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EAST WEST BANCORP INC - Quarter Report: 2008 June (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Mark One

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2008

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 .

 

Commission file number 000-24939

 

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4703316

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

135 N. Los Robles Ave, 7th Floor, Pasadena, California 91101

(Address of principal executive offices) (Zip Code)

 

(626) 768-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 63,468,321 shares of common stock as of July 31, 2008.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

4

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

4-7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8-26

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27-61

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures of Market Risks

 

61

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

61

 

 

 

 

 

PART II - OTHER INFORMATION

 

62

 

 

 

 

Item 1.

Legal Proceedings

 

62

 

 

 

 

 

 

Item 1A.

Risk Factors

 

62

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

63

 

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

63

 

 

 

 

 

 

Item 5.

Other Information

 

64

 

 

 

 

 

 

Item 6.

Exhibits

 

64

 

 

 

 

 

SIGNATURE

 

65

 

2



Table of Contents

 

Forward-Looking Statements

 

Certain matters discussed in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties.  These forward-looking statements relate to, among other things, expectations of the environment in which the Company operates and projections of future performance including future earnings, operating results, financial condition, and cash flows.  The Company’s actual results, performance, or achievements may differ significantly from the results, performance, or achievements expected or implied in such forward-looking statements as a result of the effect of interest rate and currency exchange fluctuations; competition in the financial services market for both loans and deposits; our ability to incorporate acquisitions into our operations; the effect of regulatory and legislative action; and regional and general economic conditions.  Such risk and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

 

·                  changes in our borrowers’ performance on loans;

 

·                  changes in the commercial and consumer real estate markets;

 

·                  changes in our costs of operation, compliance and expansion;

 

·                  changes in the economy, including inflation;

 

·                  changes in government interest rate policies;

 

·                  changes in laws or the regulatory environment;

 

·                  changes in accounting policies or procedures;

 

·                  changes in the equity and debt securities markets;

 

·                  changes in competitive pressures on financial institutions;

 

·                  effect of additional provision for loan losses;

 

·                  effect of any goodwill impairment;

 

·                  fluctuations in our stock price;

 

·                  success and timing of our business strategies;

 

·                  changes in our ability to receive dividends from our subsidiaries; and

 

·                  political developments, wars, acts of terrorism or natural disasters such as earthquakes or floods.

 

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2007 Form 10-K under the heading “ITEM 1A. RISK FACTORS.”  The Company does not undertake, and specifically disclaims any obligation to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

 

3



Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

June 30,
2008

 

December 31,
2007

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

424,058

 

$

160,347

 

Short term investments

 

880

 

 

Securities purchased under resale agreements

 

50,000

 

150,000

 

Investment securities available-for-sale, at fair value (with amortized cost of $2,009,573 in 2008 and $1,954,140 in 2007)

 

1,828,181

 

1,887,136

 

Loans receivable, net of allowance for loan losses of $168,413 at June 30, 2008 and $88,407 at December 31, 2007

 

8,483,124

 

8,750,921

 

Investment in Federal Home Loan Bank stock, at cost

 

90,683

 

84,976

 

Investment in Federal Reserve Bank stock, at cost

 

27,589

 

21,685

 

Other real estate owned, net

 

17,490

 

1,500

 

Investment in affordable housing partnerships

 

43,640

 

44,206

 

Premises and equipment, net

 

62,402

 

64,943

 

Due from customers on acceptances

 

9,538

 

15,941

 

Premiums on deposits acquired, net

 

23,896

 

28,459

 

Goodwill

 

337,574

 

335,366

 

Cash surrender value of life insurance policies

 

90,408

 

88,658

 

Accrued interest receivable and other assets

 

125,938

 

151,664

 

Deferred tax assets

 

169,499

 

66,410

 

TOTAL

 

$

11,784,900

 

$

11,852,212

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Customer deposit accounts:

 

 

 

 

 

Noninterest-bearing

 

$

1,419,183

 

$

1,431,730

 

Interest-bearing

 

6,099,819

 

5,847,184

 

Total customer deposits

 

7,519,002

 

7,278,914

 

 

 

 

 

 

 

Federal funds purchased

 

86,149

 

222,275

 

Federal Home Loan Bank advances

 

1,543,389

 

1,808,419

 

Securities sold under repurchase agreements

 

1,000,812

 

1,001,955

 

Notes payable

 

13,533

 

16,242

 

Long-term debt

 

235,570

 

235,570

 

Bank acceptances outstanding

 

9,538

 

15,941

 

Accrued interest payable, accrued expenses and other liabilities

 

104,707

 

101,073

 

Total liabilities

 

10,512,700

 

10,680,389

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 8)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock (par value of $0.001 per share)

 

 

 

 

 

Authorized — 5,000,000 shares

 

 

 

 

 

Issued and outstanding — 200,000 shares of Series A, convertible preferred stock, in 2008 and none in 2007

 

 

 

Common stock (par value of $0.001 per share)

 

 

 

 

 

Authorized — 200,000,000 shares

 

 

 

 

 

Issued — 70,002,157 shares in 2008 and 69,634,811 shares in 2007

 

 

 

 

 

Outstanding — 63,438,596 shares in 2008 and 63,137,221 shares in 2007

 

70

 

70

 

Additional paid in capital

 

855,082

 

652,297

 

Retained earnings

 

623,202

 

657,183

 

Treasury stock, at cost — 6,563,561 shares in 2008 and 6,497,590 shares in 2007

 

(101,029

)

(98,925

)

Accumulated other comprehensive loss, net of tax

 

(105,125

)

(38,802

)

Total stockholders’ equity

 

1,272,200

 

1,171,823

 

TOTAL

 

$

11,784,900

 

$

11,852,212

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

137,997

 

$

158,844

 

$

293,431

 

$

317,007

 

Investment securities available-for-sale

 

25,730

 

23,370

 

52,780

 

46,270

 

Securities purchased under resale agreements

 

1,264

 

3,943

 

3,817

 

7,729

 

Investment in Federal Home Loan Bank stock

 

1,479

 

668

 

2,763

 

1,629

 

Short-term investments

 

1,051

 

117

 

1,589

 

217

 

Investment in Federal Reserve Bank stock

 

384

 

272

 

709

 

539

 

Total interest and dividend income

 

167,905

 

187,214

 

355,089

 

373,391

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Customer deposit accounts

 

43,536

 

61,124

 

95,789

 

120,086

 

Federal Home Loan Bank advances

 

17,541

 

12,514

 

37,223

 

27,380

 

Securities sold under repurchase agreements

 

11,290

 

9,018

 

21,819

 

17,412

 

Long-term debt

 

2,994

 

3,752

 

6,717

 

7,134

 

Federal funds purchased

 

368

 

1,877

 

1,746

 

3,847

 

Total interest expense

 

75,729

 

88,285

 

163,294

 

175,859

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES

 

92,176

 

98,929

 

191,795

 

197,532

 

PROVISION FOR LOAN LOSSES

 

85,000

 

 

140,000

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

7,176

 

98,929

 

51,795

 

197,532

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

Branch fees

 

4,339

 

3,404

 

8,440

 

6,831

 

Net gain on sale of investment securities available-for-sale

 

3,433

 

918

 

7,767

 

2,446

 

Letters of credit fees and commissions

 

2,476

 

2,633

 

5,153

 

4,986

 

Net gain on sale of loans

 

273

 

86

 

2,128

 

1,024

 

Ancillary loan fees

 

984

 

1,487

 

2,125

 

2,767

 

Income from life insurance policies

 

1,024

 

1,058

 

2,052

 

2,032

 

Other operating income

 

854

 

1,216

 

1,631

 

1,867

 

Total noninterest income

 

13,383

 

10,802

 

29,296

 

21,953

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

25,790

 

20,648

 

49,058

 

41,430

 

Occupancy and equipment expense

 

6,539

 

6,046

 

13,547

 

11,927

 

Impairment writedown on investment securities

 

9,945

 

 

9,945

 

 

Amortization and impairment writedowns of premiums on deposits acquired

 

1,827

 

1,525

 

4,564

 

3,057

 

Amortization of investments in affordable housing partnerships

 

1,920

 

1,236

 

3,635

 

2,504

 

Deposit insurance premiums and regulatory assessments

 

2,321

 

324

 

3,513

 

671

 

Legal expense

 

1,135

 

344

 

3,035

 

605

 

Data processing

 

1,135

 

1,070

 

2,331

 

2,052

 

Deposit-related expenses

 

1,237

 

1,862

 

2,185

 

3,549

 

Other real estate owned expense (income)

 

508

 

(2

)

1,397

 

(1,247

)

Impairment writedown on goodwill

 

586

 

 

586

 

 

Other operating expenses

 

12,657

 

10,210

 

24,694

 

19,689

 

Total noninterest expense

 

65,600

 

43,263

 

118,490

 

84,237

 

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES

 

(45,041

)

66,468

 

(37,399

)

135,248

 

(BENEFIT) PROVISION FOR INCOME TAXES

 

(19,154

)

25,978

 

(16,556

)

52,662

 

NET (LOSS) INCOME

 

$

(25,887

)

$

40,490

 

$

(20,843

)

$

82,586

 

 

 

 

 

 

 

 

 

 

 

(LOSS) EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

$

(0.41

)

$

0.67

 

$

(0.33

)

$

1.36

 

DILUTED

 

$

(0.41

)

$

0.66

 

$

(0.33

)

$

1.34

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

BASIC

 

62,599

 

60,381

 

62,542

 

60,515

 

DILUTED

 

62,599

 

61,346

 

62,542

 

61,523

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

Preferred
Stock

 

Common
Stock

 

Additional
Paid In
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax

 

Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 1, 2007

 

$

 

$

66

 

$

544,469

 

$

525,247

 

$

(40,305

)

$

(10,087

)

 

 

$

1,019,390

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

 

 

 

 

82,586

 

 

 

 

 

$

82,586

 

82,586

 

Net unrealized gain on investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

1,549

 

1,549

 

1,549

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

84,135

 

 

 

Cumulative effect of change in accounting principle pursuant to adoption of FIN 48

 

 

 

 

 

 

 

(4,628

)

 

 

 

 

 

 

(4,628

Stock compensation costs

 

 

 

 

 

3,150

 

 

 

 

 

 

 

 

 

3,150

 

Tax benefit from stock option exercises

 

 

 

 

 

6,071

 

 

 

 

 

 

 

 

 

6,071

 

Tax benefit from vested restricted stock

 

 

 

 

 

184

 

 

 

 

 

 

 

 

 

184

 

Issuance of 668,392 shares pursuant to various stock plans and agreements

 

 

 

1

 

5,708

 

 

 

 

 

 

 

 

 

5,709

 

Cancellation of 54,980 shares due to forfeitures of issued restricted stock

 

 

 

 

 

2,013

 

 

 

(2,013

)

 

 

 

 

 

Purchase of 21,747 shares of treasury stock due to the vesting of restricted stock

 

 

 

 

 

 

 

 

 

(795

)

 

 

 

 

(795

)

Purchase of 1,175,000 shares of treasury stock pursuant to the Stock Repurchase Program

 

 

 

 

 

 

 

 

 

(45,815

)

 

 

 

 

(45,815

)

Dividends paid on common stock

 

 

 

 

 

 

 

(12,230

)

 

 

 

 

 

 

(12,230

)

BALANCE, JUNE 30, 2007

 

$

 

$

67

 

$

561,595

 

$

590,975

 

$

(88,928

)

$

(8,538

)

 

 

$

1,055,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 1, 2008

 

$

 

$

70

 

$

652,297

 

$

657,183

 

$

(98,925

)

$

(38,802

)

 

 

$

1,171,823

 

Comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) for the period

 

 

 

 

 

 

 

(20,843

)

 

 

 

 

$

(20,843

)

(20,843

)

Net unrealized loss on investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

(66,323

)

(66,323

)

(66,323

)

Total comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(87,166

)

 

 

Cumulative effect of change in accounting principle pursuant to adoption of EITF 06-4

 

 

 

 

 

 

 

(479

)

 

 

 

 

 

 

(479

)

Stock compensation costs

 

 

 

 

 

3,016

 

 

 

 

 

 

 

 

 

3,016

 

Tax benefit from stock option exercises

 

 

 

 

 

141

 

 

 

 

 

 

 

 

 

141

 

Tax provision from vested restricted stock

 

 

 

 

 

(370

)

 

 

 

 

 

 

 

 

(370

)

Issuance of 200,000 shares Series A convertible preferred stock, net of stock issuance costs

 

 

 

 

 

194,075

 

 

 

 

 

 

 

 

 

194,075

 

Issuance of 367,146 shares pursuant to various stock plans and agreements

 

 

 

 

 

1,529

 

 

 

 

 

 

 

 

 

1,529

 

Cancellation of 65,561 shares due to forfeitures of issued restricted stock

 

 

 

 

 

2,096

 

 

 

(2,096

)

 

 

 

 

 

Purchase accounting adjustment pursuant to DCB Acquisition

 

 

 

 

 

2,298

 

 

 

 

 

 

 

 

 

2,298

 

Purchase of 410 shares of treasury stock due to the vesting of restricted stock

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

(8

)

Dividends paid on common stock

 

 

 

 

 

 

 

(12,659

)

 

 

 

 

 

 

(12,659

)

BALANCE, JUNE 30, 2008

 

$

 

$

70

 

$

855,082

 

$

623,202

 

$

(101,029

)

$

(105,125

)

 

 

$

1,272,200

 

 

 

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Disclosure of reclassification amounts:

 

 

 

 

 

Unrealized holding (loss) gain on securities arising during the period, net of tax benefit (expense) of $48,942 in 2008 and $(2,149) in 2007

 

$

(67,586

)

$

2,968

 

Less: Reclassification adjustment for loss (gain) included in net income, net of tax expense (benefit) of $(915) in 2008 and $1,027 in 2007

 

1,263

 

(1,419

)

Net unrealized (loss) gain on securities, net of tax benefit (expense) of $48,027 in 2008 and $(1,122) in 2007

 

$

(66,323

)

$

1,549

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


 


Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net (loss) income

 

$

(20,843

)

$

82,586

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

10,103

 

8,430

 

Impairment writedown on goodwill

 

586

 

 

Impairment writedown of investment securities

 

9,945

 

 

Stock compensation costs

 

3,016

 

3,150

 

Deferred tax (benefit) provision

 

(49,444

)

(5,751

)

Provision for loan losses

 

140,000

 

 

Net gain on sales of investment securities, loans and other assets

 

(8,682

)

(4,191

)

Federal Home Loan Bank stock dividends

 

(2,362

)

(1,962

)

Originations of loans held for sale

 

(34,330

)

(21,938

)

Proceeds from sale of loans held for sale

 

34,655

 

21,939

 

Tax benefit from stock options exercised

 

(141

)

(6,071

)

Tax provision (benefit) from vested restricted stock

 

370

 

(184

)

Net change in accrued interest receivable and other assets

 

26,408

 

(17,952

)

Net change in accrued interest payable, accrued expenses and other liabilities

 

(6,583

)

2,823

 

Total adjustments

 

123,541

 

(21,707

)

Net cash provided by operating activities

 

102,698

 

60,879

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Net loan originations

 

(41,862

)

(502,123

)

Purchases of:

 

 

 

 

 

Short term investments

 

(880

)

(1,537

)

Securities purchased under resale agreements

 

 

(100,000

)

Investment securities available-for-sale

 

(820,430

)

(394,758

)

Federal Home Loan Bank stock

 

(9,400

)

(8,243

)

Federal Reserve Bank stock

 

(5,904

)

(600

)

Premises and equipment

 

(1,742

)

(5,340

)

Proceeds from sale of:

 

 

 

 

 

Investment securities available-for-sale

 

376,148

 

206,987

 

Securities purchased under resale agreements

 

100,000

 

 

Loans receivable

 

146,556

 

16,057

 

Real estate owned

 

9,949

 

4,130

 

Premises and equipment

 

 

1,212

 

Repayments, maturity and redemption of investment securities available-for-sale

 

388,627

 

773,455

 

Redemption of Federal Home Loan Bank stock

 

6,054

 

31,767

 

Acquisitions, net of cash acquired

 

(924

)

 

Net cash provided by investing activities

 

146,192

 

21,007

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase (decrease) in deposits

 

240,091

 

(87,990

)

Net (decrease) increase in federal funds purchased

 

(136,126

)

8,000

 

Net (decrease) increase in Federal Home Loan Bank advances

 

(265,000

)

28,000

 

Repayment of securities sold under repurchase agreements

 

(1,143

)

 

Repayment of notes payable on affordable housing investments

 

(5,709

)

(5,041

)

Proceeds from issuance of long-term debt

 

 

20,000

 

Proceeds from issuance of common stock pursuant to various stock plans and agreements

 

1,529

 

5,709

 

Proceeds from issuance of convertible preferred stock, net of stock issuance costs

 

194,075

 

 

Tax benefit from stock options exercised

 

141

 

6,071

 

Tax (provision) benefit from vested restricted stock

 

(370

)

184

 

Dividends paid on common stock

 

(12,659

)

(12,230

)

Purchase of treasury shares pursuant to stock repurchase program and vesting of restricted stock

 

(8

)

(46,610

)

Net cash provided by (used in) financing activities

 

14,821

 

(83,907

)

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

263,711

 

(2,021

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

160,347

 

192,559

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

424,058

 

$

190,538

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

159,084

 

$

178,728

 

Income tax payments, net of refunds

 

36,477

 

59,803

 

Noncash investing and financing activities:

 

 

 

 

 

Guaranteed mortgage loan securitizations

 

 

721,787

 

Affordable housing investment financed through notes payable

 

3,000

 

9,613

 

Equity interests in East West Capital Trusts

 

 

619

 

Real estate acquired through foreclosure

 

26,009

 

622

 

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2008 and 2007

(Unaudited)

 

1.              BASIS OF PRESENTATION

 

The condensed consolidated financial statements include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly-owned subsidiaries, East West Bank and subsidiaries (the “Bank”) and East West Insurance Services, Inc.  Intercompany transactions and accounts have been eliminated in consolidation.  East West also has nine wholly-owned subsidiaries that are statutory business trusts (the “Trusts”).  In accordance with Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities, the Trusts are not consolidated into the accounts of East West Bancorp, Inc.

 

The interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods.  All adjustments are of a normal and recurring nature.  Results for the six months ended June 30, 2008 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2007.

 

Certain items in the condensed consolidated statements of operations for the three and six months ended 2008 and 2007 were reclassified to conform to the year-to-date 2008 presentation.  These reclassifications did not affect previously reported net income.  In June 2008, the Company reclassified net gain on sale of other real estate owned (“OREO”) of $1.3 million for the six months ended June 30, 2007, previously included under the caption Noninterest Income to OREO expenses (income), which is a component of Noninterest Expense, in order to present all OREO activity in a single line item.

 

2.              SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Standards

 

In September 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, which requires employers to recognize an obligation associated with endorsement split-dollar life insurance arrangements that extend into the employee’s postretirement period.  EITF 06-4 is effective for financial statements issued for fiscal years beginning after December 31, 2007.  Upon adoption of EITF 06-4, the Company recorded a net decrease to retained earnings of $479 thousand, net of tax.

 

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In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, Fair Value Measurements (“SFAS 157”), which provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements.  SFAS 157 provides a definition of fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States (“GAAP”), and requires expanded disclosures about fair value measurements.  The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value and, therefore, does not expand the use of fair value in any new circumstance.  The Company adopted SFAS 157 on a prospective basis.  The adoption of SFAS No. 157 on January 1, 2008 did not have any impact on the Company’s financial condition, results of operations, or cash flows.  The adoption of this standard resulted in additional disclosures which are presented in Note 3 of the Company’s condensed consolidated financial statements presented elsewhere in this report.  In February 2008, the FASB issued SFAS No. 157-2, Effective Date of FASB Statement No. 157, which  provided for a one-year deferral of the implementation of this standard for other nonfinanical assets and liabilities, effective for fiscal years beginning after November 15, 2008.  This additional guidance is not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”), which amends SFAS No. 87, Employers’ Accounting for Pensions; SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits; SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions; and SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003).  This Statement requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements.  The asset or liability is the offset to other accumulated comprehensive income, consisting of previously unrecognized prior service costs and credits, actuarial gains or losses, and accumulated transition obligations and assets.  SFAS 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year-end.  The standard provides two transition alternatives for companies to make the measurement-date provisions.  The Company adopted the recognition and disclosure elements of SFAS 158, effective January 1, 2008, which did not have a material effect on its financial position, results of operations, or cash flows.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS 159”).  SFAS 159 would allow the Company a one-time irrevocable election to measure certain financial assets and liabilities on the balance sheet at fair value and report the unrealized gains and losses on the elected items in earnings at each subsequent reporting date.  This Statement requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The Company has elected not to measure any new financial instruments at fair value, as permitted in SFAS 159, but to continue recording its financial instruments in accordance with current practice.

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), which replaces FASB Statement No. 141, Business Combinations.  SFAS 141(R) establishes principles and requirements for how an acquiring company (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) is effective for business combinations occurring on or after the beginning of the fiscal year

 

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beginning on or after December 15, 2008.  SFAS 141(R), effective for the Company on January 1, 2009, and applies to all transactions or other events in which the Company obtains control in one or more businesses.  Management will assess each transaction on a case-by-case basis as they occur.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51 (“SFAS 160”).  This Statement requires that noncontrolling or minority interests in subsidiaries be presented in the consolidated statement of financial position within equity, but separate from the parents’ equity, and that the amount of the consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income.  SFAS 160 is effective for fiscal years beginning on or after December 15, 2008.  The Company does not expect this guidance to have a material effect on its financial condition, results of operations, or cash flows.

 

In February 2008, the FASB issued FASB Staff Position FAS No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP No. 140-3”), which provides a consistent framework for the evaluation of a transfer of a financial asset and subsequent repurchase agreement entered into with the same counterparty.  FSP FAS No. 140-3 provides guidelines that must be met in order for an initial transfer and subsequent repurchase agreement to not be considered linked for evaluation.  If the transactions do not meet the specified criteria, they are required to be accounted for as one transaction.  This FSP is effective for fiscal years beginning after November 15, 2008, and shall be applied prospectively to initial transfers and repurchase financings for which the initial transfer is executed on or after adoption.  The Company does not expect this guidance to have a material effect on its financial condition, results of operations, or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”).  SFAS 161 requires specific disclosures regarding the location and amounts of derivative instruments in the financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the financial position, financial performance, and cash flows of the Company.  It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged.  The Company does not expect this guidance to have a material effect on its financial condition, results of operations, or cash flows.

 

In April 2008, the FASB directed the FASB Staff to issue FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.  FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). FSP No. FAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP.  FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008.  Earlier application is not permitted.  The Company does not expect this guidance to have a material effect on its financial condition, results of operations, or cash flows.

 

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”).  SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities (“the Hierarchy”).  The Hierarchy within SFAS 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (“SAS 69”).  SFAS 162 is effective 60 days following the SEC’s approval of the

 

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Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Company does not expect this guidance to have a material effect on its financial condition, results of operations, or cash flows.

 

In June 2008, the FASB issued FSP EITF 03-06-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.  FSP EITF 03-06-1 requires all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends to be considered participating securities and requires entities to apply the two-class method of computing basic and diluted earnings per share.  This FSP is effective for fiscal years beginning after December 31, 2008, and interim periods within those fiscal years.  Early adoption is prohibited.  The Company is currently evaluating the impact that this FSP will have on the Company’s consolidated financial statements.

 

3.              FAIR VALUE MEASUREMENT

 

The Company adopted SFAS 157 and SFAS 159, effective January 1, 2008.  SFAS 157 provides a framework for measuring fair value under GAAP.  This standard applies to all financial assets and liabilities that are being measured and reported at fair value on a recurring and non-recurring basis.  For the Company, this includes the investment securities available-for-sale (“AFS”) portfolio, equity swap agreements, derivatives payable mortgage servicing assets and impaired loans.

 

As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market and income approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability.  These inputs can be readily observable, market corroborated, or generally unobservable firm inputs.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.  The hierarchy ranks the quality and reliability of the information used to determine fair values.  The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency.  Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

·                  Level 1 – Quoted prices for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets.  Level 1 financial instruments typically include U.S. Treasury securities.

 

·                  Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.  Level 2 financial instruments typically include U.S. Government and agency mortgage-backed securities, corporate debt securities, equity swap agreements and derivatives payable.

 

·                  Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  This category typically

 

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includes mortgage servicing assets, impaired loans, private label mortgage-backed securities, retained residual interests in securitizations, and pooled trust preferred securities.

 

In determining the appropriate levels, the Company performs a detailed analysis of assets and liabilities that are subject to SFAS 157.  The following table presents financial assets and liabilities that are measured at fair value on a recurring and non-recurring basis.  These assets and liabilities are reported on the condensed consolidated statements of financial condition at their fair values as of June 30, 2008.  As required by SFAS 157, financial assets are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

 

 

 

Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of June 30, 2008

 

 

 

Fair Value
Measurements
June 30, 2008

 

Quoted Prices in
Active Markets for
Identifical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant Unobservable
Inputs
(Level 3)

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Investment Securities (“AFS”)

 

$

1,828,181

 

$

5,030

 

$

1,215,667

 

$

607,484

 

Equity Swap Agreements

 

17,806

 

 

17,806

 

 

Derivatives Payable

 

(17,806

)

 

(17,806

)

 

 

 

 

Assets Measured at Fair Value on a Non-Recurring Basis as of June 30, 2008

 

 

 

Fair Value
Measurements
June 30, 2008

 

Quoted Prices in
Active Markets for
Identifical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant Unobservable
Inputs
(Level 3)

 

 

 

(In Thousands)

 

Mortgage Servicing Assets

 

$

19,391

 

$

 

$

 

$

19,391

 

Impaired Loans

 

157,461

 

 

 

157,461

 

 

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.  The following table provides a reconciliation of the beginning and ending balances for asset categories measured at fair value using significant unobservable inputs (level 3) for the three and six months ended June 30, 2008:

 

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Table of Contents

 

 

 

Investment
Securities
Available for
Sale

 

Mortgage
Servicing
Assets

 

Impaired
Loans

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

Beginning balance, March 31, 2008

 

$

572,371

 

$

20,886

 

$

158,446

 

Total gains or losses (1)

 

 

 

 

 

 

 

Included in earnings (realized)

 

1,097

 

(1,563

)

(39,470

)

Included in other comprehensive loss (unrealized) (2)

 

64,258

 

 

 

Purchases, issuances, sales, settlements (3)

 

(30,242

)

68

 

 

Transfers in and/or out of Level 3 (4)

 

 

 

38,485

 

Ending balance June 30, 2008

 

$

607,484

 

$

19,391

 

$

157,461

 

Changes in unrealized losses included in earnings relating to assets and liabilities still held at June 30, 2008 (4)

 

$

(1,574

)

$

 

$

 

 

 

 

Investment
Securities
Available for
Sale

 

Mortgage
Servicing
Assets

 

Impaired
Loans

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

Beginning balance, January 1, 2008

 

$

700,434

 

$

21,558

 

$

107,544

 

Total gains or losses (1)

 

 

 

 

 

 

 

Included in earnings (realized)

 

3,471

 

(3,031

)

(39,408

)

Included in other comprehensive loss (unrealized) (2)

 

(35,965

)

 

 

Purchases, issuances, sales, settlements (3)

 

(60,456

)

864

 

 

Transfers in and/or out of Level 3 (4)

 

 

 

89,325

 

Ending balance June 30, 2008

 

$

607,484

 

$

19,391

 

$

157,461

 

Changes in unrealized losses included in earnings relating to assets and liabilities still held at June 30, 2008 (4)

 

$

(1,574

)

$

 

$

 

 


(1)        Total gains or losses represent the total realized and unrealized gains and losses recorded for Level 3 assets and liabilities.  Realized gains or losses are reported in the condensed consolidated statements of income.

 

(2)        Unrealized gains or losses on investment securities are reported in accumulated other comprehensive income (loss), net of tax in the condensed consolidated statements of changes in stockholders’ equity.

 

(3)        Purchases, issuances, sales and settlements represent Level 3 assets and liabilities that were either purchased, issued, sold, or settled during the period.  The amounts are recorded at their end of period fair values.

 

(4)        Transfers in and/or out represent existing assets and liabilities that were either previously categorized as a higher level and the inputs to the model became unobservable or assets and liabilities that were previously classified as Level 3 and the lowest significant input became observable during the period.  These assets and liabilities are recorded at their end of period fair values.

 

Valuation Methodologies

 

Investment Securities Available-for-Sale – The fair values of available-for-sale investment securities are generally determined by reference to the average of at least two quoted market prices

 

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Table of Contents

 

obtained from independent external brokers or prices obtained from independent external pricing service providers who have experience in valuing these securities.  In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values.  For those securities for which the Company is unable to obtain more than one outside quoted market price, the Company evaluates the broker’s valuation methodology for reasonableness and obtains an independent validation of the market price received from another broker who has experience with such investments.

 

The Company’s Level 3 available-for-sale securities include private label mortgage-backed securities, and residual securities that have been retained by the Company in connection with loan securitization activities, as well as pooled trust preferred securities.  The fair values of private label mortgage-backed securities and pooled trust preferred securities are generally based on the average of two quoted market prices obtained from independent external brokers.  The valuation of residual securities is based on a discounted cash flow approach utilizing several assumption factors.  Assumptions related to prepayment speeds, forward yield curves, financial characteristics of the underlying assets, delinquency trends, and other factors are taken into consideration in determining the discount margin on residual securities.  Furthermore, the liquidity of the market for similar securities is also incorporated in the valuation analysis to better determine the fair value of residual securities.

 

Equity Swap Agreements – The Company has entered into several equity swap agreements with a major investment brokerage firm to hedge against market fluctuations in a promotional equity index certificate of deposit product offered to bank customers.  This deposit product, which has a term of 5 years or 5½ years, pays interest based on the performance of the Hang Seng China Enterprises Index (“HSCEI”).  The fair value of these equity swap agreements is based on the income approach.  The fair value is based on the change in the value of the HSCEI and the volatility of the call option over the life of the individual swap agreement.  The option value is derived based on the volatility, the interest rate and the time remaining to maturity of the call option.  The Company considered the counterparty’s credit risk in determining the valuation. The valuation of equity swap agreements falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of these derivative contracts.

 

Derivatives Payable – The Company’s derivatives payable are recorded in conjunction with the certificate of deposits (“host instrument”) that pays interest based on changes in the HSCEI and are included in interest-bearing deposits on the condensed consolidated balance sheets. The fair value of these embedded derivatives is based on the income approach. The Company considered its own credit risk in determining the valuation. The valuation of the derivatives payable falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of these derivative contracts.

 

Mortgage Servicing Assets (“MSAs”) – The Company records MSAs in conjunction with its loan sale and securitization activities since the servicing of the underlying loans is retained by the Bank.  MSAs are initially measured at fair value using an income approach.  The initial fair value of MSAs is determined based on the present value of estimated net future cash flows related to contractually specified servicing fees.  The valuation for MSAs falls within Level 3 of the fair value hierarchy since there are no quoted prices for MSAs and the significant inputs used to determine fair value are not directly observable.  The valuation of MSAs is determined using a discounted cash flow approach utilizing the appropriate yield curve and several market-derived assumptions including prepayment speeds, servicing cost, delinquency and foreclosure costs and behavior, and float earnings rate, to name a few.  Net cash flows are present valued using a market-derived discount rate.  The resulting fair value is then compared to recently observed bulk market transactions with similar characteristics.  The fair value is adjusted accordingly to be better aligned with current observed market trends and activity.

 

Impaired Loans – In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15, the Company’s impaired loans are generally measured using the fair value of the underlying collateral, which is determined based on the most recent appraisal information received, less costs to sell.  Appraised values may be adjusted based on factors such as the Company’s historical knowledge and changes in market conditions from the time of valuation.  As of June 30, 2008, the impaired loan balance, net of the specific reserve, was $157.5

 

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Table of Contents

 

million.  Impaired loans fall within Level 3 of the fair value hierarchy since they were measured at fair value based on appraisals of the underlying collateral.

 

4.              STOCK-BASED COMPENSATION

 

The Company issues stock-based compensation to certain employees, officers and directors under share-based compensation plans.  The Company adopted SFAS No. 123(R), Share-Based Payment on January 1, 2006 using the modified prospective method.  Under this method, the provisions of SFAS No. 123(R) are applied to new awards and to awards modified, repurchased or canceled after December 31, 2005 and to awards outstanding on December 31, 2005 for which requisite service has not yet been rendered.  SFAS No. 123(R) requires companies to account for stock options using the fair value method, which generally results in compensation expense recognition.  Prior to the adoption of SFAS No. 123(R), the Company applied APB No. 25 to account for its stock based awards.

 

During the three and six months ended June 30, 2008, total compensation cost recognized in the consolidated statements of income related to stock options and restricted stock awards amounted to $1.5 million and $3.0 million, respectively, with related tax benefits of $613 thousand and $1.3 million, respectively.  During the three and six months ended June 30, 2007, total compensation cost recognized in the consolidated statements of income related to stock options and restricted stock awards amounted to $1.7 million and $3.1 million, respectively, with related tax benefits of $698 thousand and $1.3 million, respectively.

 

Stock Options

 

The Company issues fixed stock options to certain employees, officers, and directors.  Stock options are issued at the current market price on the date of grant with a three-year or four-year vesting period and contractual terms of 7 years.  Stock options issued prior to July 2002 had contractual terms of 10 years.  The Company issues new shares upon the exercise of stock options.

 

A summary of activity for the Company’s stock options as of and for the six months ended June 30, 2008 is presented below:

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value
(In thousands) (1)

 

Outstanding at beginning of period

 

2,099,120

 

$

21.71

 

 

 

 

 

Granted

 

721,499

 

18.71

 

 

 

 

 

Exercised

 

(49,116

)

10.36

 

 

 

 

 

Forfeited

 

(44,364

)

33.22

 

 

 

 

 

Outstanding at end of period

 

2,727,139

 

$

20.94

 

3.84 years

 

$

37

 

Vested or expected to vest

 

2,647,620

 

$

20.79

 

3.77 years

 

$

37

 

Exercisable at end of period

 

1,598,087

 

$

17.56

 

2.31 years

 

$

37

 

 


(1) The aggregate intrinsic value excludes shares of 1,051,929 weighted average options outstanding for the six months ended June 30, 2008, respectively, as well as 176,036 weighted average options outstanding for the six months ended June 30, 2007, respectively, for which the exercise price exceeded the average market price of the Company’s common stock during these periods.

 

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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Expected term (1)

 

4 years

 

4 years

 

4 years

 

4 years

 

Expected volatility (2)

 

28.9

%

23.8

%

27.9

%

24.1

%

Expected dividend yield (3)

 

1.3

%

1.1

%

1.2

%

1.1

%

Risk-free interest rate (4)

 

3.0

%

4.8

%

2.6

%

4.5

%

 


(1) 

The expected term (estimated period of time outstanding) of stock options granted was estimated using the historical exercise behavior of employees.

 

 

(2) 

The expected volatility was based on historical volatility for a period equal to the stock option’s expected term.

 

 

(3) 

The expected dividend yield is based on the Company’s prevailing dividend rate at the time of grant.

 

 

(4) 

The risk-free rate is based on the U.S. Treasury strips in effect at the time of grant equal to the stock option’s expected term.

 

During the three and six months ended June 30, 2008 and 2007, information related to stock options is presented as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Weighted average fair value of stock options granted during the period

 

$

3.59

 

$

9.21

 

$

4.27

 

$

9.27

 

Total intrinsic value of options exercised (in thousands)

 

$

170

 

$

8,113

 

$

337

 

$

14,439

 

Total fair value of options vested (in thousands)

 

$

116

 

$

41

 

$

1,222

 

$

662

 

 

As of June 30, 2008, total unrecognized compensation cost related to stock options amounted to $5.2 million.  The cost is expected to be recognized over a weighted average period of 3.2 years.

 

Restricted Stock

 

In addition to stock options, the Company also grants restricted stock awards to directors, certain officers and employees.  The restricted shares awarded become fully vested after three to five years of continued employment from the date of grant.  The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued.  Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions.  The Company records forfeitures of restricted stock as treasury share repurchases.

 

A summary of the activity for restricted stock as of June 30, 2008, including changes during the six months then ended, is presented below:

 

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Shares

 

Weighted
Average
Price

 

Outstanding at beginning of period

 

683,336

 

$

34.48

 

Granted

 

254,102

 

20.38

 

Vested

 

(46,956

)

36.32

 

Forfeited

 

(65,561

)

31.94

 

Outstanding at end of period

 

824,921

 

$

30.23

 

 

The weighted average fair values of restricted stock awards granted during the six months ended June 30, 2008 and 2007 were $20.38 and $38.71, respectively.

 

As of June 30, 2008, total unrecognized compensation cost related to restricted stock awards amounted to $15.5 million.  This cost is expected to be recognized over a weighted average period of 3.0 years.

 

The Company also grants performance restricted stock with a two-year cliff vesting to an executive officer.  The number of shares that the executive will receive under these stock awards will ultimately depend on the Company’s achievement of specified performance targets over the specified performance periods.  At the end of each performance period, the number of stock awards issued will be determined by adjusting upward or downward from the target amount of shares in a range approximately between 25% and 125%.  The final performance percentages on which the payouts will be based, considering performance metrics established for the performance periods, will be determined by the Board of Directors or a committee of the Board.  If the Company performs below its performance targets, the Board or the committee may, at its discretion, choose not to award any shares.  Shares of stock, if any, will be issued following the end of each performance period.  Compensation costs are accrued over the service period and are based on the probable outcome of the performance condition.  The maximum number of shares subject to these stock awards varies for each grant representing a maximum total of 99,767 shares as of June 30, 2008.

 

5.              INVESTMENTS AVAILABLE FOR SALE

 

As a result of periodic reviews for impairment in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, the Company recorded $9.9 million in other-than-temporary impairment charges on certain available-for-sale securities during the second quarter of 2008.  Of the $9.9 million in total impairment charges, $8.4 million related to certain Fannie Mae and Freddie Mac preferred securities.  These preferred securities are perpetual in nature and, as a result, are treated similar to equity securities for purposes of impairment analysis.  Both Fannie Mae and Freddie Mac preferred securities had investment grade ratings at the time of purchase and they maintained their investment grade status as of June 30, 2008.

 

The remaining $1.5 million in impairment charges were related to pooled trust preferred securities that were determined to be other than temporarily impaired in accordance with EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.

 

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6.              GOODWILL AND OTHER INTANGIBLE ASSETS

 

The carrying amount of goodwill amounted to $337.6 million and $335.4 million at June 30, 2008 and December 31, 2007, respectively.  Goodwill is tested for impairment on an annual basis, or more frequently, as events occur or as current circumstances and conditions warrant.  The Company records impairment writedowns as charges to noninterest expense and adjustments to the carrying value of goodwill.  Subsequent reversals of goodwill impairment are prohibited.

 

During the second quarter of 2008, the banking industry continued to experience volatility and the effect of such volatility unfavorably impacted the market prices of banking stocks, including the Company’s.  As such, the Company has deemed it prudent to perform a goodwill impairment test on an interim basis.  As of June 30, 2008, the Company’s market capitalization based on total outstanding common and preferred shares was $605.9 million and its total stockholders’ equity was $1.27 billion.  As a result, the Company performed an impairment analysis as of June 30, 2008 to determine whether and to what extent, if any, recorded goodwill was impaired.  The valuation analysis compared the fair value of each of the reporting units, including goodwill, to the respective carrying amounts.  If the carrying amount of the reporting unit, including goodwill exceeds the fair value of that reporting unit, then further testing for goodwill impairment is performed.

 

As a result of this analysis, it was determined that the fair value of the Company’s insurance agency reporting unit, East West Insurance Services, Inc., was less than its carrying value and that goodwill was impaired.  The Company recorded goodwill impairment of $586 thousand as a charge to earnings.  This impairment charge had no effect on the Company’s cash balances or liquidity.  In addition, because goodwill and other intangible assets are not included in the calculation of regulatory capital, the Company’s well capitalized regulatory ratios are not affected by this non-cash expense.  No assurance can be given that goodwill will not be written down further in future periods.  The Company did not record any goodwill impairment writedowns during the first half of 2007.

 

The Company also has premiums on acquired deposits which represent the intangible value of depositor relationships resulting from deposit liabilities assumed from various acquisitions.  The gross carrying amount of deposit premiums totaled $43.0 million and $46.9 million, respectively, with related accumulated amortization amounting to $18.3 million and $18.5 million, respectively, at June 30, 2008 and December 31, 2007.  During the first quarter of 2008, the Company recorded an $855 thousand impairment writedown on deposit premiums initially recorded for the Desert Community Bank (“DCB”) acquisition due to higher than anticipated runoffs in certain deposit categories.  The Company did not record any impairment writedowns on deposit premiums during 2007.

 

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7.              ALLOWANCE FOR LOAN LOSSES

 

The following table summarizes activity in the allowance for loan losses for the periods indicated:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Allowance balance, beginning of period

 

$

117,120

 

$

75,970

 

$

88,407

 

$

78,201

 

Allowance for unfunded loan commitments and letters of credit

 

1,136

 

1,886

 

232

 

(189

)

Provision for loan losses

 

85,000

 

 

140,000

 

 

Chargeoffs:

 

 

 

 

 

 

 

 

 

Single family real estate

 

634

 

 

709

 

 

Multifamily real estate

 

436

 

 

436

 

 

Commercial and industrial real estate

 

16,337

 

 

21,418

 

 

Construction

 

15,726

 

 

24,291

 

 

Commercial business

 

1,919

 

865

 

13,735

 

1,045

 

Automobile

 

134

 

 

163

 

 

Other consumer

 

23

 

 

40

 

11

 

Total chargeoffs

 

35,209

 

865

 

60,792

 

1,056

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Single family real estate

 

2

 

 

2

 

 

Commercial and industrial real estate

 

3

 

 

6

 

 

Commercial business

 

357

 

289

 

537

 

323

 

Automobile

 

4

 

 

21

 

1

 

Total recoveries

 

366

 

289

 

566

 

324

 

Net chargeoffs

 

34,843

 

576

 

60,226

 

732

 

Allowance balance, end of period

 

$

168,413

 

$

77,280

 

$

168,413

 

$

77,280

 

Average loans outstanding

 

$

8,773,028

 

$

8,097,386

 

$

8,864,142

 

$

8,137,161

 

Total gross loans outstanding, end of period

 

$

8,656,427

 

$

8,030,111

 

$

8,656,427

 

$

8,030,111

 

Annualized net chargeoffs to average loans

 

1.59

%

0.03

%

1.36

%

0.02

%

Allowance for loan losses to total gross loans, end of period

 

1.95

%

0.96

%

1.95

%

0.96

%

 

At June 30, 2008, the allowance for loan losses amounted to $168.4 million, or 1.95% of total loans, compared with $88.4 million, or 1.00% of total loans, at December 31, 2007, and $77.3 million, or 0.96% of total loans, at June 30, 2007.  The increase in the allowance for loan losses is primarily due to the $140.0 million in provisions for loan losses recorded during the first half of 2008.  In comparison, no loss provisions were recorded during the first half of 2007.  In response to the unprecedented downturn in the real estate and housing markets, the Company performed an extensive evaluation of certain sectors of its credit portfolio during the second quarter of 2008 to identify and mitigate potential losses in loan categories that were especially hard hit by current market conditions.  As part of this evaluation process, the Company ordered new appraisals for land and residential construction loans and also engaged the services of an independent third party to make a current assessment as to the financial strength of the borrowers.  The significant increase in loss provisions recorded during the second quarter reflects the findings and results from the Company’s comprehensive loan review efforts.  During the first half of 2008, the Company recorded $60.2 million in net chargeoffs, compared to $732 thousand in net chargeoffs recorded during the first half of 2007.  Moreover, the volume of delinquent and

 

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Table of Contents

 

nonperforming loans also increased significantly in 2008 relative to 2007 as a result of the deterioration in the real estate and housing markets.

 

The Company is currently undergoing a similar evaluation process for other sectors of its loan portfolio to proactively manage potential loss exposures in other loan categories.  Although the Company expects to record additional loss provisions for the remainder of the year due to the challenging market and ongoing decline in the credit markets, the Company anticipates these additional provisions to be at lower levels than those recorded during the first half of 2008.

 

8.              COMMITMENTS AND CONTINGENCIES

 

Credit Extensions - In the normal course of business, the Company has various outstanding commitments to extend credit that are not reflected in the accompanying interim condensed consolidated financial statements.  As of June 30, 2008 and December 31, 2007, respectively, undisbursed loan commitments amounted to $2.13 billion and $2.72 billion, respectively.  Commercial and standby letters of credit amounted to $602.2 million and $619.9 million as of June 30, 2008 and December 31, 2007, respectively.

 

Guarantees – From time to time, the Company securitizes loans with recourse in the ordinary course of business.  For loans that have been securitized with recourse, the recourse component is considered a guarantee.  When the Company securitizes a loan with recourse, it commits to stand ready to perform if the loan defaults, and to make payments to remedy the default.  As of June 30, 2008, total loans securitized with recourse amounted to $593.9 million and were comprised of $67.2 million in single family loans with full recourse and $526.6 million in multifamily loans with limited recourse.  In comparison, total loans securitized with recourse amounted to $650.2 million at December 31, 2007, comprised of $72.7 million in single family loans with full recourse and $577.5 million in multifamily loans with limited recourse.  The recourse provision on multifamily loans is limited to 2.5% of the top loss on the underlying loans.  All of these transactions represent securitizations with Fannie Mae.  The Company’s recourse reserve related to these loan securitizations totaled $1.3 million and $3.0 million as of June 30, 2008 and December 31, 2007, respectively, and is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.  Despite the challenging conditions in the real estate market, the Company continues to experience minimal losses from single family and multifamily loan portfolios.

 

The Company also sells or securitizes loans without recourse that may have to be subsequently repurchased if a defect that occurred during the loan origination process results in a violation of a representation or warranty made in connection with the securitization or sale of the loan.  When a loan sold or securitized to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred and if such defects give rise to a violation of a representation or warranty made to the investor in connection with the sale or securitization.  If such a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained.  If there are no such defects, the Company has no commitment to repurchase the loan.  As of June 30, 2008 and December 31, 2007, the amount of loans sold without recourse totaled $769.0 million and $606.5 million, respectively.  Total loans securitized without recourse amounted to $1.12 billion and $1.19 billion, respectively, at June 30, 2008 and December 31, 2007.  The loans sold or securitized without recourse represent the unpaid principal balance of the Company’s loans serviced for others portfolio.

 

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Litigation - Neither the Company nor the Bank is involved in any material legal proceedings at June 30, 2008.  The Bank, from time to time, is a party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank.  After taking into consideration information furnished by counsel to the Company and the Bank, management believes that the resolution of such issues will not have a material adverse impact on the financial position, results of operations, or liquidity of the Company or the Bank.

 

Regulated Investment Company (“RIC”) – On December 31, 2003, the California Franchise Tax Board (“FTB”) announced that it is taking the position that certain tax deductions relating to regulated investment companies will be disallowed pursuant to California Senate Bill 614 and California Assembly Bill 1601, which were signed into law in the fourth quarter of 2003.  East West Securities Company, Inc. (the “Fund”), a RIC formed and funded in July 2000 to raise capital in an efficient and economical manner was dissolved on December 30, 2002 as a result of, among other reasons, proposed legislation to change the tax treatments of RICs.  The Fund provided state tax benefits beginning in 2000 until the end of 2002, when the RIC was officially dissolved.  While the Company’s management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time, the Company has deemed it prudent to participate in the voluntary compliance initiative, or “VCI” offered by the State of California to avoid certain potential penalties should the FTB choose to litigate its announced position about the tax treatment of RICs for periods prior to enactment of the legislation described above and should the FTB be successful in that litigation.

 

Pursuant to the VCI program, the Company filed amended California income tax returns on April 15, 2004 for all affected years and paid the resulting taxes and interest due to the FTB.  This amounted to an aggregate payment of $14.2 million for tax years 2000, 2001, and 2002.  As the Company’s management believes that the tax deductions were appropriate, refund claims were filed for the amounts paid with the amended returns.  These refund claims were reflected as assets in the Company’s consolidated financial statements.  As a result of these actions—amending the Company’s California income tax returns and subsequent related filing of refund claims—the Company retains its potential exposure for assertion of an accuracy-related penalty should the FTB prevail in its position.  The Company’s potential exposure to all other penalties, however, has been eliminated through this course of action.

 

Management has considered this claim as part of its evaluation of the Company’s uncertain tax positions in accordance with the provisions of FIN 48.  Pursuant to the adoption of FIN 48 on January 1, 2007, the Company increased its existing unrecognized tax benefits by $7.1 million in connection with these refund claims.  During the second quarter of 2008, the Company received notification from the FTB that refund claims for tax years 2000 through 2002 have been denied.  Accordingly, the Company has deemed it prudent to write off the remaining $7.1 million tax receivable as a charge against the provision for income taxes during the second quarter of 2008.  The Company will continue to appeal and pursue these claims.

 

9.              STOCKHOLDERS’ EQUITY

 

Earnings (Loss) Per Share (“EPS”) – The actual number of shares outstanding at June 30, 2008 was 63,438,596.  Basic EPS excludes dilution and is computed by dividing income or loss available to common stockholders by the weighted-average number of shares outstanding during the period.  Diluted EPS is calculated on the basis of the weighted average number of shares outstanding during the period plus restricted stock and shares issuable upon the assumed exercise of outstanding convertible preferred

 

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Table of Contents

 

stock, common stock options and warrants, unless they have an antidilutive effect.  In accordance with SFAS No. 128, Earnings Per Share, due to the net loss recorded during the three and six months ended June 30, 2008, incremental shares resulting from the assumed conversion, exercise, or contingent issuance of securities are not included as their effect on earnings or loss per share would be antidilutive.

 

The following table sets forth (loss) earnings per share calculations for the three and six months ended June 30, 2008 and 2007:

 

 

 

Three Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

Net (Loss)

 

Number

 

Per Share

 

Net

 

Number

 

Per Share

 

 

 

Income

 

of Shares

 

Amounts

 

Income

 

of Shares

 

Amounts

 

 

 

(In thousands, except per share data)

 

Basic (loss) earnings per share

 

$

(25,887

)

62,599

 

$

(0.41

)

$

40,490

 

60,381

 

$

0.67

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

724

 

(0.01

)

Restricted stock

 

 

 

 

 

195

 

 

Stock warrants

 

 

 

 

 

46

 

 

Diluted (loss) earnings per share

 

$

(25,887

)

62,599

 

$

(0.41

)

$

40,490

 

61,346

 

$

0.66

 

 

 

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

Net (Loss)

 

Number

 

Per Share

 

Net

 

Number

 

Per Share

 

 

 

Income

 

of Shares

 

Amounts

 

Income

 

of Shares

 

Amounts

 

 

 

(In thousands, except per share data)

 

Basic (loss) earnings per share

 

$

(20,843

)

62,542

 

$

(0.33

)

$

82,586

 

60,515

 

$

1.36

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

769

 

(0.02

)

Restricted stock

 

 

 

 

 

193

 

 

Stock warrants

 

 

 

 

 

46

 

 

Diluted (loss) earnings per share

 

$

(20,843

)

62,542

 

$

(0.33

)

$

82,586

 

61,523

 

$

1.34

 

 

The following outstanding convertible preferred stock, stock options, restricted stock and stock warrants for the three and six months ended June 30, 2008 and 2007, respectively, were excluded from the computation of diluted EPS because including them would have had an antidilutive effect.

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months 
Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

Convertible preferred stock

 

9,838

 

 

4,919

 

 

Stock options

 

2,113

 

26

 

1,234

 

176

 

Restricted stock

 

58

 

 

97

 

 

 

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Convertible Preferred Stock Offering - In April 2008, the Company issued 200,000 shares of 8% Non-Cumulative Perpetual Convertible Preferred Stock, Series A (“Preferred Stock”).  The Company received net proceeds of approximately $194.1 million after deducting underwriting discounts, commissions and offering expenses.  The holders of the Preferred Stock will have the right at any time to convert each share of Preferred Stock into 64.9942 shares of the Company’s common stock, plus cash in lieu of fractional shares.  This represents an initial conversion price of approximately $15.39 per share of common stock or a 22.5% conversion premium based on the closing price of the Company’s common stock on April 23, 2008 of $12.56 per share.  On or after May 1, 2013, the Company will have the right, under certain circumstances, to cause the Preferred Stock to be converted into shares of the Company’s common stock.  Dividends on the Preferred Stock, if declared, will accrue and be payable quarterly in arrears at a rate per annum equal to 8% on the liquidation preference of $1,000 per share, commencing on August 1, 2008.  The proceeds from this offering were used to augment the Company’s liquidity and capital positions and reduce its borrowings.

 

Stock Repurchase Program – During 2007, the Company’s Board of Directors authorized a new stock repurchase program to buy back up to $80.0 million of the Company’s common stock.  The Company did not repurchase any shares during the six months ended June 30, 2008 in connection with this stock repurchase program.

 

Quarterly Dividends – The Company’s Board of Directors declared and paid quarterly common stock cash dividends of $0.10 per share payable on or about May 14, 2008 to shareholders of record on April 30, 2008.  Cash dividends totaling $6.3 million and $12.7 million were paid to the Company’s shareholders during the second quarter and first half of 2008, respectively.

 

10.       BUSINESS SEGMENTS

 

The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company overall.  The Company 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 and eliminations of inter-segment amounts have been aggregated and included in “Other.”  Although all four operating segments offer financial products and services, they are managed separately based on each segment’s strategic focus.  While the retail banking segment focuses primarily on retail operations through the Bank’s branch network, certain designated branches have responsibility for generating commercial deposits and loans.  The commercial lending segment, which includes commercial real estate, primarily generates commercial loans and deposits through the efforts of commercial lending officers located in the Bank’s northern and southern California production offices.  The treasury department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk; the residential lending segment is mainly responsible for the Bank’s portfolio of single family and multifamily residential loans.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies described in Note 1 of the Company’s annual report on Form 10-K for the year ended December 31, 2007.  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.  Net interest income is based on the Company’s internal funds transfer pricing system which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics.  Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are

 

23



Table of Contents

 

assigned to that business.  Indirect costs, including overhead expense, are allocated to the segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume.  The provision for credit losses is allocated based on actual losses incurred and an allocation of the remaining provision based on new loan origination volume for the period.  The Company evaluates overall performance based on profit or loss from operations before income taxes excluding nonrecurring gains and losses.

 

During the second quarter of 2008, the Company revised the allocation of certain investment securities and related revenues and expenses previously included in the Treasury segment.  Specifically, investment securities that have resulted from the Company’s in-house securitization activities have been allocated to the operating segments (i.e. retail banking, commercial lending, and residential lending) that initially originated the underlying loans.  Interest income, related premium amortizations and discount accretions, as well as any gains or losses from the sale of these investment securities have also been allocated to the appropriate operating segments.  As a result of these changes, the Company has revised its results for the comparable periods in 2007 to reflect the current allocation methodology between the treasury segment and the other operating segments.

 

The following tables present the operating results and other key financial measures for the individual operating segments for the three and six months ended June 30, 2008 and 2007:

 

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Table of Contents

 

 

 

Three Months Ended June 30, 2008

 

 

 

Retail

 

Commercial

 

 

 

Residential

 

 

 

 

 

 

 

Banking

 

Lending

 

Treasury

 

Lending

 

Other

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

51,316

 

$

81,067

 

$

17,078

 

$

17,597

 

$

847

 

$

167,905

 

Charge for funds used

 

(23,206

)

(36,189

)

(31,414

)

(8,294

)

 

(99,103

)

Interest spread on funds used

 

28,110

 

44,878

 

(14,336

)

9,303

 

847

 

68,802

 

Interest expense

 

(32,681

)

(5,668

)

(37,380

)

 

 

(75,729

)

Credit on funds provided

 

49,219

 

7,933

 

41,951

 

 

 

99,103

 

Interest spread on funds provided

 

16,538

 

2,265

 

4,571

 

 

 

23,374

 

Net interest income (expense)

 

$

44,648

 

$

47,143

 

$

(9,765

)

$

9,303

 

$

847

 

$

92,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

3,929

 

$

205

 

$

(1,592

)

$

(118

)

$

2,399

 

$

4,823

 

Goodwill

 

269,841

 

16,865

 

 

50,595

 

273

 

337,574

 

Segment pretax profit (loss)

 

35

 

(27,609

)

(21,975

)

5,970

 

(1,462

)

(45,041

)

Segment assets

 

3,481,179

 

5,126,660

 

1,462,164

 

1,086,918

 

627,979

 

11,784,900

 

 

 

 

Three Months Ended June 30, 2007

 

 

 

Retail

 

Commercial

 

 

 

Residential

 

 

 

 

 

 

 

Banking

 

Lending

 

Treasury

 

Lending

 

Other

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

67,507

 

$

82,937

 

$

14,750

 

$

20,653

 

$

1,367

 

$

187,214

 

Charge for funds used

 

(47,092

)

(56,711

)

(17,670

)

(15,047

)

 

(136,520

)

Interest spread on funds used

 

20,415

 

26,226

 

(2,920

)

5,606

 

1,367

 

50,694

 

Interest expense

 

(40,955

)

(9,004

)

(38,326

)

 

 

(88,285

)

Credit on funds provided

 

74,471

 

14,426

 

47,623

 

 

 

136,520

 

Interest spread on funds provided

 

33,516

 

5,422

 

9,297

 

 

 

48,235

 

Net interest income

 

$

53,931

 

$

31,648

 

$

6,377

 

$

5,606

 

$

1,367

 

$

98,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

2,551

 

$

136

 

$

(99

)

$

(51

)

$

1,254

 

$

3,791

 

Goodwill

 

181,910

 

12,127

 

 

48,509

 

1,717

 

244,263

 

Segment pretax profit (loss)

 

35,476

 

28,154

 

6,498

 

5,028

 

(8,688

)

66,468

 

Segment assets

 

3,716,324

 

4,296,370

 

959,965

 

1,343,389

 

513,309

 

10,829,357

 

 

 

 

Six Months Ended June 30, 2008

 

 

 

Retail

 

Commercial

 

 

 

Residential

 

 

 

 

 

 

 

Banking

 

Lending

 

Treasury

 

Lending

 

Other

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

108,174

 

$

174,117

 

$

34,186

 

$

36,785

 

$

1,827

 

$

355,089

 

Charge for funds used

 

(56,261

)

(87,985

)

(41,276

)

(20,208

)

 

(205,730

)

Interest spread on funds used

 

51,913

 

86,132

 

(7,090

)

16,577

 

1,827

 

149,359

 

Interest expense

 

(72,459

)

(11,988

)

(78,847

)

 

 

(163,294

)

Credit on funds provided

 

110,378

 

17,024

 

78,328

 

 

 

205,730

 

Interest spread on funds provided

 

37,919

 

5,036

 

(519

)

 

 

42,436

 

Net interest income (expense)

 

$

89,832

 

$

91,168

 

$

(7,609

)

$

16,577

 

$

1,827

 

$

191,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

$

7,088

 

$

422

 

$

(1,978

)

$

(18

)

$

4,589

 

$

10,103

 

Goodwill

 

269,841

 

16,865

 

 

50,595

 

273

 

337,574

 

Segment pretax (loss) profit

 

(6,891

)

(19,104

)

(20,380

)

12,733

 

(3,757

)

(37,399

)

Segment assets

 

3,481,179

 

5,126,660

 

1,462,164

 

1,086,918

 

627,979

 

11,784,900

 

 

 

 

Six Months Ended June 30, 2007

 

 

 

Retail

 

Commercial

 

 

 

Residential

 

 

 

 

 

 

 

Banking

 

Lending

 

Treasury

 

Lending

 

Other

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

133,755

 

$

162,085

 

$

32,899

 

$

41,830

 

$

2,822

 

$

373,391

 

Charge for funds used

 

(93,203

)

(110,955

)

(36,910

)

(30,040

)

 

(271,108

)

Interest spread on funds used

 

40,552

 

51,130

 

(4,011

)

11,790

 

2,822

 

102,283

 

Interest expense

 

(80,042

)

(17,102

)

(78,715

)

 

 

(175,859

)

Credit on funds provided

 

148,242

 

27,884

 

94,982

 

 

 

271,108

 

Interest spread on funds provided

 

68,200

 

10,782

 

16,267

 

 

 

95,249

 

Net interest income

 

$

108,752

 

$

61,912

 

$

12,256

 

$

11,790

 

$