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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

For the transition period from                  to                 .

 

Commission file number 000-24939

 

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

135 N. Los Robles Ave, 7^th 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.

 

 

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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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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