 ========= =========
13 Noninterest expense increased $760 thousand or 9% during the first three months of 1999 in comparison to the same period in 1998. Noninterest expense is comprised primarily of compensation and employee benefits, occupancy and other operating expenses. The increase in compensation and employee benefits of $271 thousand or 6% can be attributed to the Company's growth including the opening of a new branch office in Milpitas, California in August 1998. Other factors contributing to the increase in compensation and employee benefits includes the impact of annual salary and cost increases for existing employees, as well as an increase in incentive compensation tied to the Company's performance. Occupancy expenses increased $128 thousand or 10% for the first quarter of 1999, reflecting three months of operations for the new Milpitas branch, an overhead factor which was not present during the first quarter of 1998. In addition, occupancy expense also increased during the first three months of 1999, in comparison the same period a year ago, as a result of the impact of normal rent adjustments in existing leases, as well as increased expenses related to the outsourcing of computer hardware maintenance. The amortization of investments in affordable housing partnerships increased $184 thousand, reflecting the impact of additional investment purchases made since the first quarter of 1998. Total investment in affordable housing partnerships amounted to $21.6 million as of March 31, 1999 compared to $14.6 million as of March 31, 1998. Expenses related to OREO operations decreased $203 thousand or 251% during the first quarter of 1999 when compared to the first quarter of 1998. This is primarily due to an increase in net gains on sales of OREO properties of $174 thousand and higher rental income collected on such properties. Other operating expenses include advertising and public relations, telephone and postage, stationery and supplies, bank and item processing charges, insurance, legal and other professional fees. The $358 thousand or 25% increase in other operating expenses when comparing the first quarter of 1999 and 1998 is primarily due to the overall growth of the Bank. Various expenses incurred as a result of the Company's recent registration and filing with the Securities and Exchange Commission and NASDAQ also contributed to the increase in other operating expenses. Provision for Income Taxes The provision for income taxes increased $2.0 million or 135% during the first quarter of 1999 in comparison to the same period a year ago mainly as a direct result of higher pretax income partially offset by the utilization of tax credits from qualified affordable housing investments amounting to $550 thousand. The first quarter 1999 provision of $3.5 million reflects an effective tax rate of 37.0% compared to the first quarter 1998 provision of $1.5 million which represents an effective tax rate of 33.2%. Balance Sheet Analysis The Company's total assets at March 31, 1999 were $2.00 billion, a decrease of $57.1 million or 3% when compared to December 31, 1998. This decline was primarily due to decreases in short-term investments of $70.0 million and investment securities of $45.4 million, partially offset by a $67.1 million increase in loans receivable. The decrease in total assets is prompted by decreases of $11.9 million in short-term borrowings and $63.0 million in FHLB advances, partially offset by an increase in deposits of $14.9 million. Investment Securities Available for Sale Investment securities available for sale of $637.1 million as of March 31, 1999 represents a decrease of $45.4 million or 7% compared to the December 31, 1998 balance of $682.4 million. Total repayments on mortgage-backed securities, including calls and redemptions, totaled $216.5 million for the first quarter of 1999. Proceeds from such repayments were utilized to purchase additional mortgage-backed securities with more attractive yields. During the first three months of 1999, the Bank sold mortgage-backed securities with total carrying value of $87.9 million. The Bank recorded net gains on sale of $380 thousand from these transactions. Proceeds from the sale of these securities were used to repay $63.0 million of FHLB advances and $11.9 million of short-term borrowings. The remaining proceeds were used to fund a portion of the loan originations and loan purchases made during the first three months of 1999. 14 The following table sets forth the amortized cost and the estimated fair values of investment securities available for sale as of March 31, 1999 and December 31, 1998:
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair Gains Losses Value --------- ---------- ---------- --------- (In thousands) As of March 31, 1999: Mortgage-backed securities........ $638,391 $616 $(1,933) $637,074 As of December 31, 1998: Mortgage-backed securities........ $683,335 $471 $(1,370) $682,436
Loans The Company continued to experience strong loan demand during the first quarter of 1999. Net loans receivable at March 31, 1999 totaled $1.17 billion, representing a $67.1 million or 6% increase from December 31, 1998. The increase in loans was funded, in large part, through the liquidation of lower- yielding short-term investments and, to a lesser extent, through sales of mortgage-backed securities. The Company continues to focus its lending efforts in originating multifamily and commercial loan products, as evidenced by the composition of the net growth in loans during the first quarter of 1999. Specifically, the growth in net loans receivable during the first three months of 1999 is comprised of increases in multifamily loans of $31.7 million, commercial real estate loans of $22.4 million, construction loans of $9.0 million, and commercial loans, including trade finance products, of $23.3 million. Management anticipates strong loan demand in these categories throughout 1999. Partially offsetting the increases in the multifamily and commercial loan categories is a decline of $18.7 million in single family residential loans which is consistent with the Bank's strategy of de-emphasizing the retention of single family mortgage loans for its portfolio. Under the Bank's current lending strategy, substantially all new fixed-rate single family residential loans are sold into the secondary market. The following table sets forth the composition of the loan portfolio as of the dates indicated:
March 31, 1999 December 31, 1998 March 31, 1998 ------------------- ------------------- ----------------- Balance Percent Balance Percent Balance Percent ---------- ------- ---------- ------- -------- ------- (Dollars in thousands) Real estate loans: Residential, one to four units............ $ 251,728 21.2% $ 270,444 24.2% $345,608 34.7% Residential, multifamily........... 199,256 16.8 167,545 15.0 145,973 14.6 Commercial and industrial real estate................ 381,220 32.1 358,850 32.0 295,012 29.6 Construction........... 87,873 7.4 78,922 7.0 32,795 3.3 ---------- ----- ---------- ----- -------- ----- Total real estate loans................ 920,077 77.5 875,761 78.2 819,388 82.2 ---------- ----- ---------- ----- -------- ----- Other loans: Business, commercial... 246,582 20.8 223,318 20.0 164,579 16.5 Automobile............. 4,652 0.4 4,972 0.4 5,429 0.5 Other consumer......... 15,594 1.3 15,156 1.4 8,075 0.8 ---------- ----- ---------- ----- -------- ----- Total other loans..... 266,828 22.5 243,446 21.8 178,083 17.8 ---------- ----- ---------- ----- -------- ----- Total gross loans.... 1,186,905 100.0% 1,119,207 100.0% 997,471 100.0% ===== ===== ===== Unearned fees, premiums and discounts, net..... (1,624) (2,122) (2,432) Allowance for loan losses................. (17,560) (16,506) (12,947) ---------- ---------- -------- Loans receivable, net.................. $1,167,721 $1,100,579 $982,092 ========== ========== ========
15 Nonperforming Assets Nonaccrual loans, which include loans 90 days or more past due, totaled $4.0 million at March 31, 1999, compared with $9.8 million at December 31,1998. The $5.8 million decrease in nonaccrual loans is primarily due to $4.8 million in payoffs, $1.5 million in loans brought current and one loan for $270 thousand that was transferred to other real estate owned. These decreases in nonaccrual loans were offset in part by three single family loans totaling $746 thousand and one commercial real estate loan for $43 thousand that were placed on nonaccrual status during the first quarter of 1999. Restructured loans or loans that have had their original terms modified totaled $6.2 million at March 31, 1999, representing a slight increase of $218 thousand from the $5.9 million reported at December 31, 1998. The increase in restructured loans is primarily due to the addition of one commercial loan. Other real estate owned ("OREO") includes properties acquired through foreclosure or through full or partial satisfaction of loans. Other real estate owned totaled $3.6 million, $4.6 million and $6.0 million at March 31, 1999, December 31, 1998 and March 31, 1998, respectively. For the three months ended March 31, 1999, one multifamily property with a book value of $270 thousand was added to OREO and six properties with a combined book value of $1.3 million were sold. The following table sets forth information regarding nonaccrual loans, restructured loans and other real estate owned as of the dates indicated:
June March 31, December 31, September 30, 30, 1999 1998 1998 1998 --------- ------------ ------------- ------- (Dollars in thousands) Nonaccrual loans............. $ 3,983 $ 9,762 $ 9,415 $ 4,378 Loans past due 90 days or more but not on nonaccrual.. -- 129 -- -- ------- ------- ------- ------- Total nonperforming loans.. 3,983 9,891 9,415 4,378 ------- ------- ------- ------- Restructured loans........... 6,154 5,936 6,430 6,279 Other real estate owned, net......................... 3,585 4,600 5,088 5,386 ------- ------- ------- ------- Total nonperforming assets.................... $13,722 $20,427 $20,933 $16,043 ======= ======= ======= ======= Total nonperforming assets to total assets................ 0.69% 0.99% 1.12% 0.89% Allowance for loan losses to nonperforming loans......... 440.87 166.88 167.92 324.65 Nonperforming loans to total gross loans................. 0.34 0.88 0.90 0.44
Loans classified as impaired totaled $10.9 million at March 31, 1999, compared with $10.0 million at December 31, 1998. Specific reserves on impaired loans were $540 thousand and $350 thousand as of March 31, 1999 and December 31, 1998, respectively. Chargeoffs related to impaired loans totaled $1.6 million during the three months ended March 31, 1999. A significant portion of the impaired loans, 62% at March 31, 1999 and 67% at December 31, 1998, were secured by real estate. The Bank's average recorded investment in impaired loans for the three months ended March 31, 1999 was $11.1 million. During the three months ended March 31, 1999, gross interest income that would have been recorded on impaired loans, had they performed in accordance with their original terms, totaled $263 thousand. Of this amount, actual interest recognized on impaired loans, on a cash basis, was $210 thousand. Allowance for Loan Losses A certain degree of risk is inherent in the extension of credit. The allowance for loan losses is maintained at a level considered by management to be commensurate with the estimated known and inherent risks in the existing portfolio. Management performs an ongoing assessment of the risks inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period 16 operating results, and is decreased by the amount of net charge-offs during the period. The Bank determines the level of the allowance for loan losses, and correspondingly, the provision for loan losses based upon various judgments and assumptions, including general economic conditions (especially in California), loan portfolio composition and concentrations, prior loan loss experience, collateral value, identification of problem and potential problem loans, and other relevant data. While management believes that the allowance for loan losses is adequate at March 31, 1999, future additions to the allowance will be subject to continuing evaluation of inherent risks in the loan portfolio. At March 31, 1999, the allowance for loan losses amounted to $17.6 million, or 1.48% of total loans, as compared to $16.5 million, or 1.47% of total loans, at December 31, 1998, and $12.9 million, or 1.30% of total loans, at March 31, 1998. The following table summarizes activity in the allowance for loan losses for the periods indicated:
Three Months Ended March 31, ------------------------- 1999 1998 ------------ ----------- (Dollars in thousands) Allowance balance at beginning of period............ $ 16,506 $ 12,273 Provision for loan losses........................... 1,200 1,742 Actual chargeoffs: 1-4 family residential real estate................. 3 68 Multifamily real estate............................ -- 33 Commercial and industrial real estate.............. -- 60 Business, commercial............................... 327 1,361 Automobile......................................... -- 43 Other.............................................. -- 3 ------------ ---------- Total chargeoffs.................................. 330 1,568 ------------ ---------- Recoveries: 1-4 family residential real estate................. -- 71 Multifamily real estate............................ 70 -- Commercial and industrial real estate.............. 70 275 Business, commercial............................... 30 143 Automobile......................................... 14 11 Other.............................................. -- -- ------------ ---------- Total recoveries.................................. 184 500 ------------ ---------- Net chargeoffs................................... 146 1,068 ------------ ---------- Allowance balance at end of period.................. $ 17,560 $ 12,947 ============ ========== Average net loans outstanding....................... $ 1,131,692 $ 974,749 ============ ========== Total gross loans outstanding at end of period...... $ 1,186,905 $ 997,471 ============ ========== Net chargeoffs to average loans..................... 0.01% 0.11% Allowance for loan losses to total gross loans at end of year........................................ 1.48 1.30 Provision for loan losses to net chargeoffs......... 8.22 1.63
The provision for loan losses totaled $1.2 million for the quarter ended March 31, 1999, as compared to $1.7 million for the same period in 1998. The decline reflects improvement in the Company's asset quality. Net chargeoffs totaled $146 thousand for the three months ended March 31, 1999, a significant reduction from $1.1 million for the same period a year ago. As a percentage of average loans outstanding, net charge-offs were 0.01% and 0.11%, respectively, for the three months ended March 31, 1999 and 1998. 17 The Bank uses several methodologies to test the overall adequacy of the allowance. The two primary methodologies, the classification migration model and the individual loan review analysis methodology, provide the basis for determining the overall adequacy of the allowance. These methodologies are augmented by ancillary analyses, which include historical loss analyses, peer group comparisons, and analyses based on the federal regulatory interagency policy for loan and lease losses. The Bank also performs an analysis to quantify the potential impact on asset quality created by customer preparedness or lack thereof to "Year 2000" technology requirements. The classification migration model utilizes net losses incurred by the Bank during the preceding five years in conjunction with current asset classifications to extrapolate loss factors for various loan categories in determining an estimated allowance requirement. The individual loan review analysis method provides a more contemporaneous assessment of the portfolio by incorporating individual asset evaluations prepared by the Bank's credit administration department. Loans are reviewed at least annually and more frequently if warranted by circumstances. Real estate loans and commercial business loans not subject to individual loan review, as well as out-of-cycle individually reviewed loans, are monitored based on problem loan indicators such as loan payment and property tax status. The estimated exposure and subsequent charge-offs that result from these individual loan reviews provide the basis for loss factors assigned to the various loan categories. The following table reflects management'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:
March 31, 1999 December 31, 1998 --------------- ------------------- Amount Percent Amount Percent ------- ------- --------- --------- (Dollars in Thousands) 1-4 family residential real estate...... $ 391 21.2% $ 500 24.2% Multifamily real estate................. 2,686 16.8 2,435 15.0 Commercial and industrial real estate... 2,772 32.1 1,373 32.0 Construction............................ 1,277 7.4 2,339 7.0 Business, commercial.................... 7,071 20.8 7,679 20.0 Automobile.............................. 25 0.4 45 0.4 Consumer and other...................... 15 1.3 22 1.4 Year 2000 exposure...................... 500 600 Unallocated............................. 2,823 1,513 ------- ----- --------- ------- Total................................. $17,560 100.0% $ 16,506 100.0% ======= ===== ========= =======
The allowance for loan losses of $17.6 million at March 31, 1999 exceeded the Bank's estimated allowance requirement by $3.3 million. The estimated allowance requirement as of March 31, 1999 was $14.2 million as compared to $14.4 million as of December 31, 1998. The improvement in the requirement is indicative of improved asset quality. Notwithstanding this improvement, however, the Bank continues to record loan loss provisions on a monthly basis to compensate for actual and anticipated growth in the various loan portfolios. Moreover, it is management's opinion that the commercial loan portfolio has not fully seasoned, and therefore, current positive loss trends and loan quality may not necessarily be reflective of potential future losses. As of March 31, 1999, the Bank has earmarked $500 thousand of the unallocated allowance to absorb any potential exposure to "Year 2000" issues. The remaining unallocated allowance at March 31, 1999 is $2.8 million compared to the $1.5 million unallocated allowance at December 31, 1998. These amounts represent 16% and 9% of the total allowance for loan losses at March 31, 1999 and December 31, 1998, respectively. The maintenance of the unallocated portion of the allowance is considered necessary for the reasons outlined in the preceding paragraph. Specifically, management believes that the maintenance of the unallocated portion of the allowance is considered prudent to mitigate the uncertainties associated with the Bank's relatively untested loan portfolios. Loan seasoning, economic conditions, growth projections, sustained asset classification trends, and loan concentrations are some of the factors considered when determining the necessity, or lack thereof, for the unallocated allowance amount. 18 Deposits Deposits of $1.31 billion at March 31, 1999, represented an increase of $14.9 million or 1% over December 31, 1998. The increase in deposits is comprised primarily of increases in time deposits of $18.0 million or 2% partially offset by a slight decrease in noninterest-bearing demand accounts of $4.3 million or 4%. The increase in time deposits during the first quarter of 1999 is largely a due to a promotion associated with the Chinese New Year holiday. Although the Company occasionally promotes certain time deposit products, its efforts are largely concentrated in increasing the volume of low-cost transaction accounts which generate higher fee income and are a less costly source of funds in comparison to time deposits. The average balance of non-time deposit accounts, which include noninterest-bearing demand accounts, interest-bearing checking accounts, savings deposits and money market accounts, increased $67.5 million or 18% during the three months ended March 31, 1999, compared with the same period in 1998. This increase was comprised of a $31.8 million or 47% increase in noninterest-bearing demand accounts, a $16.8 million or 8% increase in savings deposits, a $15.8 million or 71% increase in money market accounts and a $3.1 million or 4% increase in interest-bearing checking accounts. Borrowings Short-term borrowings, which consist primarily of federal funds purchased and securities sold under agreements to repurchase, decreased $11.9 million or 57% to $21.1 million as of March 31, 1999 from $33.0 million as of December 31, 1998. FHLB advances totaled $500.0 million as of March 31, 1999, representing a $63.0 million or 13% decrease from the December 31, 1998 balance of $563.0 million. Decreases or repayments in both short-term borrowings and FHLB advances were derived from proceeds resulting from the sale of mortgage-backed securities. Capital Resources The primary source of capital for the Company is the retention of net after tax earnings. At March 31, 1999, stockholders' equity totaled $148.9 million, a decrease of $1.9 million or 1% from $150.8 million as of December 31, 1998. The decrease is due primarily to: (i) repurchase of $7.0 million or 725,000 shares of common stock authorized by the Board of Directors during the first quarter of 1999; (ii) payment of a $0.03 per share quarterly cash dividend totaling $714 thousand in February 1999; and (iii) a net increase of $207 thousand in unrealized losses on available-for-sale securities. These transactions were offset in part by first quarter 1999 net income of $6.0 million. On March 29, 1999, the Company's Board of Directors authorized a second stock repurchase program, authorizing the repurchase of an additional $7.0 million of the Company's common stock. As of April 30, 1999, the Company had repurchased $1.2 million or 125,000 shares of the total $7.0 million authorized in the second repurchase program. Management is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company and its bank subsidiary are financially sound. The Company and its bank subsidiary are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. According to the regulations, institutions whose Tier 1 and total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be "well-capitalized." At March 31, 1999, the Company's Tier 1 and total capital ratios were 10.15% and 11.36%, respectively, compared to 10.28% and 11.42%, respectively, at December 31, 1998, and 12.01% and 13.19%, respectively, at March 31, 1998. 19 The following table compares the Company's and the Bank's actual capital ratios at March 31, 1999, to those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
Minimum Well East West East West Regulatory Capitalized Bancorp Bank Requirements Requirements --------- --------- ------------ ------------ Total Capital (to Risk- Weighted Assets)............ 11.36% 11.35% 8.0% 10.0% Tier 1 Capital (to Risk- Weighted Assets)............ 10.15 10.14 4.0 6.0 Tier 1 Capital (to Average Assets)..................... 7.28 7.24 4.0 5.0
ASSET LIABILITY AND MARKET RISK MANAGEMENT Liquidity Liquidity management involves the Bank's ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers' credit needs and ongoing repayment of borrowings. The Bank's liquidity is actively managed on a daily basis and reviewed periodically by the Asset/Liability Committee and the Board of Directors. This process is intended to ensure the maintenance of sufficient funds to meet the needs of the Bank, including adequate cash flow for off-balance sheet instruments. The Bank's primary sources of liquidity are derived from financing activities which include the acceptance of customer deposits, federal funds facilities, repurchase agreement facilities and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of principal and interest on loans, the routine liquidation of securities from the available-for-sale portfolio and securitizations of eligible loans. Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating of operating expenses. For the three months ended March 31, 1999, the Bank experienced net cash outflows from both its financing and investing activities. The net cash outflow from financing activities of approximately $68.7 million can be attributed primarily to the partial repayment of FHLB advances and short-term borrowings. The net cash outflow of $25.7 million from investing activities is largely due to the growth in the Bank's loan portfolio. Partially offsetting these net cash outflows from financing and investing activities is $14.2 million in net cash provided by operating activities, primarily derived from increased interest income received on loans and investment securities and net proceeds from sales of loans held for sale. As a means of augmenting its liquidity, the Bank has established federal funds lines with two correspondent banks and several master repurchase agreements with major brokerage companies. At March 31, 1999, the Bank's available borrowing capacity includes approximately $14.0 million in repurchase arrangements and $35.0 million in federal funds line facilities. Management believes its liquidity sources to be stable and adequate. At March 31, 1999, management was not aware of any information that would result in or that was reasonably likely to have a material effect on the Bank's liquidity position. The liquidity of the parent company, East West Bancorp, Inc. is primarily dependent on the payment of cash dividends by its subsidiary, East West Bank, subject to limitations imposed by the Financial Code of the State of California. For the first quarter of 1999, East West Bank declared dividends amounting to $8.0 million to East West Bancorp, Inc. As of March 31, 1999, approximately $24.2 million of undivided profits of the Bank was available for dividends to the Company. Interest Rate Sensitivity Management The Bank's success is largely dependent upon its ability to manage interest rate risk, which is the impact of adverse fluctuations in interest rates on the Bank's net interest income and net portfolio value. Although in the normal course of business the Bank manages other risks, such as credit and liquidity risk, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the Bank's financial condition and results of operations. 20 The fundamental objective of the asset liability management process is to manage the Bank's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. The Bank's strategy is formulated by the Asset/Liability Committee, which coordinates with the Board of Directors to monitor the Bank's overall asset and liability composition. The Committee meets regularly to evaluate, among other things, the sensitivity of the Bank's assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses on its available-for-sale portfolio (including those attributable to hedging transactions), purchase and securitization activity, and maturities of investments and borrowings. The Bank's overall strategy is to minimize the adverse impact of immediate incremental changes in market interest rates (rate shock) on net interest income and net portfolio value. Net portfolio value is defined as the present value of assets, minus the present value of liabilities and off-balance sheet instruments. The attainment of this goal requires a balance between profitability, liquidity and interest rate risk exposure. The table below shows the estimated impact of changes in interest rates on net interest income and market value of equity as of March 31, 1999, assuming a parallel shift of 100 to 200 basis points in both directions:
Change in Interest Rates Net Interest Income Net Portfolio Value (Basis Points) Volatility (1) Volatility (2) ------------------------ ------------------- ------------------- +200 1.1% (8.2)% +100 2.6% (1.4)% -100 (3.8)% (4.8)% -200 (7.2)% (10.5)%
- -------- (1) The percentage change represents net interest income for twelve months in a stable interest rate environment versus the net interest income in the various rate scenarios. (2) The percentage change represents net portfolio value of the Bank in a stable rate environment versus the net portfolio value in the various rate scenarios. All interest-earning assets, interest-bearing liabilities and derivative contracts are included in the interest rate sensitivity analysis at March 31, 1999. At March 31, 1999, the Bank's estimated changes in net interest income and net portfolio value were within the ranges established by the Board of Directors. The primary analytical tool used by the Bank to gauge interest rate sensitivity is a simulation model used by many major banks and bank regulators, and is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model attempts to predict changes in the yields earned on assets and the rates paid on liabilities in relation to changes in market interest rates. The model also incorporates prepayment assumptions and market rates of interest provided by independent broker/dealer quotations, an independent pricing model and other available public sources. Adjustments are made to reflect the shift in the Treasury and other appropriate yield curves. The model factors in projections of anticipated activity levels by Bank product line and takes into account the Bank's increased ability to control rates offered on deposit products in comparison to its ability to control rates on adjustable-rate loans tied to published indices. 21 The following table provides the outstanding principal balances and the weighted average interest rates of the Bank's non-derivative financial instruments as of March 31, 1999. The Bank does not consider these financial instruments to be materially sensitive to interest rate fluctuations. Historically, the balances of these financial instruments have remained fairly constant over various economic conditions. The information presented below is based on the repricing date for variable rate instruments and the expected maturity date for fixed rate instruments.
Expected Maturity or Repricing Date by Year -------------------------------------------------------- Fair value at After March 31, 1999 2000 2001 2002 2003 2003 Total 1999 ---------- ------- ------- ------- -------- ------- ---------- ------------- (Dollars in thousands) Assets: Short-term investments.. $ 54,000 $ -- $ -- $ -- $ -- $ -- $ 54,000 $ 54,000 Weighted average rate.. 5.65% -- % -- % -- % -- % -- % 5.65% Investment securities available-for-sale (fixed rate)........... $ 85,264 $59,112 $40,960 $28,368 $ 19,637 $43,866 $ 277,207 $ 276,383 Weighted average rate.. 6.33% 6.33% 6.33% 6.33% 6.33% 6.31% 6.33% Investment securities available-for-sale (variable rate)........ $ 361,181 $ -- $ -- $ -- $ -- $ -- $ 361,181 $ 360,691 Weighted average rate.. 5.66% -- % -- % -- % -- % -- % 5.66% Total gross loans....... $1,064,327 $41,288 $26,527 $19,219 $ 17,719 $17,825 $1,186,905 $1,194,959 Weighted average rate.. 7.96% 8.00% 8.30% 8.36% 8.39% 8.16% 7.98% Liabilities: Checking accounts....... $ 81,059 $ -- $ -- $ -- $ -- $ -- $ 81,059 $ 81,059 Weighted average rate.. 1.15% -- % -- % -- % -- % -- % 1.15% Money market accounts... $ 41,988 $ -- $ -- $ -- $ -- $ -- $ 41,988 $ 41,988 Weighted average rate.. 3.04% -- % -- % -- % -- % -- % 3.04% Savings deposits........ $ 216,756 $ -- $ -- $ -- $ -- $ -- $ 216,756 $ 216,756 Weighted average rate.. 1.90% -- % -- % -- % -- % -- % 1.90% Time deposits........... $ 844,199 $22,023 $ 483 $ 743 $ 1,764 $ -- $ 869,212 $ 869,170 Weighted average rate.. 4.62% 4.87% 5.76% 5.50% 5.64% -- % 4.63% Short-term borrowings... $ 21,078 $ -- $ -- $ -- $ -- $ -- $ 21,078 $ 21,078 Weighted average rate.. 4.89% -- % -- % -- % -- % -- % 4.89% FHLB advances........... $ 381,000 $10,000 $ -- $ -- $109,000 $ -- $ 500,000 $ 502,175 Weighted average rate.. 4.93% 5.50% -- % -- % 5.20% -- % 5.00%
Expected maturities of assets are contractual maturities adjusted for projected payment based on contractual amortization and unscheduled prepayments of principal as well as repricing frequency. Expected maturities for deposits are based on contractual maturities adjusted for projected rollover rates and changes in pricing for deposits with no stated maturity dates. The Bank utilizes assumptions supported by documented analyses for the expected maturities of its loans and repricing of its deposits. It also relies on third party data providers for prepayment projections for amortizing securities. The actual maturities of these instruments could vary significantly if future prepayments and repricing differ from the Bank's expectations based on historical experience. The fair values of short-term investments approximate their book values due to their short maturities. The fair values of available for sale securities are based on bid quotations from third party data providers. The fair values of loans are estimated for portfolios with similar financial characteristics and takes into consideration discounted cash flows based on expected maturities or repricing dates utilizing estimated market discount rates as projected by third party data providers. Transaction deposit accounts, which include checking, money market and savings accounts, are presumed to have equal book and fair values because the interest rates paid on these accounts are based on prevailing market rates. The fair value of time deposits is based upon the discounted value of contractual cash flows, which is estimated using current rates offered for deposits of similar remaining terms. The fair value of short-term borrowings approximates book value due to their short maturities. The fair value of FHLB advances is estimated 22 by discounting the cash flows through maturity or the next repricing date based on current rates offered by the FHLB for borrowings with similar maturities. The Asset/Liability Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist in the management of interest rate risk. Derivative positions are integral components of the Bank's asset/liability management strategy. Therefore, the Bank does not believe it is meaningful to separately analyze the derivatives components of its risk management activities in isolation from their related positions. The Bank uses derivative instruments, primarily interest rate swap and cap agreements, as part of its management of asset and liability positions in connection with its overall goal of minimizing the impact of interest rate fluctuations on the Bank's net interest margin or its stockholders' equity. These contracts are entered into for purposes of reducing the Bank's interest rate risk and not for trading purposes. Interest rate swaps were designated for purposes of converting fixed rate loans to floating rate assets while interest rate cap agreements were designated as hedges against certain securities in the available-for-sale portfolio. The total gross notional amount of the interest rate swaps on March 31, 1999 was $28.5 million. The net unrealized loss on the swap agreement portfolio was $1.2 million compared to a net unrealized loss of $1.5 million at December 31, 1998. Interest rate caps are used as hedges against market fluctuations in the Bank's available-for-sale securities portfolio. The total gross notional amount of interest rate cap agreements on March 31, 1999 was $36.0 million. The net unrealized loss on the cap agreement portfolio was $509 thousand compared to a net unrealized loss of $580 thousand at December 31, 1998. These cap agreements are primarily linked to the three-month LIBOR. The following table summarizes the expected maturities, weighted average pay and receive rates, and the unrealized gains and losses of the Bank's interest rate contracts as of March 31, 1999. The fair values reflected in the table are based on quoted market prices from broker dealers making a market for these derivatives.
Expected Maturity ------------------------------------- Average After Unrealized Expected 1999 2000 2001 2002 2002 Total Gain (Loss) Maturity ----- ----- ------- ------- ----- ------- ---------- --------- (Dollars in thousands) Interest rate swap agreements: Notional amount......... $ -- $ -- $10,000 $18,500 $ -- $28,500 $(1,154) 3.2 Years Weighted average receive rate................... --% --% 5.34% 5.39% --% 5.37% Weighted average pay rate................... --% --% 6.46% 6.45% --% 6.46% Interest rate cap agreements: Notional amount......... $ -- $ -- $18,000 $18,000 $ -- $36,000 $ (509) 2.8 Years LIBOR cap rate.......... --% --% 6.50% 7.00% --% 6.75%
Year 2000 Many computer programs were designed and developed using only two digits in date fields, resulting in the inability to recognize the year 2000 or years thereafter. This "Year 2000" issue creates risks for the Bank from unforseen or unanticipated problems in its internal computer systems as well as from computer systems of the Federal Reserve Bank, correspondent banks, customers, and vendors. Failures of these systems or untimely corrections could have a material adverse impact on the Bank's ability to conduct its business and results of operations. The Bank's computer systems and programs are designed and supported by companies specifically in the business of providing such products and services. The Bank has formed a Year 2000 committee comprised of certain of the Bank's officers to address the "Year 2000" issue. The committee's Year 2000 plan includes holding awareness seminars; evaluating existing hardware, software, ATMs, vaults, alarm systems, communication systems, and other electrical devices; testing critical application programs and systems, both internally and externally; establishing a contingency plan; and upgrading hardware and software as necessary. 23 As of March 31, 1999, the Bank has successfully completed the awareness, assessment and remediation phases of the Year 2000 plan and is currently in the validation testing and implementation phases of the plan. The plan is on schedule. All of the Bank's critical systems are programmed, serviced or provided by outside system vendors. With the exception of the wire transfer system, which is expected to be certified in May 1999, substantially all of the systems that were identified in the assessment phase as critical to the Bank's operations have been tested and certified as compliant by the various "system owners" of the Bank. This meets the Federal Financial Institutions Examination Council's ("FFIEC") time frame for year 2000 progress. The Bank has also been reviewing and coordinating relationships with "secondary" systems vendors, borrowers, and other third parties to ensure that their systems will be "Year 2000" compliant. These vendors have informed the Bank that their "Year 2000" projects are on schedule and progress is being monitored by Bank personnel. In addition, as discussed below, manual data processing of business functions is part of the Bank's contingency plan. In addition to these software applications, much of the Bank's hardware and network infrastructure is being replaced as part of the "Year 2000" plan. The Bank has developed a detailed project plan for the replacement. The principal elements are the replacement of the router network and the replacement or upgrading of personal computers. The router network has already been replaced and the replacement or upgrading of personal computers is in process and is expected to be substantially complete by June 30, 1999. The hardware and network infrastructure replacement cost of $750 thousand represents the largest portion of the "Year 2000" plan total budget of $1.0 million. The Bank has incurred $547 thousand in "Year 2000" expenses to date, $249 thousand of which was incurred during 1999. Non-information technology systems are expected to function well in 2000 and beyond; none have been identified with "Year 2000" problems. The Bank's environmental systems have been reviewed by the Bank's administrative services personnel and vendor indications have been received in writing for all such systems. In addition, the Bank has obtained a written indication of "Year 2000" compliance from the local energy company. Indications of "Year 2000" readiness have also been received from the telecommunications companies on which the Bank depends. The contingency plan provides for changing outside vendors if current vendors cannot meet their schedules to be "Year 2000" compliant and for manual processing and other action by the Bank in the event a problem is not discovered in a critical system that has previously been tested and certified as compliant. An expected reasonable "worst case" scenario is that, notwithstanding the testing and certification of all the Bank's critical systems beforehand, a problem is discovered in the year 2000 that impacts the core accounting systems. In this event, the Bank would be required to perform many business functions manually until such time as the responsible vendor corrects the problem. Such manual processing of functions is provided for in the Bank's contingency plans, which have been reviewed and updated as of March 31, 1999. In October 1998, the Bank tested the transition from computer- performed operations to "offline" manual operations at all branch locations. The test was conducted while an outside vendor shut down the Bank's system to perform "Year 2000" repairs. During the shut down, the transition to manual procedures worked as planned. Other elements of the Bank's contingency plan will be tested during 1999, as is the case with wire transfer operations which were successfully tested at the Bank's offsite contingency location during January 1999. The Bank's contingency plan will be independently reviewed by June 30, 1999 in accordance with the FFIEC's "Year 2000" progress time frame. Business Segments The Company has four reportable segments: retail banking, commercial lending, treasury and residential lending. The retail banking segment is responsible for generating retail and commercial loans and deposits from the 23 branch locations in California. The commercial lending segment generates commercial loans and deposits from its production offices in northern and southern California. The treasury department is responsible for managing the Company's investments, liquidity, and interest rate risk. The residential lending segment is responsible for the portfolio of single-family and multifamily residential loans. The Company's reportable segments are strategic business units that offer financial products and services. They are managed separately because the retail branches focus primarily on retail operations, but some of the branches do generate commercial loans and deposits. The commercial lending segment specifically generates commercial loans and deposits through the efforts of commercial lending officers. 24 The following tables present information pertaining to the Company's reportable business segments for the three months ended March 31, 1999 and 1998: Three Months Ended March 31, 1999 (unaudited)
Retail Commercial Residential Banking Lending Treasury Lending Adjustments Total -------- ---------- -------- ----------- ----------- ---------- (In thousands) Interest income......... $ 5,467 $ 8,310 $ 11,363 $ 8,830 $ 692 $ 34,662 Charges for funds used.. (3,218) (4,772) (9,725) (5,823) -- (23,538) -------- -------- -------- -------- ------- ---------- Interest spread on funds used............ 2,249 3,538 1,638 3,007 692 11,124 -------- -------- -------- -------- ------- ---------- Interest expense........ (9,570) (672) (8,189) -- -- (18,431) Credit on funds provided............... 13,322 1,110 9,106 -- -- 23,538 -------- -------- -------- -------- ------- ---------- Interest spread on funds provided........ 3,752 438 917 -- -- 5,107 -------- -------- -------- -------- ------- ---------- Net interest income... $ 6,001 $ 3,976 $ 2,555 $ 3,007 $ 692 $ 16,231 ======== ======== ======== ======== ======= ========== Depreciation and amortization........... $ 367 $ 61 $ 1 $ -- $ 107 $ 536 Segment pretax profit... 855 3,753 2,570 2,368 -- 9,546 Segment assets.......... 272,416 432,583 724,366 483,488 88,205 2,001,058
Three Months Ended March 31, 1998 (unaudited)
Retail Commercial Residential Banking Lending Treasury Lending Adjustments Total -------- ---------- -------- ----------- ----------- ---------- (In thousands) Interest income......... $ 3,483 $ 6,374 $ 8,324 $ 9,994 $ 407 $ 28,582 Charges for funds used.. (2,215) (3,772) (7,002) (8,377) -- (21,366) -------- -------- -------- -------- ------- ---------- Interest spread on funds used............ 1,268 2,602 1,322 1,617 407 7,216 -------- -------- -------- -------- ------- ---------- Interest expense........ (10,845) (636) (4,703) -- -- (16,184) Credit on funds provided............... 14,922 928 5,516 -- -- 21,366 -------- -------- -------- -------- ------- ---------- Interest spread on funds provided........ 4,077 292 813 -- -- 5,182 -------- -------- -------- -------- ------- ---------- Net interest income... $ 5,345 $ 2,894 $ 2,135 $ 1,617 $ 407 $ 12,398 ======== ======== ======== ======== ======= ========== Depreciation and amortization........... $ 393 $ 33 $ 1 $ -- $ 112 $ 539 Segment pretax profit... 167 2,425 1,442 484 -- 4,518 Segment assets.......... 169,510 308,464 587,818 502,149 93,293 1,661,234
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS For quantitative and qualitative disclosures regarding market risks in the Company's portfolio, see, "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Asset Liability and Market Risk Management." 25 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Neither the Bank nor the Company 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. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial position, results of operations, or liquidity of the Bank or the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS No events have transpired which would make response to this item appropriate. ITEM 3. DEFAULTS UPON SENIOR SECURITIES No events have transpired which would make response to this item appropriate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No events have transpired which would make response to this item appropriate. ITEM 5. OTHER INFORMATION No events have transpired which would make response to this item appropriate. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Index
Exhibit Number Description -------------- ----------- 27 Financial Data Schedule
All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the first quarter of 1999. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 5, 1999 EAST WEST BANCORP, INC. (Registrant) By /s/ Julia Gouw ----------------------------------- JULIA GOUW Executive Vice President and Chief Financial Officer 27 EX-27 2 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Bank's Balance Sheet as of March 31, 1999, and Statement of Earnings for the three months ended March 31, 1999 and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 26,954 0 54,000 0 637,074 0 0 1,167,721 17,560 2,001,058 1,307,805 21,078 23,263 500,000 0 0 23 148,889 2,001,058 23,259 9,778 1,625 34,662 11,495 18,431 16,231 1,200 398 8,817 9,546 6,012 0 0 6,012 0.26 0.26 8.22 3,983 0 6,154 2,370 16,506 330 184 17,560 17,560 0 2,823
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