-----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, TlO6sOeM+v4T/t/xT4VAFwppG2OdlRMcnUHPEVSXpko++Vf5vt1w/E8cmJj1+lBc B+42Aw8zx3OCStzOfgGPEg== 0000944209-99-001775.txt : 19991117 0000944209-99-001775.hdr.sgml : 19991117 ACCESSION NUMBER: 0000944209-99-001775 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 000-24939 FILM NUMBER: 99753493 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 As filed with the Securities and Exchange Commission on November 15, 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 September 30, 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 October 31, 1999: 22,398,212 shares - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I--FINANCIAL INFORMATION........................................... 3 Item 1. Interim Consolidated Financial Statements................... 4-7 Notes to Interim Consolidated Financial Statements.......... 8-9 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations............... 9-30 Item 3. Quantitative and Qualitative Disclosures of Market Risks.... 30 PART II--OTHER INFORMATION.............................................. 31 Item 1. Legal Proceedings........................................... 31 Item 2. Changes in Securities and Use of Proceeds................... 31 Item 3. Defaults upon Senior Securities............................. 31 Item 4. Submission of Matters to a Vote of Security Holders......... 31 Item 5. Other Information........................................... 31 Item 6. Exhibits and Reports on Form 8-K............................ 31 SIGNATURES.............................................................. 32
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)
September 30, December 31, 1999 1998 ------------- ------------ (unaudited) ASSETS - ------ Cash and cash equivalents........................... $ 40,238 $ 161,131 Investment securities available for sale, at fair value (with amortized cost of $542,873 in 1999 and $683,335 in 1998) ................................. 526,685 682,436 Loans receivable, net of allowance for loan losses of $20,533 in 1999 and $16,506 in 1998............. 1,375,073 1,100,579 Investment in Federal Home Loan Bank stock, at cost............................................... 27,716 32,874 Other real estate owned............................. 2,823 4,600 Investment in affordable housing partnerships....... 24,691 18,602 Premises and equipment, net......................... 22,950 23,406 Premiums on deposits acquired, net.................. 4,156 2,648 Excess of purchase price over fair value of net assets acquired, net............................... 6,878 3,590 Accrued interest receivable and other assets........ 29,864 28,294 Deferred tax asset.................................. 6,543 -- ---------- ---------- TOTAL........................................... $2,067,617 $2,058,160 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Customer deposit accounts........................... $1,465,749 $1,292,937 Securities sold under agreements to repurchase...... 36,000 33,000 Federal Home Loan Bank advances..................... 398,000 563,000 Notes payable....................................... 2,452 1,820 Accrued expenses and other liabilities.............. 16,894 12,871 Deferred income taxes............................... -- 1,259 ---------- ---------- Total liabilities................................. 1,919,095 1,904,887 ---------- ---------- FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE PRICE, NET................................ 2,132 2,443 STOCKHOLDER'S EQUITY Common stock (par value of $0.001 per share) Authorized -- 50,000,000 shares Issued and outstanding -- 22,399,495 shares and 23,775,000 shares in 1999 and 1998, respectively..................................... 22 24 Additional paid in capital.......................... 96,485 109,976 Accumulated other comprehensive loss: Unrealized losses on securities available for sale, net of tax................................. (9,906) (888) Retained earnings................................... 59,789 41,718 ---------- ---------- Total stockholders' equity........................ 146,390 150,830 ---------- ---------- TOTAL........................................... $2,067,617 $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)
Three Months Nine Months Ended Ended September 30, September 30, --------------- ---------------- 1999 1998 1999 1998 ------- ------- ------- ------- INTEREST AND DIVIDEND INCOME Loans receivable, including fees........... $28,590 $21,334 $77,607 $62,473 Investment securities available for sale... 8,426 7,002 27,470 17,195 Investment securities held for trading..... 67 -- 81 -- Short-term investments..................... 383 3,581 2,194 10,829 Federal Home Loan Bank stock............... 356 260 1,149 677 ------- ------- ------- ------- Total interest and dividend income........ 37,822 32,177 108,501 91,174 ------- ------- ------- ------- INTEREST EXPENSE Customer deposit accounts.................. 12,977 12,511 36,298 37,576 Short-term borrowings...................... 54 2,029 596 5,536 Federal Home Loan Bank advances............ 6,180 3,808 19,428 8,582 ------- ------- ------- ------- Total interest expense.................... 19,211 18,348 56,322 51,694 ------- ------- ------- ------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES................................ 18,611 13,829 52,179 39,480 PROVISION FOR LOAN LOSSES................... 1,320 1,264 4,006 4,589 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..................................... 17,291 12,565 48,173 34,891 ------- ------- ------- ------- NONINTEREST INCOME Loan fees.................................. 419 571 1,545 1,710 Branch fees................................ 889 644 2,500 1,890 Letters of credit fees and commissions..... 1,062 824 3,101 1,865 Net gain on sales of investment securities available for sale........................ -- 908 685 1,316 Net gain on sales of investment securities held for trading.......................... 841 -- 1,266 -- Net gain on sale of investment in affordable housing partnerships........... -- -- 402 -- Net gain on sale of branch................. -- -- 676 -- Amortization of fair value of net assets acquired in excess of purchase price...... 104 104 312 312 Other operating income..................... 229 99 616 334 ------- ------- ------- ------- Total noninterest income.................. 3,544 3,150 11,103 7,427 ------- ------- ------- ------- NONINTEREST EXPENSE Compensation and employee benefits......... 4,773 4,527 13,910 13,140 Net occupancy.............................. 1,571 1,259 4,272 3,695 Data processing............................ 383 315 1,073 953 Amortization of premiums on deposits acquired and excess of purchase price over fair value of net assets acquired......... 452 310 1,120 931 Amortization of investment in affordable housing partnerships...................... 866 255 2,053 762 Deposit insurance premiums and regulatory assessments............................... 223 205 638 628 Other real estate owned operations, net.... 198 (5) (63) (202) Other operating expenses................... 2,171 1,490 6,031 4,443 ------- ------- ------- ------- Total noninterest expense................. 10,637 8,356 29,034 24,350 ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES.... 10,198 7,359 30,242 17,968 PROVISION FOR INCOME TAXES.................. 3,169 2,671 10,101 6,435 ------- ------- ------- ------- NET INCOME.................................. $ 7,029 $ 4,688 $20,141 $11,533 ======= ======= ======= ======= BASIC EARNINGS PER SHARE.................... $ 0.31 $ 0.20 $ 0.88 $ 0.49 DILUTED EARNINGS PER SHARE.................. $ 0.31 $ 0.20 $ 0.88 $ 0.49 AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC..................................... 22,392 23,775 22,901 23,775 AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED................................... 22,448 23,775 22,917 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 (Loss) 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............... 20,141 20,141 20,141 Other comprehensive loss, net of tax..... Net change in unrealized losses on securities, net of tax................. (9,018) (9,018) (9,018) ------- Comprehensive income... $11,123 ======= Net issuance under restricted stock award plan of 99,495 shares................ 1,051 1,051 Repurchase of common stock................. (2) (14,542) (14,544) Dividends declared on common stock.......... (2,070) (2,070) --- -------- ------- ------- -------- BALANCE, SEPTEMBER 30, 1999.................. $22 $ 96,485 $(9,906) $59,789 $146,390 === ======== ======= ======= ========
Nine Months Year Ended Ended September 30, December 31, 1999 1998 ------------- ------------ (In thousands) Disclosure of reclassification amounts: Unrealized holding (losses) gains arising during period, net of tax benefit (expense) of $4,294 in 1999 and $(595) in 1998............................ $(8,562) $1,109 Less: Reclassification adjustment for gains included in net income, net of tax expense of $229 in 1999 and $461 in 1998................................... (456) (859) ------- ------ Net change in unrealized losses on securities, net of tax benefit (expense) of $4,523 in 1999 and $(134) in 1998..................................... $(9,018) $ 250 ======= ======
See accompanying notes to interim consolidated financial statements. 6 EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30, ----------------------- 1999 1998 ------------ --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................... $ 20,141 $ 11,533 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of premiums......................... 1,347 1,412 Depreciation and amortization........................ 1,640 1,626 Net loan fees deferred............................... 1,752 1,929 Deferred tax benefit................................. (2,458) (1,965) Provision for loan losses............................ 4,006 4,589 Provision for other real estate owned losses......... 102 301 Net gains on sales of investment securities and other assets.............................................. (2,037) (2,296) Federal Home Loan Bank stock dividends............... (1,233) (615) Proceeds from sale of loans held for sale............ 43,135 63,457 Originations of loans held for sale.................. (33,972) (67,615) Increase in accrued interest receivable and other assets.............................................. (1,570) (10,593) Increase in accrued expenses and other liabilities... 4,023 5,630 ------------ --------- Total adjustments................................... 14,735 (4,140) ------------ --------- Net cash provided by operating activities........... 34,876 7,393 ------------ --------- CASH FLOWS FROM INVESTING ACTIVITIES Net disbursements of loans........................... (99,554) (111,871) Purchases of: Investment securities available for sale............. (419,612) (586,738) Loans receivable..................................... (188,072) (19,514) Federal Home Loan Bank stock......................... (1,808) (10,646) Investment in affordable housing partnerships........ (7,975) (1,219) Premises and equipment............................... (1,226) (903) Proceeds from sale, maturity, redemption or repayment of: Investment securities available for sale............. 560,727 455,685 Federal Home Loan Bank stock......................... 8,200 -- Other real estate owned.............................. 2,628 2,533 Investment in affordable housing partnerships........ 3,267 -- Premises and equipment............................... 2 10 Principal repayments on foreclosed property.......... 100 -- Payment for purchase of First Central Bank, net of cash received....................................... (5,295) -- ------------ --------- Net cash used in investing activities............... (148,618) (272,663) ------------ --------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits............................... $ 97,311 $ 17,931 Deposits acquired from First Central Bank............ 92,569 -- Deposits sold to People's Bank of California......... (17,068) -- Proceeds from Federal Home Loan Bank advances........ 13,043,000 982,820 Repayment of Federal Home Loan Bank advances......... (13,208,000) (809,520) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase.. 3,000 (74,800) Repayments of notes payable on affordable housing investments......................................... (2,400) (1,615) Repurchase of common stock........................... (13,493) -- Dividends paid on common stock....................... (2,070) -- ------------ --------- Net cash (used in) provided by financing activities......................................... (7,151) 114,816 ------------ --------- NET DECREASE IN CASH AND CASH EQUIVALENTS............. (120,893) (150,454) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 161,131 347,601 ------------ --------- CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 40,238 $ 197,147 ============ ========= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid........................................ $ 55,640 $ 51,392 Income tax payments, net............................. 14,050 7,295 Noncash investing and financing activities: Other real estate acquired through foreclosure....... 1,320 5,510 Loans made to facilitate sales of other real estate owned............................................... 650 1,027 Investment in affordable housing partnerships acquired through notes payable...................... 3,033 -- Net change in unrealized losses on securities available for sale, net of tax...................... (9,018) 155 Mortgage loans held to maturity securitized to investment securities available for sale............ -- 35,875
See accompanying notes to interim consolidated financial statements. 7 EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the Nine Months Ended September 30,1999 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 September 30, 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 September 30, 1999, was 22,399,495. 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. Quarterly Dividends During 1999, the Company's Board of Directors initiated regular quarterly common stock cash dividends of $0.03 per share. Quarterly cash dividends were paid on or about February 16, 1999, May 11, 1999 and August 18, 1999 to shareholders of record at February 2, 1999, May 5, 1999 and August 4, 1999, respectively. For the nine months ended September 30, 1999, cash dividends totaling $2.1 million have been paid to the Company's shareholders. Stock Repurchase Programs On January 25, 1999, the Company's Board of Directors authorized the Company to repurchase up to $7.0 million of its common stock. During the first quarter of 1999, the Company repurchased 725,000 shares of its common stock for a total of $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 common stock. The Company has also completed the second stock repurchase program repurchasing 700,000 shares for a total of $7.0 million. On August 13, 1999, the Company's Board of Directors initiated a third stock repurchase program, authorizing the repurchase of up to an additional $7.0 million of common stock. As of September 30, 1999, the Company has repurchased 50,000 shares of its common stock for approximately $503 thousand in conjunction with its third stock repurchase program. 8 3. BRANCH SALE On May 21, 1999, the Company completed the sale of its Irvine Branch to People's Bank of California. Total assets purchased and total liabilities assumed by People's Bank were $83 thousand and $17.1 million, respectively. The purchase price was 4.25% of outstanding deposits assumed as of May 21, 1999 or $725 thousand. The net gain on sale recorded by the Company on this transaction was $676 thousand. 4. FIRST CENTRAL BANK ACQUISITION On May 28, 1999, the Company completed its $13.5 million acquisition of First Central Bank, N.A. in an all-cash transaction. First Central Bank, with assets of $102 million, was a national bank with three branches in Southern California, specializing in serving the banking needs of the Chinese-American community. The acquisition was accounted for under the purchase method of accounting, and accordingly, all assets and liabilities were adjusted to and recorded at their estimated fair values as of the acquisition date. The estimated tax effect of differences between tax bases and market values has been reflected in deferred income taxes. The Company recorded total goodwill of approximately $3.5 million, which is being amortized using the straight-line method over 15 years. 5. AMERICAN INTERNATIONAL BANK ACQUISITION On September 17, 1999, the Company signed a definitive agreement to purchase American International Bank ("AIB") for approximately $33.8 million in an all- cash transaction. Completion of the merger is anticipated in the first quarter of 2000 and is subject to regulatory and AIB shareholder approval. American International Bank, with assets of $211 million as of September 30, 1999, is a state-chartered bank with eight branches in Southern California. AIB specializes in servicing small-to-medium sized companies involved in international trade and other areas, as well as offering a full range of personal banking products and services to a predominantly Chinese-American customer base. 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 and performance in future periods to differ materially from those discussed in such forward-looking statements. These factors include, but are not limited to, the effect of interest rate and currency exchange fluctuations, competition in the financial services market for both deposits and loans; the Company's ability to efficiently incorporate acquisitions into its operations; the Company's ability to successfully address "Year 2000" issues during the assimilation process; the ability of the Company to increase its customer base; and regional and general economic conditions. Given these uncertainties, the reader is cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation to update or revise any forward-looking statements contained herein to reflect any changes in the Company's expectations of results or any change in events. 9 Quarterly Cash Dividend On July 21, 1999, the Company announced that the Board of Directors had declared a regular quarterly cash dividend of $0.03 per share. The dividend payment was made on or about August 18, 1999 to shareholders of record at August 4, 1999. Stock Repurchase Programs On August 13, 1999, the Company's Board of Directors initiated a third stock repurchase program authorizing the repurchase of up to an additional $7.0 million of common stock. As of September 30, 1999, the Company had completed its second stock repurchase program, repurchasing 700,000 shares of common stock for a total of $7.0 million. For the nine months ended September 30, 1999, the Company has repurchased a total of 1,475,000 shares amounting to $14.5 million. Acquisition of American International Bank On September 17, 1999, the Company announced that it has signed a definitive agreement to purchase American International Bank for approximately $33.8 million in an all-cash transaction. The merger is anticipated to be completed in the first quarter of 2000 subject to regulatory and AIB shareholder approval. Results of Operations East West Bancorp, Inc, parent company of East West Bank (the "Bank") reported third quarter 1999 net income of $7.0 million, or $0.31 per basic and diluted share, compared to $4.7 million, or $0.20 per basic and diluted share, reported during the third quarter of 1998. The Company's annualized return on average total assets increased to 1.34% for the quarter ended September 30, 1999, from 1.02% for the same period in 1998. The annualized return on average stockholders' equity increased to 19.37% for the third quarter of 1999, compared with 13.12% for the third quarter of 1998. Net income for the nine months ended September 30, 1999 increased to $20.1 million, or $0.88 per basic and diluted share, from $11.5 million, or $0.49 per basic and diluted share, for the first nine months of 1998. The annualized return on average total assets increased to 1.30% for the first nine months of 1999, compared with 0.89% for the first nine months of 1998. The annualized return on average stockholders' equity increased to 18.19% for the first three quarters of 1999, compared with 11.13% for the same period in 1998. Components of Net Income
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------ 1999 1998 1999 1998 --------- --------- -------- -------- (In millions) (In millions) Net interest income............... $ 18.6 $ 13.8 $ 52.2 $ 39.5 Provision for loan losses......... (1.3) (1.3) (4.0) (4.6) Noninterest income................ 3.5 3.2 11.1 7.4 Noninterest expense............... (10.6) (8.4) (29.0) (24.4) Provision for income taxes........ (3.2) (2.6) (10.2) (6.4) --------- -------- -------- -------- Net income...................... $ 7.0 $ 4.7 $ 20.1 $ 11.5 ========= ======== ======== ======== Annualized return on average total assets........................... 1.34% 1.02% 1.30% 0.89% ========= ======== ======== ========
Net income increased 50% and 75%, respectively, for the three and nine months ended September 30, 1999 compared with corresponding periods in 1998. The increases in third quarter and year-to-date 1999 net income is largely attributable to the growth in the Company's loan and investment securities portfolios, and to the reduction in the Company's cost of funds. Further, sustained growth in noninterest-related revenues, as well as continuing efforts to manage operational expenses, have also contributed to the increase in net income. 10 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 third quarter of 1999 totaled $18.6 million, a 35% increase over net interest income of $13.8 million for the same period in 1998. For the first nine months of 1999, net interest income increased to $52.2 million, reflecting a 32% increase from $39.5 million for the first nine months of 1998. Total interest and dividend income during the quarter ended September 30, 1999 increased 18% to $37.8 million compared with $32.2 million during the same period in 1998. Similarly, year-to-date interest and dividend income increased 19% to $108.5 million, from $91.2 million during the first nine months of 1998. The increase in interest and dividend income is due primarily to the growth in average earning assets of 14% and 19%, respectively, during the three and nine months ended September 30, 1999. Growth in the Company's loan and investment portfolios, partially offset by a decrease in short-term investments, propelled the net increase in average earning assets. The net growth in average earning assets was funded largely by increases in FHLB advances and time deposits. Additionally, a 49% growth in noninterest-bearing demand deposits during the three- and nine-month periods ended September 30, 1999 also provided another funding source to the Company. The overall yield on earning assets increased to 7.56% and 7.33%, from 7.32% and 7.31%, respectively, for the third quarter and first nine months of 1999. Although a marked decrease in the average prime rate resulted in lower loan yields for both periods, yields on investment securities increased over the same periods due to purchases of fixed rate securities during the second half of 1998. Total interest expense during the third quarter of 1999 increased 5% to $19.2 million compared with $18.3 million for the same period a year ago. For the first nine months of 1999, total interest expense increased 9% to $56.3 million, from $51.7 million for the first three quarters of 1998. The increase in third quarter and year-to-date 1999 interest expense is primarily attributable to increases in average FHLB advances and time deposits, partially offset by a decrease in average short-term borrowings. Additionally, a reduction in the cost of funds for all categories of interest-bearing liabilities was another significant factor in the year-to-date 1999 increase in interest expense. Net interest margin, defined as taxable equivalent net interest income divided by average earning assets, increased 57 basis points to 3.72% for the third quarter of 1999, compared with 3.15% for the third quarter of 1998. For the first nine months of 1999, the net interest margin was 3.52%, a 35 basis point increase from the net interest margin of 3.17% for the same period a year ago. An increase in the overall yield on average earning assets, compounded by a significant decline in the cost of funds, contributed to the increase in the Company's net interest margin. The Company's overall cost of funds decreased 36 and 37 basis points to 4.24% and 4.21%, respectively, for the three and nine months ended September 30, 1999. 11 The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the three months ended September 30, 1999 and 1998:
Three Months Ended September 30, ---------------------------------------------------------- 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............ $ 25,074 $ 383 6.11% $ 239,740 $ 3,581 5.97% Taxable investment securities (2)(3)........................... 570,422 8,493 5.96 511,459 7,002 5.48 Loans receivable (2)(4)........... 1,379,199 28,590 8.29 986,596 21,334 8.65 FHLB stock........................ 27,606 356 5.16 20,681 260 5.03 ---------- ------- ---------- ------- Total interest-earning assets.... 2,002,301 37,822 7.56 1,758,476 32,177 7.32 ------- ---- ------- ---- Noninterest-earning assets: Cash and due from banks........... 38,870 25,032 Allowance for loan losses......... (20,477) (14,994) Other assets...................... 72,545 63,562 ---------- ---------- Total assets..................... $2,093,239 $1,832,076 ========== ========== LIABILITIES AND STOCKHOLDERS EQUITY - ----------------------------------- Interest-bearing liabilities: Checking accounts................. $ 93,914 $ 295 1.26 $ 78,601 $ 270 1.37 Money market accounts............. 62,926 503 3.20 26,872 256 3.81 Savings deposits.................. 213,544 945 1.77 218,194 1,373 2.52 Time deposits..................... 965,306 11,234 4.66 838,916 10,612 5.06 Short-term borrowings............. 2,873 54 7.52 140,188 2,029 5.79 FHLB advances..................... 472,910 6,180 5.23 293,425 3,808 5.19 ---------- ------- ---------- ------- Total interest-bearing liabilities..................... 1,811,473 19,211 4.24 1,596,196 18,348 4.60 ------- ---- ------- ---- Noninterest-bearing liabilities: Demand deposits................... 121,176 81,153 Other liabilities................. 15,457 11,817 Stockholders' equity.............. 145,133 142,910 ---------- ---------- Total liabilities and stockholders' equity............ $2,093,239 $1,832,076 ========== ========== Interest rate spread............... 3.32% 2.72% ==== ==== Net interest income and net interest margin................... $18,611 3.72% $13,829 3.15% ======= ==== ======= ====
- ------- (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. 12 The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the nine months ended September 30, 1999 and 1998:
Nine Months Ended September 30, --------------------------------------------------------- 1999 1998 ---------------------------- ---------------------------- Average Average Yield/ Yield/ Average Rate Average Rate Balance Interest (1) Balance Interest (1) ---------- -------- ------- ---------- -------- ------- (Dollars in thousands) ASSETS - ------ Interest-earning assets: Short-term investments........... $ 49,921 $ 2,194 5.86% $ 245,100 $10,829 5.89% Taxable investment securities (2)(3)..... 636,918 27,551 5.77 420,312 17,195 5.45 Loans receivable (2)(4)................ 1,257,768 77,607 8.23 980,618 62,473 8.49 FHLB stock............. 29,878 1,149 5.13 16,774 677 5.38 ---------- ------- ---------- ------- Total interest-earning assets............... 1,974,485 108,501 7.33 1,662,804 91,174 7.31 ------- ---- ------- ---- Noninterest-earning assets: Cash and due from banks................. 32,352 23,646 Allowance for loan losses................ (18,598) (13,649) Other assets........... 69,717 58,761 ---------- ---------- Total assets.......... $2,057,956 $1,731,562 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Interest-bearing liabilities: Checking accounts...... $ 85,981 $ 765 1.19 $ 77,638 $ 836 1.44 Money market accounts.. 49,046 1,128 3.07 24,529 702 3.82 Savings deposits....... 218,524 3,024 1.85 212,087 3,976 2.50 Time deposits.......... 903,495 31,381 4.63 847,854 32,062 5.04 Short-term borrowings.. 14,786 596 5.37 129,426 5,536 5.70 FHLB advances.......... 510,345 19,428 5.08 214,927 8,582 5.32 ---------- ------- ---------- ------- Total interest-bearing liabilities.......... 1,782,177 56,322 4.21 1,506,461 51,694 4.58 ------- ---- ------- ---- Noninterest-bearing liabilities: Demand deposits........ 110,237 73,795 Other liabilities...... 17,880 13,145 Stockholders' equity... 147,662 138,161 ---------- ---------- Total liabilities and stockholders' equity............... $2,057,956 $1,731,562 ========== ========== Interest rate spread.... 3.12% 2.73% ==== ==== Net interest income and net interest margin.... $52,179 3.52% $39,480 3.17% ======= ==== ======= ====
- ------- (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. 13 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 Nine Months Ended September 30, 1999 vs. 1998 September 30, 1999 vs. 1998 ----------------------------- ----------------------------- Total Changes Due to Total Changes Due to Change Volume (1) Rates (1) Change Volume (1) Rates (1) ------- ---------- --------- ------- ---------- --------- (In thousands) (In thousands) INTEREST-EARNING ASSETS: Short-term investments.. $(3,198) $(3,281) $ 83 $(8,635) $(8,578) $ (57) Taxable investment securities............. 1,491 847 644 10,356 9,319 1,037 Loans receivable, net... 7,256 8,098 (842) 15,134 17,031 (1,897) FHLB stock.............. 96 89 7 472 502 (30) ------- ------- ----- ------- ------- ------- Total interest income............... $ 5,645 $ 5,753 $(108) $17,327 $18,274 $ (947) ======= ======= ===== ======= ======= ======= INTEREST-BEARING LIABILITIES: Checking accounts....... $ 25 $ 45 $ (20) $ (71) $ 115 $ (186) Money market accounts... 247 281 (34) 426 530 (104) Savings deposits........ (428) (29) (399) (952) 125 (1,077) Time deposits........... 622 1,326 (704) (681) 2,812 (3,493) Short-term borrowings... (1,975) (2,841) 866 (4,940) (4,638) (302) FHLB advances........... 2,372 2,345 27 10,846 11,227 (381) ------- ------- ----- ------- ------- ------- Total interest expense.............. $ 863 $ 1,127 $(264) $ 4,628 $10,171 $(5,543) ======= ======= ===== ======= ======= ======= CHANGE IN NET INTEREST INCOME................. $ 4,782 $ 4,626 $ 156 $12,699 $ 8,103 $ 4,596 ======= ======= ===== ======= ======= =======
- -------- (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 totaled $1.3 million for the quarters ended September 30, 1999 and 1998. For the first nine months of 1999, the provision for loan losses decreased 16% to $4.0 million, compared to $4.6 million for the corresponding period in 1998. The decreased provision for loan losses recorded in the current year reflects continued stability in the Company's asset quality, as manifested by improvements in nonperforming asset ratios, when compared to 1998. For further information regarding net credit losses and the allowance for loan losses, see the "Allowance for Loan Losses" section of this report. 14 Noninterest Income Components of Noninterest Income
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------ 1999 1998 1999 1998 --------- --------- --------- -------- (In millions) (In millions) Loan fees........................... $ 0.42 $ 0.57 $ 1.54 $ 1.71 Branch fees......................... 0.89 0.64 2.50 1.89 Letters of credit fees and commissions........................ 1.06 0.83 3.10 1.87 Net gains on sales of securities available for sale................. -- 0.91 0.68 1.32 Net gains on sales of securities held for trading................... 0.84 -- 1.27 -- Gain on sale of affordable housing investments........................ -- -- 0.40 -- Gain on sale of branch.............. -- -- 0.68 -- Amortization of negative intangibles........................ 0.10 0.10 0.31 0.31 Other............................... 0.23 0.10 0.62 0.33 --------- --------- --------- -------- Total............................. $ 3.54 $ 3.15 $ 11.10 $ 7.43 ========= ========= ========= ========
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 trading securities, investment securities available for sale, and affordable housing investments. Noninterest income for the three months ended September 30, 1999 increased 13% to $3.5 million, compared with $3.2 million for the three months ended September 30, 1998. For the first nine months of 1999, noninterest income increased 50% to $11.1 million, from $7.4 million for the first three quarters of 1998. Included in year-to-date noninterest income are a one-time $676 thousand gain on sale of a branch and a $402 thousand gain on sale of an investment in affordable housing partnerships. Excluding these non-recurring sources of revenue, noninterest income increased 35% to $10.0 million for the first nine months of 1999 when compared to the same period in 1998. The increase in noninterest income for the quarter and year-to-date compared with the prior year is primarily due to growth in fee-based service income, including letters of credit fees and commissions and branch fees. Letters of credit fees and commissions amounted to $1.1 million for the third quarter of 1999 compared to $824 thousand for the third quarter of 1998. This 29% increase is attributed primarily to a $201 thousand increase in issuance and maintenance fees related to standby letters of credit. The remainder of the increase is attributed to trade finance activities which experienced growth of 32% and 42%, respectively, in the number of transactions processed for the three months and the nine months ended September 30, 1999 in comparison to the same periods a year ago. For the nine months ended September 30, 1999, letters of credit fees and commissions increased 66% to $3.1 million, compared with $1.9 million for the same period in 1998. Branch fees, which represent revenues derived from branch operations, amounted to $889 thousand for the third quarter of 1999, a 38% increase from the $664 thousand earned during the third quarter of 1998. This was primarily due to higher revenues derived from analysis charges on commercial deposit accounts, increased fees related to transaction accounts, and higher revenues from the sale of nonproprietary mutual funds. For the nine months ended September 30, 1999, branch fees increased 32% to $2.5 million, compared with $1.9 million for the same period in 1998. Other contributions to noninterest income include $841 thousand and $1.3 million, respectively, of net gain on sales of investment securities held for trading for the three- and nine-month periods ended September 30, 1999. There were no gains on sales of trading securities during the same periods in 1998. For the nine months ended September 30, 1999, net gain on sales of available for sale securities decreased to $684 thousand, 15 compared with $1.3 million for the corresponding period in 1998. There were no sales of investment securities available for sale during the third quarter of 1999. For the 1998 third quarter, net gain on sales of available for sale securities amounted to $908 thousand. Noninterest Expense Components of Noninterest Expense
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------ 1999 1998 1999 1998 --------- --------- -------- -------- (In millions) (In millions) Compensation and other employee benefits........................ $ 4.77 $ 4.53 $ 13.91 $ 13.14 Net occupancy.................... 1.57 1.26 4.27 3.70 Data processing.................. 0.38 0.32 1.07 0.95 Amortization of positive intangibles..................... 0.45 0.31 1.12 0.93 Amortization of affordable housing investments............. 0.87 0.25 2.05 0.76 Deposit insurance premiums and regulatory assessments.......... 0.22 0.21 0.64 0.63 Other real estate owned operations, net................. 0.20 (0.01) (0.06) (0.20) Other............................ 2.18 1.49 6.03 4.44 --------- --------- -------- -------- Total.......................... $ 10.64 $ 8.36 $ 29.03 $ 24.35 ========= ========= ======== ======== Efficiency ratio............... 42% 46% 41% 49% ========= ========= ======== ========
Noninterest expense increased 27% to $10.6 million for the three months ended September 30, 1999, from $8.4 million for the three months ended September 30, 1998. Noninterest expense totaled $29.0 million for the first three quarters of 1999, compared with $24.4 million for the same period in 1998. Noninterest expense is comprised primarily of compensation and employee benefits, occupancy and other operating expenses. Compensation and employee benefits increased 5% to $4.8 million for the third quarter of 1999, compared with $4.5 million for the third quarter of 1998. This primarily reflects the Company's continuing growth which includes the acquisition of First Central Bank at the end of May 1999. For the nine months ended September 30, 1999, compensation and employee benefits increased to $13.9 million from $13.1 million for the same period a year earlier. In addition to the acquisition of First Central Bank, the impact of annual salary and related cost increases for existing employees, as well as increases in incentive compensation tied to the Company's performance, further contributed to the year-to-date increase in compensation and employee benefits. Occupancy expenses increased 25% and 16% to $1.6 million and $4.3 million, respectively, for the three and nine months ended September 30, 1999. The increase in occupancy expenses for both periods primarily reflects four months of operations for the branches and administrative offices of First Central Bank, an overhead factor which was not present during 1998. Additionally, the impact of normal rent adjustments in existing leases, as well as increased expenses related to the outsourcing of computer hardware maintenance further contributed to the rise in occupancy expenses. The amortization of investments in affordable housing partnerships increased to $866 thousand for the third quarter of 1999, compared with $255 thousand for the third quarter of 1998. For the nine months ended September 30, 1999, amortization of investments in affordable housing partnerships totaled $2.1 million, compared to $762 thousand for the same period in 1998. The increase in amortization reflects the impact of additional investment purchases made since the third quarter of 1998. Total investments in affordable housing partnerships amounted to $24.7 million as of September 30, 1999, compared with $14.8 million as of September 30, 1998. The amortization of positive intangibles, which include premiums on deposits acquired and excess of purchase price over fair value of net assets acquired ("goodwill"), increased 46% and 20%, respectively, during the three and nine months ended September 30, 1999 when compared to the same periods in 1998. The increase 16 in amortization expense for both periods is due entirely to the monthly amortization of goodwill and deposit premium recorded as a result of the First Central Bank acquisition. The amounts of goodwill and deposit premium recorded by the Company totaled approximately $3.5 million and $2.5 million, respectively, and are being amortized straight line over 15 and 7 years, respectively. Net expenses related to OREO operations, which include writedowns and net gains and losses on sales of OREO properties, increased by $203 thousand during the third quarter of 1999 when compared to the third quarter of 1998. For the nine months ended September 30, 1999, net income generated from OREO operations totaled $63 thousand compared to $202 thousand for the same period in 1998. This decrease in net OREO income for both periods is primarily due to significantly lower rental income recorded in 1999 compared to 1998. 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. Other operating expenses for the third quarter of 1999 increased 46% to $2.2 million, compared with $1.5 million for the third quarter of 1998. For the nine months ended September 30, 1999, other operating expenses increased 36% to $6.0 million, compared with $4.4 million for the nine months ended September 30, 1998. The increase in other operating expenses for both periods can be attributed to the Company's growth, which includes the acquisition of First Central Bank as well as organic expansion. Further, various expenses directly related to the Company's change in status from a privately held institution to a public company have also contributed to the increase in other operating expenses. These expenses include, but are not limited to, legal fees, investor relations expenses, Delaware corporation franchise fees, SEC and NASDAQ filing fees, and stock transfer agent fees. Continuing efforts to closely manage operational expenses have resulted in a significant improvement in the Company's efficiency ratio, which represents noninterest expense (excluding the amortization of intangibles and investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income (excluding the amortization of intangibles). For the third quarter of 1999, the Company's efficiency ratio improved to 42%, as compared to 46% for the third quarter of 1998. For the nine months ended September 30, 1999, the efficiency ratio improved to 41%, compared with 49% for the same period in 1998. Provision for Income Taxes The provision for income taxes increased 19% to $3.2 million during the third quarter of 1999, compared with $2.7 million for the third quarter of 1998, primarily due to higher pretax income partially offset by tax credits from qualified affordable housing investments. Tax credits utilized in the third quarter of 1999 totaled $743 thousand, compared to $422 thousand for the third quarter of 1998. The third quarter 1999 provision reflects an effective tax rate of 31.1%, compared with an effective tax rate of 36.3% for the third quarter 1998. For the nine months ended September 30, 1999, the provision for income taxes totaled $10.1 million, a 57% increase from the $6.4 million income tax expense recorded for the same period a year ago. The effective tax rate of 33.4% for the first three quarters of 1999 reflects tax credits of $2.2 million, compared with an effective tax rate of 35.8% for the first three quarters of 1998 reflecting tax credits of $1.3 million. Balance Sheet Analysis The Company's total assets at September 30, 1999 increased to $2.07 billion, a slight increase of $9.5 million when compared to December 31, 1998. The increase in total assets was comprised primarily of a $274.5 million growth in loans receivable, partially offset by decreases in short-term investments of $114.0 million and investment securities available for sale of $155.8 million. The increase in total assets was funded by an increase of $172.8 million in deposits, partially offset by a decrease in FHLB advances of $165.0 million. 17 Investment Securities Held for Trading Investment securities held for trading are investment grade securities which are generally held by the Company for a period of seven days or less. Net gains on sales of trading securities amounted to $841 thousand and $1.3 million for the three and nine months ended September 30, 1999. There were no purchases and sales of investment securities held for trading during 1998. There were no outstanding investment securities held for trading at September 30, 1999. Investment Securities Available for Sale Investment securities available for sale of $526.7 million as of September 30, 1999 represents a decrease of $155.8 million, or 23%, compared to the December 31, 1998 balance of $682.4 million. Total repayments on mortgage- backed securities, including calls and redemptions, totaled $383.0 million for the first nine months of 1999. Proceeds from such repayments were utilized to purchase additional mortgage-backed securities and to fund loan originations and purchases. There were no sales of available for sale securities during the three months ended September 30, 1999. For the nine months ended September 30, 1999, the Bank recorded net gains totaling $685 thousand on sales of available for sale securities. Proceeds from sales of securities were applied towards the repayment of FHLB advances as well as funding a portion of the loan originations and loan purchases made during the first nine months of 1999. The following table sets forth the amortized cost and the estimated fair values of investment securities available for sale as of September 30, 1999 and December 31, 1998:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (In thousands) As of September 30, 1999: U.S. Treasury securities............. $ 1,997 $ -- $ (40) $ 1,957 U.S. Government agency securities.... 75,605 -- (4,510) 71,095 Mortgage-backed securities........... 465,071 48 (11,689) 453,430 Obligations of states and political subdivisions........................ 200 3 -- 203 -------- ----- -------- -------- Total investment securities available for sale................ $542,873 $ 51 $(16,239) $526,685 ======== ===== ======== ======== As of December 31, 1998: U.S. Treasury securities............. $ -- $ -- $ -- $ -- U.S. Government agency securities.... -- -- -- -- Mortgage-backed securities........... 683,335 471 (1,370) 682,436 Obligations of states and political subdivisions........................ -- -- -- -- -------- ----- -------- -------- Total investment securities available for sale................ $683,335 $ 471 $ (1,370) $682,436 ======== ===== ======== ========
Loans The Company continued to experience strong loan demand during the third quarter of 1999. Net loans receivable at September 30, 1999 totaled $1.38 billion, representing a $274.5 million or 25% increase from December 31, 1998. The increase in loans was funded, in large part, through repayments and sales of mortgage-backed securities and, to a lesser extent, through the liquidation of lower-yielding short-term investments. The Company continues to focus its lending efforts on originating multifamily and commercial loan products, as evidenced by the composition of the growth in loans during the first nine months of 1999. Excluding the $55.0 million in loans acquired from First Central Bank, gross loans receivable increased $222.1 million, or 20%, from December 31, 1998. This growth is comprised of increases in multifamily loans of $125.6 million or 75%, commercial real estate loans of $74.3 million or 21%, construction loans of $18.3 million or 23%, and commercial business loans, including trade finance products, of $9.5 million or 4%. Management anticipates continued strong loan demand in these categories throughout the remainder of 1999. 18 Partially offsetting the increases in the multifamily and commercial loan categories is a decline of $10.6 million, or 4%, in single family residential loans, which excludes the $4.8 million of single family loans acquired from First Central Bank. This decrease 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:
September 30, 1999 December 31, 1998 September 30, 1998 ------------------- ------------------- ------------------- Balance Percent Balance Percent Balance Percent ---------- ------- ---------- ------- ---------- ------- (Dollars in thousands) Real estate loans: Residential, one to four units............ $ 264,645 19.0% $ 270,444 24.2% $ 287,659 27.6% Residential, multifamily........... 302,197 21.6 167,545 15.0 154,804 14.8 Commercial and industrial real estate................ 467,067 33.5 358,850 32.0 332,552 31.8 Construction........... 99,525 7.1 78,922 7.0 65,990 6.3 ---------- ----- ---------- ----- ---------- ----- Total real estate loans................ 1,133,434 81.2 875,761 78.2 841,005 80.5 ---------- ----- ---------- ----- ---------- ----- Other loans: Business, commercial... 236,629 16.9 223,318 20.0 183,415 17.6 Automobile............. 5,142 0.4 4,972 0.4 5,086 0.5 Other consumer......... 20,587 1.5 15,156 1.4 14,576 1.4 ---------- ----- ---------- ----- ---------- ----- Total other loans..... 262,358 18.8 243,446 21.8 203,077 19.5 ---------- ----- ---------- ----- ---------- ----- Total gross loans.... 1,395,792 100.0% 1,119,207 100.0% 1,044,082 100.0% ========== ===== ========== ===== ========== ===== Unearned fees, premiums and discounts, net..... (186) (2,122) (2,600) Allowance for loan losses................. (20,533) (16,506) (15,810) ---------- ---------- ---------- Loans receivable, net.................. $1,375,073 $1,100,579 $1,025,672 ========== ========== ==========
Nonperforming Assets Nonaccrual loans, which include loans 90 days or more past due, totaled $5.8 million at September 30, 1999, compared with $9.8 million at December 31,1998, and $9.4 million at September 30, 1998. Nonaccrual loans as a percentage of total loans outstanding were 0.42% at September 30, 1999, 0.88% at December 31, 1998, and 0.90% at September 30, 1998. Loans totaling $2.9 million were placed on nonaccrual status during the three months ended September 30, 1999. The increase in nonaccrual loans was partially offset by $944 thousand in payoffs, $1.4 million in loans brought current and two loans totaling $154 thousand that were transferred to other real estate owned. The increase in nonaccrual loans during the third quarter of 1999 is comprised primarily of $1.2 million in residential single family loans and $1.6 million in commercial loans. For the nine months ended September 30, 1999, nonaccrual loans decreased by $3.9 million due to payoffs totaling $5.5 million, loans brought current totaling $2.9 million, gross chargeoffs totaling $158 thousand and loans transferred to other real estate owned totaling $312 thousand. These were offset by $4.8 million of loans placed on nonaccrual status during the nine months ended September 30, 1999. Restructured loans or loans that have had their original terms modified totaled $6.1 million at September 30, 1999, representing an increase of $124 thousand from the $5.9 million reported at December 31, 1998. The net increase in restructured loans since December 31, 1998 reflects the addition of two commercial loans partially offset by payments received. Other real estate owned ("OREO") includes properties acquired through foreclosure or through full or partial satisfaction of loans. Other real estate owned totaled $2.8 million, $4.6 million and $5.1 million at 19 September 30, 1999, December 31, 1998 and September 30, 1998, respectively. For the nine months ended September 30, 1999, six properties with a combined book value of $670 thousand were added to OREO and fourteen properties with a total book value of $2.2 million were sold. Net gains amounting to $384 thousand were recognized on OREO sales during the nine months ended September 30, 1999. The following table sets forth information regarding nonaccrual loans, restructured loans and other real estate owned as of the dates indicated:
September 30, June 30, March 31, December 31, September 30, 1999 1999 1999 1998 1998 ------------- -------- --------- ------------ ------------- (Dollars in thousands) Nonaccrual loans........ $ 5,843 $ 5,508 $ 3,983 $ 9,762 $ 9,415 Loans past due 90 days or more but not on nonaccrual............. -- -- -- 129 -- ------- ------- ------- ------- ------- Total nonperforming loans................ 5,843 5,508 3,983 9,891 9,415 ------- ------- ------- ------- ------- Restructured loans...... 6,060 7,249 6,154 5,936 6,430 Other real estate owned, net.................... 2,823 3,034 3,585 4,600 5,088 ------- ------- ------- ------- ------- Total nonperforming assets............... $14,726 $15,791 $13,722 $20,427 $20,933 ======= ======= ======= ======= ======= Total nonperforming assets to total assets................. 0.71% 0.75% 0.69% 0.99% 1.12% Allowance for loan losses to nonperforming loans.................. 351.41 363.45 440.87 166.88 167.92 Nonperforming loans to total gross loans...... 0.42 0.41 0.34 0.88 0.90
Loans classified as impaired totaled $21.7 million at September 30, 1999, compared with $10.0 million at December 31, 1998. Specific reserves on impaired loans were $1.3 million and $350 thousand as of September 30, 1999 and December 31, 1998, respectively. Total chargeoffs associated with impaired loans as of September 30, 1999 amounted to $1.9 million. The Bank's average recorded investment in impaired loans for the nine months ended September 30, 1999 was $23.5 million. During the nine months ended September 30, 1999, gross interest income that would have been recorded on impaired loans, had they performed in accordance with their original terms, totaled $1.7 million. Of this amount, actual interest recognized on impaired loans, on a cash basis, was $1.2 million. 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 operating results, and is decreased by the amount of net chargeoffs 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 values, identification of problem and potential problem loans, and other relevant data. While management believes that the allowance for loan losses is adequate at September 30, 1999, future additions to the allowance will be subject to continuing evaluation of inherent risks in the loan portfolio. 20 At September 30, 1999, the allowance for loan losses amounted to $20.5 million, or 1.47% of total loans, compared with $16.5 million, or 1.47% of total loans, at December 31, 1998, and $15.8 million, or 1.51% of total loans, at September 30, 1998. The following table summarizes activity in the allowance for loan losses for the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (Dollars in thousands) Allowance balance at beginning of period......... $ 20,019 $ 14,213 $ 16,506 $ 12,273 Allowance from acquisition... -- -- 1,150 -- Provision for loan losses.... 1,320 1,264 4,006 4,589 Actual chargeoffs: 1-4 family residential real estate.................... 2 90 24 187 Multifamily real estate.... -- 368 39 480 Commercial and industrial real estate............... -- -- -- 60 Business, commercial....... 1,025 (85) 1,626 1,689 Automobile................. 10 -- 10 116 Other...................... 2 -- 2 3 ---------- ---------- ---------- ---------- Total chargeoffs......... 1,039 373 1,701 2,535 ---------- ---------- ---------- ---------- Recoveries: 1-4 family residential real estate.................... 16 56 16 157 Multifamily real estate.... 119 1 190 1 Commercial and industrial real estate............... -- 370 26 846 Business, commercial....... 97 272 326 445 Automobile................. -- 7 14 34 Other...................... 1 -- -- -- ---------- ---------- ---------- ---------- Total recoveries......... 233 706 572 1, 483 ---------- ---------- ---------- ---------- Net chargeoffs (recoveries).......... 806 (333) 1,129 1,052 ---------- ---------- ---------- ---------- Allowance balance at end of period...................... $ 20,533 $ 15,810 $ 20,533 $ 15,810 ========== ========== ========== ========== Average net loans outstanding................. $1,379,199 $ 986,596 $1,257,768 $ 980,618 ========== ========== ========== ========== Total gross loans outstanding at end of period............ $1,395,792 $1,044,082 $1,395,792 $1,044,082 ========== ========== ========== ========== Net chargeoffs (recoveries) to average loans............ 0.06% (0.03)% 0.09% 0.11% Allowance for loan losses to total gross loans at end of period...................... 1.47 1.51 1.47 1.51
The provision for loan losses totaled $4.0 million for the nine months ended September 30, 1999, compared with $4.6 million for the same period in 1998. Net chargeoffs totaled $806 thousand for the third quarter of 1999, compared to net recoveries of $333 thousand for the third quarter of 1998. As a percentage of average loans outstanding, net chargeoffs (recoveries) were 0.06% and (0.03)%, respectively, for the three months ended September 30, 1999 and 1998. Net chargeoffs amounted to $1.1 million for the nine months ended September 30, 1999 and 1998. As a percentage of average loans outstanding, net chargeoffs were 0.09% and 0.11%, respectively, for the nine months ended September 30, 1999 and 1998. This improvement in year-to-date chargeoff experience was partly achieved through the Company's ongoing efforts to implement more stringent underwriting parameters and administration procedures, and aggressive collection efforts with troubled debtors. Another significant factor contributing to the improvement of the Company's chargeoff experience is the continuance of a prosperous economy. Management recognizes these factors and adjusts the loan loss provision accordingly. The Company 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 21 analyses, which include historical loss analyses, peer group comparisons, and analyses based on the federal regulatory interagency policy for loan and lease losses. The Company 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 Company 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 Company'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:
September 30, December 31, 1999 1998 --------------- --------------- Amount Percent Amount Percent ------- ------- ------- ------- (Dollars in Thousands) 1-4 family residential real estate.............. $ 427 19.0% $ 500 24.2% Multifamily real estate......................... 2,046 21.6 2,435 15.0 Commercial and industrial real estate........... 2,601 33.5 1,373 32.0 Construction.................................... 1,623 7.1 2,339 7.0 Business, commercial............................ 10,191 16.9 7,679 20.0 Automobile...................................... 26 0.4 45 0.4 Consumer and other.............................. 28 1.5 22 1.4 Year 2000 exposure.............................. 900 600 Unallocated..................................... 2,691 1,513 ------- ----- ------- ----- Total....................................... $20,533 100.0% $16,506 100.0% ======= ===== ======= =====
The allowance for loan losses of $20.5 million at September 30, 1999 exceeded the Company's estimated allowance requirement by $3.6 million. The estimated allowance requirement, excluding the potential "Year 2000 exposure", as of September 30, 1999 was $16.9 million as compared to $14.4 million as of December 31, 1998. Notwithstanding the unallocated allowance of $2.7 million at September 30, 1999, the Company continues to record loan loss provisions on a monthly basis to compensate for growth in the various loan portfolios and the continuing shift in the overall portfolio towards commercial loan products. As of September 30, 1999, the Company has earmarked $900 thousand of the unallocated allowance to absorb any potential exposure to "Year 2000" issues. The remaining unallocated allowance at September 30, 1999 is $2.7 million compared to the $1.5 million unallocated allowance at December 31, 1998. These amounts represent 13% and 9% of the total allowance for loan losses at September 30, 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. Management believes that the maintenance of the unallocated portion of the allowance is considered prudent not only to mitigate the uncertainties associated with the Bank's increasing loan portfolios, but also to compensate for the attendant estimation risk associated with the classification migration and individual loan review analysis methodologies. Deposits Deposits of $1.47 billion at September 30, 1999, represented an increase of $172.8 million or 13% over December 31, 1998. The increase in deposits reflects $92.6 million in deposits acquired through First Central 22 Bank in May 1999, partially offset by $17.1 million of deposits sold to People's Bank of California in connection with the sale of the Company's Irvine branch during the same month. Excluding these transactions, deposits at September 30, 1999 grew $97.3 million or 8% over December 31, 1998. This growth in deposits is comprised primarily of increases in time deposits of $76.3 million or 9% and noninterest-bearing demand deposits of $13.9 million or 14%. The increase in time deposits during the first nine months of 1999 is due to various promotions associated with the Chinese New Year holiday and the Year 2000. 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 $75.7 million or 20% during the nine months ended September 30, 1999, compared with the same period in 1998. This increase was comprised of a $36.4 million or 49% increase in noninterest-bearing demand accounts, a $24.5 million or 100% increase in money market accounts, a $6.4 million or 3% increase in savings deposits, and an $8.3 million or 11% increase in interest-bearing checking accounts. Borrowings Short-term borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase increased 9% to $36.0 million at September 30, 1999 compared to $33.0 million at December 31, 1998. FHLB advances totaled $398.0 million as of September 30, 1999, a decrease of $165.0 million or 29% from the December 31, 1998 balance of $563.0 million. The decrease in FHLB advances resulted primarily from runoffs in short-term investments and mortgage-backed securities. Capital Resources The primary source of capital for the Company is the retention of net after tax earnings. At September 30, 1999, stockholders' equity totaled $146.4 million, a decrease of $4.4 million or 3% from $150.8 million as of December 31, 1998. The decrease is due primarily to: (i) repurchases of $14.5 million or 1,475,000 shares of common stock in connection with the Company's stock repurchase programs; (ii) payment of quarterly 1999 cash dividends totaling $2.1 million; and (iii) a net increase of $9.0 million in unrealized losses on available-for-sale securities. These transactions were offset, in part, by net income of $20.1 million for the nine months ended September 30, 1999. 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 September 30, 1999, the Company's Tier 1 and total capital ratios were 9.39% and 10.64%, respectively, compared to 10.28% and 11.42%, respectively, at December 31, 1998, and 11.03% and 12.27%, respectively, at September 30, 1998. The following table compares the Company's and the Bank's actual capital ratios at September 30, 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)............ 10.64% 10.63% 8.0% 10.0% Tier 1 Capital (to Risk- Weighted Assets)............ 9.39 9.37 4.0 6.0 Tier 1 Capital (to Average Assets)..................... 7.03 7.01 4.0 5.0
23 ASSET LIABILITY AND MARKET RISK MANAGEMENT Liquidity Liquidity management involves the Company'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 Company'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 Company, including adequate cash flow for off-balance sheet instruments. The Company'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 expenses. For the nine months ended September 30, 1999, the Company experienced a net cash outflow of $148.6 million from its investing activities primarily due to the growth in the Company's loan portfolio. The Company also experienced a net cash outflow of $7.2 million from its financing activities primarily due to a net repayment of FHLB advances. Partially offsetting the net cash outflows from investing and financing activities is $34.9 million in net cash provided by operating activities. Increases in interest income on loans and investment securities and net proceeds from sales of loans held for sale accounted for the net cash inflow from operating activities. As a means of augmenting its liquidity, the Bank has established federal funds lines with four correspondent banks and several master repurchase agreements with major brokerage companies. At September 30, 1999, the Bank's available borrowing capacity includes approximately $3.4 million in repurchase arrangements, $47.0 million in federal funds line facilities, and $19.5 million in unused FHLB advances. Management believes its liquidity sources to be stable and adequate. At September 30, 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 third quarter of 1999, East West Bank paid dividends amounting to $1.5 million to East West Bancorp, Inc. For the nine months ended September 30, 1999, total dividends paid by the Bank to East West Bancorp, Inc. totaled $16.2 million. As of September 30, 1999, approximately $16.0 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. 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. 24 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 September 30, 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 1.3% (11.1)% +100 1.3% (2.7)% -100 (4.2)% 3.5% -200 (9.4)% (3.0)%
- -------- (1) The percentage change represents net interest income for twelve months in a stable interest rate environment versus net interest income in the various rate scenarios. (2) The percentage change represents net portfolio value of the Bank in a stable rate environment versus 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 September 30, 1999. At September 30, 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. 25 The following table provides the outstanding principal balances and the weighted average interest rates of the Bank's non-derivative financial instruments as of September 30, 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 Sept. 30, 1999 2000 2001 2002 2003 2003 Total 1999 ---------- ------- ------- -------- ------- -------- ---------- ------------- (Dollars in thousands) Assets: Short-term investments.. $ 10,000 $ -- $ -- $ -- $ -- $ -- $ 10,000 $ 10,000 Weighted average rate.. 5.88% -- % -- % -- % -- % -- % 5.88% Investment securities available- for-sale (fixed rate).. $ 51,393 $42,731 $36,451 $ 31,180 $25,058 $115,751 $ 302,563 $ 289,938 Weighted average rate.. 6.09% 6.15% 6.15% 6.15% 6.16% 6.17% 6.15% Investment securities available- for-sale (variable rate).................. $ 240,310 $ -- $ -- $ -- $ -- $ -- $ 240,310 $ 236,747 Weighted average rate.. 5.85% -- % -- % -- % -- % -- % 5.85% Total gross loans....... $1,218,152 $57,908 $40,515 $ 31,516 $27,017 $ 20,684 $1,395,792 $1,404,848 Weighted average rate.. 8.21% 7.97% 7.98% 8.22% 8.23% 7.77% 8.18% Liabilities: Checking accounts....... $ 92,150 $ -- $ -- $ -- $ -- $ -- $ 92,150 $ 92,150 Weighted average rate.. 1.28% -- % -- % -- % -- % -- % 1.28% Money market accounts... $ 61,383 $ -- $ -- $ -- $ -- $ -- $ 61,383 $ 61,383 Weighted average rate.. 3.18% -- % -- % -- % -- % -- % 3.18% Savings deposits........ $ 212,713 $ -- $ -- $ -- $ -- $ -- $ 212,713 $ 212,713 Weighted average rate.. 1.77% -- % -- % -- % -- % -- % 1.77% Time deposits........... $ 918,318 $21,578 $ 1,282 $ 751 $ 2,076 $ 30,000 $ 974,006 $ 975,786 Weighted average rate.. 4.58% 4.54% 5.17% 5.37% 5.33% 7.00% 4.63% Short-term borrowings... $ 36,000 $ -- $ -- $ -- $ -- $ -- $ 36,000 $ 36,000 Weighted average rate.. 5.33% -- % -- % -- % -- % -- % 5.33% FHLB advances........... $ 163,000 $ 5,000 $ -- $230,000 $ -- $ -- $ 398,000 $ 399,965 Weighted average rate.. 5.37% 5.16% -- % 5.12% -- % -- % 5.22%
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 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. 26 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. The Bank enters into interest rate swap agreements for the purposes of converting fixed rate loans and deposits to floating rate assets and liabilities. As of September 30, 1999, the total gross notional amount of interest rate swaps was $58.5 million. This includes two swap agreements totaling $30.0 million entered into with two financial institutions during 1999. Both agreements are callable after one year and are used to convert fixed rate certificates of deposit into floating rate liabilities. At September 30, 1999, the net unrealized loss on the entire swap agreement portfolio was $994 thousand compared to a net unrealized loss of $1.5 million at December 31, 1998. The Bank has also entered into interest rate cap agreements which are designated 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 September 30, 1999 was $36.0 million. The net unrealized loss on the cap agreement portfolio was $321 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 September 30, 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 $30,000 $58,500 $(994) 6.4 Years Weighted average receive rate................... -- % -- % 5.17% 5.19% 7.00% 6.11% Weighted average pay rate................... -- % -- % 6.46% 6.45% 5.14% 5.78% Interest rate cap agreements: Notional amount......... $ -- $ -- $18,000 $18,000 $ -- $36,000 $(321) 2.3 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. 27 As of September 30, 1999, the Bank has successfully completed the awareness, assessment, remediation, and testing phases of the Year 2000 plan. The plan is on schedule and the Bank is in the last stage of the implementation phase of the plan. All of the Bank's critical systems are programmed, serviced or provided by outside system vendors. 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 now 98% complete. The hardware and network infrastructure replacement cost of $750 thousand represents the largest portion of the "Year 2000" plan total budget. The Bank has incurred $1.3 million in "Year 2000" expenses to date, $1.0 million of which was incurred during 1999. Additional expenses relating to formalized and expanded customer communications, amounting to approximately $50 thousand, are expected to be incurred through the remainder of the year. 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, updated, and Board- approved as of June 16, 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 the "Year 2000" upgrade. During the shut down, the transition to manual procedures worked as planned. Other elements of the Bank's contingency plan were 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 has been substantially validated by the Internal Audit department in accordance with the FFIEC's "Year 2000" progress time frame. Business Segments The Company has identified four principal operating segments for purposes of management reporting: retail banking, commercial lending, treasury, and residential lending. Information related to the Company's remaining centralized functions have been aggregated and included in "Other." Although all four operating segments offer financial products and services, they are managed separately based on each segment's strategic focus. While the retail banking segment focuses primarily on retail operations through the Company's branch network, certain designated branches have responsibility for generating commercial deposits and loans. The commercial lending segment primarily generates commercial loans and deposits through the efforts of commercial lending officers 28 located in the Company's northern and southern California production offices. The treasury department's primary focus is managing the Company's investments, liquidity, and interest rate risk; the residential lending segment is mainly responsible for the Company's portfolio of single family and multifamily residential loans. The following tables present the operating results and other key financial measures for the individual operating segments for the three months and nine months ended September 30, 1999 and 1998. Operating segment results are based on the Company's internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs and the provision for loan losses. Any future changes in the Company's management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods will be restated for comparability in the event of future changes in management structure or reporting methodologies.
Three Months Ended September 30, 1999 (unaudited) Retail Commercial Residential Banking Lending Treasury Lending Other Total -------- ---------- -------- ----------- ------- --------- (In thousands) Interest income.......................... $ 8,221 $ 9,534 $ 9,061 $10,443 $ 563 $ 37,822 Charges for funds used................... (4,915) (5,666) (7,925) (7,462) -- (25,968) -------- ------- -------- ------- ------- --------- Interest spread on funds used........... 3,306 3,868 1,136 2,981 563 11,854 -------- ------- -------- ------- ------- --------- Interest expense......................... (10,455) (804) (7,952) -- -- (19,211) Credit on funds provided................. 15,390 1,468 9,110 -- -- 25,968 -------- ------- -------- ------- ------- --------- Interest spread on funds provided....... 4,935 664 1,158 -- -- 6,757 -------- ------- -------- ------- ------- --------- Net interest income.................... $ 8,241 $ 4,532 $ 2,294 $ 2,981 $ 563 $ 18,611 ======== ======= ======== ======= ======= ========= Depreciation and amortization............ $ 322 $ 63 $ 2 $ -- $ 192 $ 579 Segment pretax profit.................... 2,340 3,038 2,564 2,256 -- 10,198 Segment assets as of September 30, 1999.. 380,883 448,173 536,694 587,051 114,816 2,067,617 Three Months Ended September 30, 1998 (unaudited) Retail Commercial Residential Banking Lending Treasury Lending Other Total -------- ---------- -------- ----------- ------- --------- (In thousands) Interest income.......................... $ 4,472 $ 7,290 $ 10,821 $ 8,889 $ 705 $ 32,177 Charges for funds used................... (2,813) (4,397) (10,689) (7,918) -- (25,817) -------- ------- -------- ------- ------- --------- Interest spread on funds used........... 1,659 2,893 132 971 705 6,360 -------- ------- -------- ------- ------- --------- Interest expense......................... (10,425) (728) (7,195) -- -- (18,348) Credit on funds provided................. 15,260 1,161 9,396 -- -- 25,817 -------- ------- -------- ------- ------- --------- Interest spread on funds provided....... 4,835 433 2,201 -- -- 7,469 -------- ------- -------- ------- ------- --------- Net interest income.................... $ 6,494 $ 3,326 $ 2,333 $ 971 $ 705 $ 13,829 ======== ======= ======== ======= ======= ========= Depreciation and amortization............ $ 368 $ 57 $ 1 $ -- $ 114 $ 540 Segment pretax profit.................... 936 3,207 2,317 899 -- 7,359 Segment assets as of September 30, 1998.. 191,161 361,761 711,896 486,276 113,208 1,864,302
29
Nine Months Ended September 30, 1999 (unaudited) Retail Commercial Residential Banking Lending Treasury Lending Other Total -------- ---------- -------- ----------- ------- --------- (In thousands) Interest income.......................... $ 20,458 $ 26,876 $ 30,557 $ 28,806 $ 1,804 $ 108,501 Charges for funds used................... (12,056) (15,590) (26,199) (19,681) -- (73,526) -------- -------- -------- -------- ------- --------- Interest spread on funds used........... 8,402 11,286 4,358 9,125 1,804 34,975 -------- -------- -------- -------- ------- --------- Interest expense......................... (29,819) (2,167) (24,336) -- -- (56,322) Credit on funds provided................. 42,427 3,803 27,296 -- -- 73,526 -------- -------- -------- -------- ------- --------- Interest spread on funds provided....... 12,608 1,636 2,960 -- -- 17,204 -------- -------- -------- -------- ------- --------- Net interest income.................... $ 21,010 $ 12,922 $ 7,318 $ 9,125 $ 1,804 $ 52,179 ======== ======== ======== ======== ======= ========= Depreciation and amortization............ $ 1,035 $ 192 $ 4 $ -- $ 564 $ 1,795 Segment pretax profit.................... 4,834 10,347 7,733 7,328 -- 30,242 Segment assets as of September 30, 1999.. 380,883 448,173 536,694 587,051 114,816 2,067,617 Nine Months Ended September 30, 1998 (unaudited) Retail Commercial Residential Banking Lending Treasury Lending Other Total -------- ---------- -------- ----------- ------- --------- (In thousands) Interest income.......................... $ 12,009 $ 20,447 $ 28,677 $ 28,442 $ 1,599 $ 91,174 Charges for funds used................... (7,562) (12,216) (26,592) (24,326) -- (70,696) -------- -------- -------- -------- ------- --------- Interest spread on funds used........... 4,447 8,231 2,085 4,116 1,599 20,478 -------- -------- -------- -------- ------- --------- Interest expense......................... (31,853) (2,030) (17,811) -- -- (51,694) Credit on funds provided................. 45,085 3,073 22,538 -- -- 70,696 -------- -------- -------- -------- ------- --------- Interest spread on funds provided....... 13,232 1,043 4,727 -- -- 19,002 -------- -------- -------- -------- ------- --------- Net interest income.................... $ 17,679 $ 9,274 $ 6,812 $ 4,116 $ 1,599 $ 39,480 ======== ======== ======== ======== ======= ========= Depreciation and amortization............ $ 1, 109 $ 172 $ 3 $ -- $ 342 $ 1,626 Segment pretax profit.................... 1,854 8,123 5,613 2,378 -- 17,968 Segment assets as of September 30, 1998.. 191,161 361,761 711,896 486,276 113,208 1,864,302
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." 30 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, based upon the advice of legal counsel, 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. ITEM 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 third quarter of 1999. 31 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: November 15, 1999 EAST WEST BANCORP, INC. (Registrant) By /s/ Julia Gouw ----------------------------------- JULIA GOUW Executive Vice President and Chief Financial Officer 32 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANK'S BALANCE SHEET AS OF SEPTEMBER 30, 1999, AND STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 30,238 0 10,000 0 526,685 0 0 1,375,073 20,533 2,067,617 1,465,749 36,000 21,478 398,000 0 0 22 148,368 2,067,617 77,607 27,470 3,343 108,501 36,298 56,322 52,179 4,006 685 29,034 30,242 20,141 0 0 20,141 0.88 0.88 3.52 5,843 0 6,060 11,434 16,506 1,701 572 20,533 20,533 0 2,691
-----END PRIVACY-ENHANCED MESSAGE-----