EAST WEST BANCORP INC - Quarter Report: 2008 March (Form 10-Q)
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 |
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For the quarterly period ended March 31, 2008 |
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or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 |
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95-4703316 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
135 N. Los Robles Ave, 7th Floor, Pasadena, California 91101
(Address of principal executive offices) (Zip Code)
(626) 768-6000
(Registrants 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 filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 issuers common stock on the latest practicable date: 63,437,246 shares of common stock as of April 30, 2008.
TABLE OF CONTENTS
4 |
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4-7 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
8-21 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
22-52 |
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56 |
2
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 Companys 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;
· 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 Companys 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
PART I - FINANCIAL INFORMATION
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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March 31, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Cash and cash equivalents |
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$ |
265,019 |
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$ |
160,347 |
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Securities purchased under resale agreements |
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50,000 |
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150,000 |
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Investment securities available-for-sale, at fair value (with amortized cost of $1,936,487 in 2008 and $1,954,140 in 2007) |
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1,748,266 |
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1,887,136 |
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Loans receivable, net of allowance for loan losses of $117,120 in 2008 and $88,407 in 2007 |
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8,726,556 |
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8,750,921 |
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Investment in Federal Home Loan Bank stock, at cost |
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95,399 |
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84,976 |
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Investment in Federal Reserve Bank stock, at cost |
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21,685 |
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21,685 |
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Other real estate owned, net |
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14,893 |
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1,500 |
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Investment in affordable housing partnerships |
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45,522 |
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44,206 |
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Premises and equipment, net |
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64,302 |
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64,943 |
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Due from customers on acceptances |
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12,740 |
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15,941 |
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Premiums on deposits acquired, net |
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25,722 |
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28,459 |
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Goodwill |
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337,576 |
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335,366 |
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Cash surrender value of life insurance policies |
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89,542 |
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88,658 |
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Accrued interest receivable and other assets |
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126,527 |
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151,664 |
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Deferred tax assets |
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136,461 |
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66,410 |
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TOTAL |
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$ |
11,760,210 |
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$ |
11,852,212 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Customer deposit accounts: |
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Noninterest-bearing |
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$ |
1,454,383 |
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$ |
1,431,730 |
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Interest-bearing |
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6,097,454 |
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5,847,184 |
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Total deposits |
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7,551,837 |
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7,278,914 |
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Federal funds purchased |
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77,502 |
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222,275 |
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Federal Home Loan Bank advances |
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1,653,411 |
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1,808,419 |
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Securities sold under repurchase agreements |
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999,911 |
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1,001,955 |
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Notes payable |
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17,527 |
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16,242 |
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Bank acceptances outstanding |
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12,740 |
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15,941 |
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Accrued interest payable, accrued expenses and other liabilities |
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107,928 |
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101,073 |
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Long-term debt |
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235,570 |
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235,570 |
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Total liabilities |
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10,656,426 |
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10,680,389 |
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COMMITMENTS AND CONTINGENCIES (Note 7) |
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STOCKHOLDERS EQUITY |
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Common stock (par value of $0.001 per share) |
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Authorized 200,000,000 shares |
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Issued 69,889,738 shares in 2008 and 69,634,811 shares in 2007 |
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Outstanding 63,356,285 shares in 2008 and 63,137,221 shares in 2007 |
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70 |
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70 |
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Additional paid in capital |
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657,438 |
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652,297 |
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Retained earnings |
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655,433 |
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657,183 |
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Treasury stock, at cost 6,533,453 shares in 2008 and 6,497,590 shares in 2007 |
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(100,125 |
) |
(98,925 |
) |
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Accumulated other comprehensive loss, net of tax |
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(109,032 |
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(38,802 |
) |
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Total stockholders equity |
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1,103,784 |
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1,171,823 |
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TOTAL |
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$ |
11,760,210 |
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$ |
11,852,212 |
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See accompanying notes to condensed consolidated financial statements.
4
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended March 31, |
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2008 |
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2007 |
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INTEREST AND DIVIDEND INCOME |
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Loans receivable, including fees |
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$ |
155,434 |
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$ |
158,163 |
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Investment securities available-for-sale |
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27,050 |
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22,900 |
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Securities purchased under resale agreements |
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2,553 |
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3,786 |
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Investment in Federal Home Loan Bank stock |
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1,284 |
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961 |
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Short-term investments |
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538 |
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100 |
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Investment in Federal Reserve Bank stock |
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325 |
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267 |
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Total interest and dividend income |
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187,184 |
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186,177 |
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INTEREST EXPENSE |
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Customer deposit accounts |
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52,253 |
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58,962 |
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Federal Home Loan Bank advances |
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19,682 |
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14,866 |
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Securities sold under repurchase agreements |
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10,529 |
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8,394 |
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Long-term debt |
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3,723 |
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3,382 |
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Federal funds purchased |
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1,378 |
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1,970 |
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Total interest expense |
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87,565 |
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87,574 |
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES |
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99,619 |
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98,603 |
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PROVISION FOR LOAN LOSSES |
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55,000 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
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44,619 |
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98,603 |
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NONINTEREST INCOME |
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Net gain on investment securities available-for-sale |
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4,334 |
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1,528 |
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Branch fees |
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4,101 |
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3,427 |
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Letters of credit fees and commissions |
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2,677 |
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2,353 |
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Net gain on sale of loans |
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1,855 |
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938 |
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Ancillary loan fees |
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1,141 |
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1,280 |
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Income from life insurance policies |
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1,028 |
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974 |
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Net gain on sale of other real estate owned |
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1,344 |
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Other operating income |
|
789 |
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651 |
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Total noninterest income |
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15,925 |
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12,495 |
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NONINTEREST EXPENSE |
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Compensation and employee benefits |
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23,268 |
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20,782 |
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Occupancy and equipment expense |
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7,008 |
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5,881 |
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Amortization and impairment writedowns of premiums on deposits acquired |
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2,737 |
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1,532 |
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Amortization of investments in affordable housing partnerships |
|
1,715 |
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1,268 |
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Data processing |
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1,196 |
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982 |
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Deposit insurance premiums and regulatory assessments |
|
1,192 |
|
347 |
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Deposit-related expenses |
|
948 |
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1,687 |
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Other operating expenses |
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14,838 |
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9,839 |
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Total noninterest expense |
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52,902 |
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42,318 |
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INCOME BEFORE PROVISION FOR INCOME TAXES |
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7,642 |
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68,780 |
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PROVISION FOR INCOME TAXES |
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2,598 |
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26,684 |
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NET INCOME |
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$ |
5,044 |
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$ |
42,096 |
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EARNINGS PER SHARE |
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BASIC |
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$ |
0.08 |
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$ |
0.69 |
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DILUTED |
|
$ |
0.08 |
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$ |
0.68 |
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |
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BASIC |
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62,485 |
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60,649 |
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DILUTED |
|
62,949 |
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61,700 |
|
See accompanying notes to condensed consolidated financial statements.
5
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
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Accumulated |
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Other |
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Additional |
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Comprehensive |
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Total |
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|||||||
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Common |
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Paid In |
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Retained |
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Treasury |
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Income (Loss), |
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Comprehensive |
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Stockholders |
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|||||||
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Stock |
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Capital |
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Earnings |
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Stock |
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Net of Tax |
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Income |
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Equity |
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|||||||
BALANCE, JANUARY 1, 2007 |
|
$ |
66 |
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$ |
544,469 |
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$ |
525,247 |
|
$ |
(40,305 |
) |
$ |
(10,087 |
) |
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$ |
1,019,390 |
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Comprehensive income |
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Net income for the period |
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|
42,096 |
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$ |
42,096 |
|
42,096 |
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Net unrealized gain on investment securities available-for-sale |
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|
12,069 |
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12,069 |
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12,069 |
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Total comprehensive income |
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$ |
54,165 |
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Cumulative effect of change in accounting principle pursuant to adoption of FIN 48 |
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(4,628 |
) |
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(4,628 |
) |
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Stock compensation costs |
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|
1,488 |
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|
1,488 |
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Tax benefit from stock option exercises |
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|
2,660 |
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|
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|
2,660 |
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Tax benefit from vested restricted stock |
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|
|
157 |
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|
157 |
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|||||||
Issuance of 345,695 shares pursuant to various stock plans and agreements |
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1 |
|
1,472 |
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|
1,473 |
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Cancellation of 26,861 shares due to forfeitures of issued restricted stock |
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|
983 |
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(983 |
) |
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Purchase of 19,075 shares of treasury stock due to the vesting of restricted stock |
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(697 |
) |
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(697 |
) |
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Purchase of 775,000 shares of treasury stock pursuant to the Stock Repurchase Program |
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(29,685 |
) |
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(29,685 |
) |
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Dividends paid on common stock |
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(6,125 |
) |
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(6,125 |
) |
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BALANCE, MARCH 31, 2007 |
|
$ |
67 |
|
$ |
551,229 |
|
$ |
556,590 |
|
$ |
(71,670 |
) |
$ |
1,982 |
|
|
|
$ |
1,038,198 |
|
|
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|||||||
BALANCE, JANUARY 1, 2008 |
|
$ |
70 |
|
$ |
652,297 |
|
$ |
657,183 |
|
$ |
(98,925 |
) |
$ |
(38,802 |
) |
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|
1,171,823 |
|
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Comprehensive income |
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|||||||
Net income for the period |
|
|
|
|
|
5,044 |
|
|
|
|
|
$ |
5,044 |
|
5,044 |
|
||||||
Net unrealized loss on investment securities available-for-sale |
|
|
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|
|
|
|
|
|
(70,230 |
) |
(70,230 |
) |
(70,230 |
) |
|||||||
Total comprehensive income |
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|
|
|
|
|
|
|
|
|
|
$ |
(65,186 |
) |
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|
||||||
Cumulative effect of change in accounting principle pursuant to adoption of EITF 06-4 (see Note 2) |
|
|
|
|
|
(479 |
) |
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|
|
|
|
|
(479 |
) |
|||||||
Stock compensation costs |
|
|
|
1,557 |
|
|
|
|
|
|
|
|
|
1,557 |
|
|||||||
Tax benefit from stock option exercises |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
70 |
|
|||||||
Tax provision from vested restricted stock |
|
|
|
(369 |
) |
|
|
|
|
|
|
|
|
(369 |
) |
|||||||
Issuance of 254,727 shares pursuant to various stock plans and agreements |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
393 |
|
|||||||
Cancellation of 35,453 shares due to forfeitures of issued restricted stock |
|
|
|
1,192 |
|
|
|
(1,192 |
) |
|
|
|
|
|
|
|||||||
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 |
|
|
|
|
|
(6,315 |
) |
|
|
|
|
|
|
(6,315 |
) |
|||||||
BALANCE, MARCH 31, 2008 |
|
$ |
70 |
|
$ |
657,438 |
|
$ |
655,433 |
|
$ |
(100,125 |
) |
$ |
(109,032 |
) |
|
|
$ |
1,103,784 |
|
|
|
Three Months Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
|
|
(In thousands) |
|
||||
Disclosure of reclassification amounts: |
|
|
|
|
|
||
Unrealized holding (loss) gain on securities arising during the period, net of tax benefit (expense) of $49,036 in 2008 and $ (9,381) in 2007 |
|
$ |
(67,716 |
) |
$ |
12,955 |
|
Less: Reclassification adjustment for gain included in net income, net of tax expense of $1,820 in 2008 and $642 in 2007 |
|
(2,514 |
) |
(886 |
) |
||
Net unrealized (loss) gain on securities, net of tax benefit (expense) of $50,856 in 2008 and $(8,740) in 2007 |
|
$ |
(70,230 |
) |
$ |
12,069 |
|
See accompanying notes to condensed consolidated financial statements.
6
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Three Months Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
||
Net income |
|
$ |
5,044 |
|
$ |
42,096 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
6,136 |
|
2,795 |
|
||
Stock compensation costs |
|
1,557 |
|
1,488 |
|
||
Deferred tax (benefit) provision |
|
(13,940 |
) |
51 |
|
||
Provision for loan losses |
|
55,000 |
|
|
|
||
Net gain on sales of investment securities, loans and other assets |
|
(5,718 |
) |
(3,545 |
) |
||
Federal Home Loan Bank stock dividends |
|
(1,023 |
) |
(1,133 |
) |
||
Originations of loans held for sale |
|
(23,733 |
) |
(12,207 |
) |
||
Proceeds from sale of loans held for sale |
|
24,025 |
|
12,211 |
|
||
Tax benefit from stock options exercised |
|
(70 |
) |
(2,660 |
) |
||
Tax provision (benefit) from vested restricted stock |
|
369 |
|
(157 |
) |
||
Net change in accrued interest receivable and other assets |
|
17,742 |
|
(5,744 |
) |
||
Net change in accrued interest payable, accrued expenses and other liabilities |
|
6,911 |
|
21,599 |
|
||
Total adjustments |
|
67,256 |
|
12,698 |
|
||
Net cash provided by operating activities |
|
72,300 |
|
54,794 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
||
Net loan originations |
|
(177,489 |
) |
(171,292 |
) |
||
Purchases of: |
|
|
|
|
|
||
Securities purchased under resale agreements |
|
|
|
(100,000 |
) |
||
Investment securities available-for-sale |
|
(243,942 |
) |
(355,414 |
) |
||
Federal Home Loan Bank stock |
|
(9,400 |
) |
|
|
||
Premises and equipment |
|
(1,522 |
) |
(3,620 |
) |
||
Proceeds from sale of: |
|
|
|
|
|
||
Investment securities available-for-sale |
|
138,595 |
|
92,008 |
|
||
Securities purchased under resale agreements |
|
100,000 |
|
|
|
||
Loans receivable |
|
135,167 |
|
15,058 |
|
||
Real estate owned |
|
|
|
4,129 |
|
||
Repayments, maturity and redemption of investment securities available-for-sale |
|
127,715 |
|
647,863 |
|
||
Redemption of Federal Home Loan Bank stock |
|
|
|
13,879 |
|
||
Acquisitions, net of cash (acquired) paid |
|
84 |
|
|
|
||
Net cash provided by investing activities |
|
69,208 |
|
142,611 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
||
Net increase in deposits |
|
272,923 |
|
85,227 |
|
||
Net decrease in federal funds purchased |
|
(144,771 |
) |
(44,500 |
) |
||
Net decrease in Federal Home Loan Bank advances |
|
(155,000 |
) |
(270,000 |
) |
||
Repayment of securities sold under repurchase agreements |
|
(1,714 |
) |
|
|
||
Repayment of notes payable |
|
(2,045 |
) |
(2,194 |
) |
||
Proceeds from issuance of long-term debt |
|
|
|
20,000 |
|
||
Proceeds from issuance of common stock pursuant to various stock plans and agreements |
|
393 |
|
1,473 |
|
||
Tax benefit from stock options exercised |
|
70 |
|
2,660 |
|
||
Tax (provision) benefit from vested restricted stock |
|
(369 |
) |
157 |
|
||
Dividends paid on common stock |
|
(6,315 |
) |
(6,125 |
) |
||
Purchase of treasury shares |
|
(8 |
) |
(29,685 |
) |
||
Net cash used in financing activities |
|
(36,836 |
) |
(242,987 |
) |
||
|
|
|
|
|
|
||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
104,672 |
|
(45,582 |
) |
||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
160,347 |
|
192,559 |
|
||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
265,019 |
|
$ |
146,977 |
|
|
|
|
|
|
|
||
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest |
|
$ |
87,624 |
|
$ |
89,228 |
|
Income tax payments, net of refunds |
|
19 |
|
4,165 |
|
||
Noncash investing and financing activities: |
|
|
|
|
|
||
Guaranteed mortgage loan securitizations |
|
|
|
395,712 |
|
||
Afforadable housing investment financed through notes payable |
|
3,000 |
|
4,614 |
|
||
Equity interests in East West Capital Trusts |
|
|
|
619 |
|
||
Real estate acquired through foreclosure |
|
13,393 |
|
622 |
|
See accompanying notes to condensed consolidated financial statements.
7
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 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 three months ended March 31, 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 Companys annual report on Form 10-K for the year ended December 31, 2007.
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 employees 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.
In September 2006, the Financial Acoounting Standards Board (FASB) issued SFAS No. 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 Companys financial condition, results of operations,
8
or cash flows. The adoption of this standard resulted in additional disclosures which are presented in Note 3 of the Companys 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 Companys 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 sponsors 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 LiabilitiesIncluding 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 companys 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 beginning on or after December 15, 2008. SFAS 141(R), effective for the Company on January 1, 2009, 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
9
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 FSP FAS No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, 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. 40-3 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. SFAS 161 is effective for financial statements issued and for fiscal years and interim periods after November 15, 2008. Early application is permitted. 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.
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, 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:
10
· 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 and the equity swap agreements.
· 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 includes mortgage servicing assets, impaired loans, private label mortgage-backed securities, retained residual interests in securitizations, and purchased residual securities.
In determining the appropriate levels, the Company performs a detailed analysis of assets and liabilities that are subject to SFAS 157. As of March 31, 2008, all of the Companys financial liabilities are reported at their carrying values. The following table presents financial assets that are measured at fair value on a recurring and non-recurring basis. These assets are reported on the consolidated statements of financial condition at their fair values as of March 31, 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 Measured at Fair Value on a recurring basis as of March 31, 2008
|
|
Fair Value |
|
Quoted Prices in Identifical Assets (Level 1) |
|
Significant Other |
|
Significant Inputs |
|
||||
|
|
(In Thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Investment Securities (AFS) |
|
$ |
1,748,266 |
|
$ |
5,012 |
|
$ |
1,170,883 |
|
$ |
572,371 |
|
Equity Swap Agreements |
|
18,103 |
|
|
|
18,103 |
|
|
|
||||
Assets Measured at Fair Value on a non-recurring basis as of March 31, 2008
|
|
Fair Value |
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
||
|
|
(In Thousands) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||
Mortgage Servicing Assets |
|
$ |
20,886 |
|
|
|
|
|
$ |
20,886 |
|
Impaired Loans |
|
158,446 |
|
|
|
|
|
158,446 |
|
||
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
11
reconciliation of the beginning and ending balances for asset categories measured at fair value using significant unobservable inputs (level 3):
|
|
Investment |
|
|
|
|
|
|||
|
|
Securities |
|
Mortgage |
|
Impaired |
|
|||
|
|
(In Thousands) |
|
|||||||
|
|
|
|
|
|
|
|
|||
Beginning balance, January 1, 2008 |
|
$ |
700,434 |
|
$ |
21,558 |
|
$ |
107,544 |
|
Total gains or losses (1) |
|
|
|
|
|
|
|
|||
Included in earnings (realized) |
|
2,374 |
|
(1,468 |
) |
63 |
|
|||
Included in other comprehensive income (unrealized) (2) |
|
(100,223 |
) |
|
|
|
|
|||
Purchases, issuances, sales, settlements (3) |
|
(30,214 |
) |
796 |
|
|
|
|||
Transfers in and/or out of Level 3 (4) |
|
|
|
|
|
50,839 |
|
|||
Ending balance March 31, 2008 |
|
$ |
572,371 |
|
$ |
20,886 |
|
$ |
158,446 |
|
|
|
|
|
|
|
|
|
|||
Changes in unrealized gains or (losses) included in earnings relating to assets and liabilities still held at 3/31/2008 (4) |
|
$ |
|
|
$ |
|
|
$ |
|
|
(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 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 brokers valuation methodology for reasonableness and obtains an independent validation of the market price received from another broker who has experience with such investments.
The Companys Level 3 available-for-sale securities include private label mortgage-backed securities and residual interests that we have retained in connection with our loan securitization activities as well as purchased residual securities. The fair values of private label mortgage-backed securities and
12
purchased residual securities are generally based on the average of two quoted market prices obtained from independent external brokers. However, distressed market conditions have impacted the Companys ability to obtain third-party pricing data for its portfolio of private label mortgage-backed securities due to their illiquid nature. Even when third-party pricing has been available, these securities fall within Level 3 of the fair value hierarchy as the limited trading activity and illiquidity resulting from current market conditions have challenged the significant observable inputs of these quotations. 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 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.
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 Companys 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 Companys historical knowledge and changes in market conditions from the time of valuation. As of March 31, 2008 the impaired loan balance, net of the specific reserve, was $158.4 million. Impaired loans falls 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 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
13
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.
For the three months ended March 31, 2008 and 2007, total compensation cost recognized in the consolidated statements of income related to stock options and restricted stock awards amounted to $1.6 million and $1.5 million, respectively, with related tax benefits of $654 thousand and $625 thousand, 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 Companys stock options as of and for the three months ended March 31, 2008 is presented below:
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
Weighted |
|
Average |
|
|
|
||
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
||
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
||
|
|
Shares |
|
Price |
|
Term |
|
Value |
|
||
|
|
|
|
|
|
|
|
(In thousands) |
|
||
Outstanding at beginning of period |
|
2,099,120 |
|
$ |
21.71 |
|
|
|
|
|
|
Granted |
|
444,873 |
|
21.08 |
|
|
|
|
|
||
Exercised |
|
(25,966 |
) |
15.13 |
|
|
|
|
|
||
Forfeited |
|
(6,929 |
) |
34.88 |
|
|
|
|
|
||
Outstanding at end of period |
|
2,511,098 |
|
$ |
21.63 |
|
3.83 years |
|
$ |
4,544 |
|
Vested or expected to vest |
|
2,454,643 |
|
$ |
21.45 |
|
3.78 years |
|
$ |
4,544 |
|
Exercisable at end of period |
|
1,612,688 |
|
$ |
17.28 |
|
2.56 years |
|
$ |
4,544 |
|
(1) The aggregate intrinsic value excludes shares of 374,308 and 919,648 weighted average options outstanding, as of March 31, 2008 and 2007, respectively, for which the exercise price exceeded the average market price of the companys common stock during these periods.
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:
14
|
|
Three Months Ended |
|
||
|
|
March 31, |
|
||
|
|
2008 |
|
2007 |
|
Expected term (1) |
|
4 years |
|
4 years |
|
Expected volatility (2) |
|
27.3 |
% |
24.1 |
% |
Expected dividend yield (3) |
|
1.2 |
% |
1.1 |
% |
Risk-free interest rate (4) |
|
2.3 |
% |
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 options expected term.
(3) The expected dividend yield is based on the Companys 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 options expected term.
During the three months ended March 31, 2008 and 2007, information related to stock options are presented as follows:
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
Weighted average fair value of stock options granted during the period |
|
$ |
4.69 |
|
$ |
9.27 |
|
Total intrinsic value of options exercised (in thousands) |
|
$ |
167 |
|
$ |
6,326 |
|
Total fair value of options vested (in thousands) |
|
$ |
1,106 |
|
$ |
621 |
|
As of March 31, 2008, total unrecognized compensation cost related to stock options amounted to $5.0 million. The cost is expected to be recognized over a weighted average period of 3.0 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 March 31, 2008, including changes during the three months then ended, is presented below:
15
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
Shares |
|
Price |
|
|
Outstanding at beginning of period |
|
683,336 |
|
$ |
34.48 |
|
Granted |
|
228,761 |
|
20.99 |
|
|
Vested |
|
(46,956 |
) |
36.32 |
|
|
Forfeited |
|
(35,453 |
) |
33.87 |
|
|
Outstanding at end of period |
|
829,688 |
|
$ |
30.68 |
|
The weighted average fair values of restricted stock awards granted during the three months ended March 31, 2008 and 2007 were $20.99 and $38.73, respectively.
As of March 31, 2008, total unrecognized compensation cost related to restricted stock awards amounted to $16.9 million. This cost is expected to be recognized over a weighted average period of 3.2 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 Companys 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 March 31, 2008.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill amounted to $337.6 million and $335.4 million at March 31, 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 first quarter of 2008, the banking industry continued to experience adverse market conditions, largely due to a downturn in the housing market. As such, the Companys management has deemed it prudent to perform a goodwill impairment test on an interim basis. As of March 31, 2008, the Companys market capitalization based on total outstanding shares was $1.12 billion and its total stockholders equity was $1.10 billion. The Company updated its December 31, 2007 valuation analysis and determined that there was no goodwill impairment at March 31, 2008. Subsequent to March 31, 2008, the Companys market capitalization decreased below its book value. If the Companys market capitalization continues to be below its book value at June 30, 2008, it will update its valuation analysis to determine whether goodwill is impaired. The Company did not record any goodwill impairment writedowns during 2007.
16
The Company also has premiums on acquired deposits which represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions. The gross carrying amount of deposit premiums totaled $43.0 million and $46.9 million, respectively, with related accumulated amortization amounting to $16.5 million and $18.5 million, respectively, at March 31, 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.
6. ALLOWANCE FOR LOAN LOSSES
The following table summarizes activity in the allowance for loan losses for the periods indicated:
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
|
|
(Dollars in thousands) |
|
||||
|
|
|
|
|
|
||
Allowance balance, beginning of period |
|
$ |
88,407 |
|
$ |
78,201 |
|
Allowance for unfunded loan commitments and letters of credit |
|
(904 |
) |
(2,075 |
) |
||
Provision for loan losses |
|
55,000 |
|
|
|
||
Chargeoffs: |
|
|
|
|
|
||
Single family real estate |
|
75 |
|
|
|
||
Commercial and industrial real estate |
|
5,081 |
|
|
|
||
Construction |
|
8,565 |
|
|
|
||
Commercial business |
|
11,816 |
|
180 |
|
||
Automobile |
|
29 |
|
|
|
||
Other consumer |
|
17 |
|
11 |
|
||
Total chargeoffs |
|
25,583 |
|
191 |
|
||
|
|
|
|
|
|
||
Recoveries: |
|
|
|
|
|
||
Commercial and industrial real estate |
|
3 |
|
|
|
||
Commercial business |
|
180 |
|
34 |
|
||
Automobile |
|
17 |
|
1 |
|
||
Total recoveries |
|
200 |
|
35 |
|
||
Net chargeoffs |
|
25,383 |
|
156 |
|
||
Allowance balance, end of period |
|
$ |
117,120 |
|
$ |
75,970 |
|
Average loans outstanding |
|
$ |
8,955,257 |
|
$ |
8,177,378 |
|
Total gross loans outstanding, end of period |
|
$ |
8,849,201 |
|
$ |
8,024,722 |
|
Annualized net chargeoffs (recoveries) to average loans |
|
1.13 |
% |
0.01 |
% |
||
Allowance for loan losses to total gross loans, end of period |
|
1.32 |
% |
0.95 |
% |
At March 31, 2008, the allowance for loan losses amounted to $117.1 million, or 1.32% of total loans, compared with $88.4 million, or 1.00% of total loans, at December 31, 2007, and $76.0 million, or 0.95% of total loans, at March 31, 2007. The increase in the allowance for loan losses is primarily due to the $55.0 million in provisions for loan losses recorded during the first quarter of 2008. In comparison, no loss provisions were recorded during the first quarter of 2007. The significant increase in loss provisions recorded during the period was due to $25.4 million in net chargeoffs recorded during the first quarter of 2008, as compared to $156 thousand in net chargeoffs recorded during the same period in 2007, as well as higher volume of classified and nonperforming loans caused by the downturn in the real estate housing market, further disruptions in the financial markets, and the continued deterioration in the overall economy.
7. 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 March 31, 2008 and December 31, 2007, respectively, undisbursed loan commitments amounted to $2.58 billion and $2.72 billion, respectively. Commercial and standby letters of credit amounted to $588.8 million and $619.9 million as of March 31, 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 March 31, 2008, total loans securitized with recourse amounted to $625.9 million and were comprised of $69.9 million in single family loans with full recourse and $556.0 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 Companys recourse reserve related to these loan securitizations totaled $1.2 million and $3.0 million as of March 31, 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, we continue to experience minimal losses from our 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 March 31, 2008 and December 31, 2007, the amount of loans sold without recourse totaled $747.6 million and $606.5 million, respectively. Total loans securitized without recourse amounted to $1.15 billion and $1.19 billion, respectively, at March 31, 2008 and December 31, 2007. The loans sold or securitized without recourse represent the unpaid principal balance of the Companys loans serviced for others portfolio
17
Litigation - Neither the Company nor the Bank is involved in any material legal proceedings at March 31, 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 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 Companys 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. The Companys management continues to believe that the tax deductions are appropriate and, as such, refund claims have also been filed for the amounts paid with the amended returns. These refund claims are reflected as assets in the Companys consolidated financial statements. As a result of these actionsamending the Companys California income tax returns and subsequent related filing of refund claimsthe Company retains its potential exposure for assertion of an accuracy-related penalty should the FTB prevail in its position, in addition to our risk of not being successful in our refund claim for taxes and interest. The Companys potential exposure to all other penalties, however, has been eliminated through this course of action.
The Franchise Tax Board is currently in the process of reviewing and assessing our refund claims for taxes and interest for tax years 2000 through 2002. Management is continuing to pursue these claims, to monitor developments in the law in this area, and to monitor the status of tax claims with respect to other registered investment companies. Management has considered this claim as part of its evaluation of the Companys 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. There has been no change to this amount during the three months ended March 31, 2008.
8. STOCKHOLDERS EQUITY
Earnings Per Share The actual number of shares outstanding at March 31, 2008 was 63,356,285. Basic earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period plus restricted stock and shares issuable upon the assumed exercise of outstanding common stock options and warrants.
18
The following table sets forth earnings per share calculations for the three months ended March 31, 2008 and 2007:
|
|
Three Months Ended March 31, |
|
|||||||||||||||
|
|
2008 |
|
2007 |
|
|||||||||||||
|
|
Net |
|
Number |
|
Per Share |
|
Net |
|
Number |
|
Per Share |
|
|||||
|
|
Income |
|
of Shares |
|
Amounts |
|
Income |
|
of Shares |
|
Amounts |
|
|||||
|
|
(In thousands, except per share data) |
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic earnings per share |
|
$ |
5,044 |
|
62,485 |
|
$ |
0.08 |
|
$ |
42,096 |
|
60,649 |
|
$ |
0.69 |
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock options |
|
|
|
356 |
|
|
|
|
|
815 |
|
(0.01 |
) |
|||||
Restricted stock |
|
|
|
108 |
|
|
|
|
|
191 |
|
|
|
|||||
Stock warrants |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|||||
Dilutive earnings per share (1) |
|
$ |
5,044 |
|
$ |
62,949 |
|
$ |
0.08 |
|
$ |
42,096 |
|
61,700 |
|
$ |
0.68 |
|
(1) Excludes 374,308 and 919,648 weighted average options outstanding for the three months ended March 31, 2008 and 2007, respectively, for which the exercise price exceeded the average market price of the companys common stock during these periods.
Stock Repurchase Program During 2007, the Companys Board of Directors authorized a new stock repurchase program to buy back up to $80.0 million of the Companys common stock. The Company did not repurchase any shares during the three months ended March 31, 2008 in connection with this stock repurchase program.
Quarterly Dividends The Companys Board of Directors declared and paid quarterly common stock cash dividends of $0.10 per share payable on or about February 20, 2008 to shareholders of record on February 6, 2008. Cash dividends totaling $6.3 million were paid to the Companys shareholders during the first quarter of 2008.
9. 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 Companys 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 segments strategic focus. While the retail banking segment focuses primarily on retail operations through the Banks 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 Banks northern and southern California production offices. The treasury departments primary focus is managing the Banks investments, liquidity, and interest rate risk; the residential lending segment is mainly responsible for the Banks portfolio of single family and multifamily residential loans.
19
The accounting policies of the segments are the same as those described in the summary of significant accounting policies described in Note 1 of our annual report on Form 10-K for the year ended December 31, 2007. Operating segment results are based on the Companys 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 Companys 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 re-pricing characteristics. Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are 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 originations for the period. The Company evaluates overall performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses.
The following tables present the operating results and other key financial measures for the individual operating segments for the three months ended March 31, 2008 and 2007:
|
|
Three Months Ended March 31, 2008 |
|
||||||||||||||||
|
|
Retail |
|
Commercial |
|
|
|
Residential |
|
|
|
|
|
||||||
|
|
Banking |
|
Lending |
|
Treasury |
|
Lending |
|
Other |
|
Total |
|
||||||
|
|
(In thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest income |
|
$ |
50,974 |
|
$ |
90,940 |
|
$ |
31,118 |
|
$ |
13,172 |
|
$ |
980 |
|
$ |
187,184 |
|
Charge for funds used |
|
(29,455 |
) |
(50,505 |
) |
(18,436 |
) |
(8,232 |
) |
|
|
(106,628 |
) |
||||||
Interest spread on funds used |
|
21,519 |
|
40,435 |
|
12,682 |
|
4,940 |
|
980 |
|
80,556 |
|
||||||
Interest expense |
|
(39,778 |
) |
(6,320 |
) |
(41,467 |
) |
|
|
|
|
(87,565 |
) |
||||||
Credit on funds provided |
|
50,274 |
|
8,096 |
|
48,258 |
|
|
|
|
|
106,628 |
|
||||||
Interest spread on funds provided |
|
10,496 |
|
1,776 |
|
6,791 |
|
|
|
|
|
19,063 |
|
||||||
Net interest income |
|
$ |
32,015 |
|
$ |
42,211 |
|
$ |
19,473 |
|
$ |
4,940 |
|
$ |
980 |
|
$ |
99,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Depreciation, amortization and accretion |
|
$ |
3,159 |
|
$ |
216 |
|
$ |
(387 |
) |
$ |
100 |
|
$ |
2,190 |
|
$ |
5,278 |
|
Goodwill |
|
269,374 |
|
16,836 |
|
|
|
50,507 |
|
859 |
|
337,576 |
|
||||||
Segment pretax profit (loss) |
|
(21,734 |
) |
7,843 |
|
22,822 |
|
2,751 |
|
(4,040 |
) |
7,642 |
|
||||||
Segment assets |
|
3,028,078 |
|
4,968,233 |
|
1,977,255 |
|
1,370,484 |
|
416,160 |
|
11,760,210 |
|
|
|
Three Months Ended March 31, 2007 |
|
||||||||||||||||
|
|
Retail |
|
Commercial |
|
|
|
Residential |
|
|
|
|
|
||||||
|
|
Banking |
|
Lending |
|
Treasury |
|
Lending |
|
Other |
|
Total |
|
||||||
|
|
(In thousands) |
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest income |
|
$ |
62,588 |
|
$ |
77,979 |
|
$ |
28,013 |
|
$ |
16,142 |
|
$ |
1,455 |
|
$ |
186,177 |
|
Charge for funds used |
|
(43,967 |
) |
(53,559 |
) |
(25,020 |
) |
(12,043 |
) |
|
|
(134,589 |
) |
||||||
Interest spread on funds used |
|
18,621 |
|
24,420 |
|
2,993 |
|
4,099 |
|
1,455 |
|
51,588 |
|
||||||
Interest expense |
|
(39,087 |
) |
(8,097 |
) |
(40,390 |
) |
|
|
|
|
(87,574 |
) |
||||||
Credit on funds provided |
|
68,319 |
|
13,072 |
|
53,198 |
|
|
|
|
|
134,589 |
|
||||||
Interest spread on funds provided |
|
29,232 |
|
4,975 |
|
12,808 |
|
|
|
|
|
47,015 |
|
||||||
Net interest income |
|
$ |
47,853 |
|
$ |
29,395 |
|
$ |
15,801 |
|
$ |
4,099 |
|
$ |
1,455 |
|
$ |
98,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Depreciation, amortization and accretion |
|
$ |
2,405 |
|
$ |
215 |
|
$ |
(851 |
) |
$ |
42 |
|
$ |
984 |
|
$ |
2,795 |
|
Goodwill |
|
182,553 |
|
12,170 |
|
|
|
48,681 |
|
859 |
|
244,263 |
|
||||||
Segment pretax profit (loss) |
|
31,782 |
|
25,987 |
|
17,241 |
|
3,218 |
|
(9,448 |
) |
68,780 |
|
||||||
Segment assets |
|
2,582,820 |
|
3,662,304 |
|
1,983,198 |
|
1,837,019 |
|
589,891 |
|
10,655,232 |
|
20
10. SUBSEQUENT EVENTS
On April 23, 2008, the Company announced that it has priced a public offering of 175,000 shares, or $175.0 million aggregate liquidation preference, of 8% Non-Cumulative Perpetual Convertible Preferred Stock, Series A (the Preferred Stock). On April 24, 2008, the underwriter exercised its option to purchase additional Preferred Stock for $25.0 million, bringing the total gross proceeds to $200.0 million. The Company received net proceeds of approximately $194.5 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 Companys 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 Companys 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 Companys 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 will be used to augment the Companys liquidity and capital positions and reduce its borrowings.
21
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion provides information about the results of operations, financial condition, liquidity, cash flows and capital resources of East West Bancorp, Inc. and its subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007, and the accompanying interim unaudited consolidated financial statements and notes hereto.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our consolidated financial statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances as of March 31, 2008.
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified five accounting policies that, due to judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to the following areas:
· classification and valuation of investment securities;
· allowance for loan losses;
· valuation of retained interests and mortgage servicing assets related to securitizations and sales of loans;
· goodwill impairment; and
· share-based compensation
In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact net income.
Goodwill is tested for impairment on an annual basis, or more frequently, as events occur or as current circumstances and conditions warrant. During the first quarter of 2008, the banking industry continued to experience adverse market conditions, largely due to a downturn in the housing market. As such, the Companys management has deemed it prudent to perform a goodwill impairment test on an interim basis. As of March 31, 2008, our market capitalization based on total outstanding shares was $1.12 billion and our total stockholders equity was $1.10 billion. We updated our December 31, 2007 valuation analysis and determined that there was no goodwill impairment at March 31, 2008. Subsequent to March 31, 2008, our market capitalization decreased below its book value. If our market capitalization continues to be below our book value at June 30, 2008, we will update our valuation analysis to determine whether goodwill is impaired.
22
Our significant accounting policies are described in greater detail in our 2007 Annual Report on Form 10-K in the Critical Accounting Policies section of Managements Discussion and Analysis and in Note 1 to the Consolidated Financial StatementsSignificant Accounting Policies which are essential to understanding Managements Discussion and Analysis of Results of Operations and Financial Condition.
Overview
We continued to face unprecedented challenges during the first quarter of 2008. The combined impact of a deeply contracted housing market, further disruptions in the broader financial markets, and continuing deterioration in the overall economy has created unparalleled conditions of instability and uncertainty for the entire banking industry. Despite our long standing policy of not originating subprime loans, the challenging economic market conditions and tighter credit environment have affected even borrowers of higher credit quality. Furthermore, the steep decline in real estate values throughout the country, including areas where the Bank conducts business, has further weakened the residential construction and residential land sectors of our loan portfolio.
As a result of these challenging economic conditions, we experienced higher chargeoff levels and recorded higher loss provisions during the first quarter of 2008. Specifically, net chargeoffs totaled $25.4 million during the first quarter of 2008, representing an annualized 1.13% of average loans for the quarter. This compares with $156 thousand in net chargeoffs, or an annualized 0.01% of average loans, during the same quarter in 2007. Of the $25.6 million in total gross chargeoffs for the quarter, 39% or $10.0 million was related to one commercial loan which we charged off in full due to suspicions of fraud. Collection efforts are aggressively underway with some recovery to potentially come from the accounts receivable and inventory of the business. Management strongly believes this to be an isolated incident and is not indicative of any systemic problems in our commercial business portfolio. Approximately 70%, or $10.9 million, of the remaining $15.6 million in gross chargeoffs during the first quarter of 2008 were related to three residential construction loans and one land loan.
Total nonperforming assets also increased to $74.5 million, or 0.63% of total assets at March 31, 2008, compared with $67.5 million, or 0.57% of total assets, at December 31, 2007. The increase in nonperforming assets is primarily due to the foreclosure of five properties during the first quarter of 2008, consisting of three residential construction projects with an aggregate carrying value of $12.2 million and two single family homes with a combined carrying value of $1.1 million. We continue to vigilantly and systematically monitor various sectors of our loan portfolio for potential weaknesses, focusing particularly on the residential construction portfolio. We have also taken additional measures to address weaknesses in our portfolio of land loans located in the Inland Empire, a region we serve that has been especially hard hit by the downturn in the real estate market.
We are proactively and aggressively dealing with asset quality issues posed by disruptions in the credit and housing markets, recording $55.0 million in loan loss provisions during first quarter of 2008. This additional provision increased the allowance for loan losses to $117.1 million at March 31, 2008, or 1.32% of outstanding total loans. This compares to $88.4 million, or 1.00% of outstanding total loans at December 31, 2007. We believe we are taking the appropriate measures to address asset quality challenges and to strengthen our balance sheet during this challenging period. We also continue to believe that our overall asset quality is sound.
Despite the substantial increase in loss provisions recorded during the first quarter of 2008, we reported positive earnings during the period with net income amounting to $5.0 million, or $0.08 per
23
basic and diluted share, for the first quarter of 2008. This compares with $42.1 million, or $0.69 per basic share and $0.68 per diluted share, reported during the first quarter of 2007. The annualized return on average assets during the first quarter of 2008 was 0.17%, compared with 1.57% for the same quarter in 2007. The annualized return on average equity was 1.74% during the first quarter of 2008, compared to 16.48% during the same period in 2007. Despite our lackluster financial performance during the first quarter of 2008, the Company remains safe, secure and financially sound. Our core profitability remains strong as evidenced by our pretax income before loss provisions exceeding the $60.0 million mark for the eighth consecutive quarter.
Net interest income increased marginally to $99.6 million during the quarter ended March 31, 2008, compared with $98.6 million during the same quarter in 2007. Our net interest margin decreased 32 basis points to 3.63% during the first quarter of 2008. This compares with 3.95% during the same period in 2007 and 3.91% during the fourth quarter 2007. Relative to both the first and fourth quarters of 2007, our net interest margin during the quarter ended March 31, 2008 was adversely impacted by the sharp decline in interest rates prompted by several recent consecutive Federal Reserve rate cuts and continued market competition in loan and deposit pricing. We anticipate net interest margin pressures to continue throughout the remainder of 2008 and we estimate our net margin to be in the range of 3.40% to 3.50% for the full year of 2008.
Total noninterest income increased 27% to $15.9 million during the first quarter of 2008, compared with $12.5 million for the corresponding quarter in 2007. This increase is attributable primarily to higher net gain on sales of investment securities. To a lesser degree, higher branch-related fee income, higher net gain on sales of loans, and higher other operating income also contributed to the rise in noninterest income during the first quarter of 2008. These increases were partially offset by lower net gain on sales of other real estate owned (OREO) properties. During the first quarter of 2007, we recorded a $1.3 million gain from the sale of an industrial OREO property located in Northern California. There were no sales of OREO properties during the first quarter of 2008.
Total noninterest expense increased 25% to $52.9 million during the first quarter of 2008, compared with $42.3 million for the same period in 2007. This increase is primarily driven by increases in compensation and employee benefits, occupancy and equipment expenses, and other operating expenses. The increases in these expense categories can be attributed to the acquisition of DCB which was consummated during the third quarter of 2007, the addition of operational and administrative personnel throughout the previous year, and the opening of new branch locations and administrative offices to accommodate our continued growth. Further contributing to the increase in noninterest expenses during the first quarter of 2008 is an increase in amortization and impairment writedowns on our core deposit intangibles, higher amortization expense on our investments in affordable housing partnerships, and higher deposit insurance premiums and regulatory assessments. Our efficiency ratio, which represents noninterest expense (excluding the amortization of intangibles and investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income, increased to 41.93% during the first quarter of 2008 compared with 35.57% for the same period in 2007. Despite the increase in our operating expense levels, our overall efficiency is still substantially better than both our direct peers and the overall banking industry. We currently anticipate noninterest expense for the remainder of 2008 to decrease moderately from first quarter 2008 levels as we continue to carefully monitor all expenditures.
In conjunction with our ongoing efforts to reduce leveraging in our balance sheet, we sold a total of $158.1 million in loans, primarily from our commercial real estate portfolio, during the first quarter of 2008. We recorded approximately $796 thousand in mortgage servicing assets as a result of these loan sales as the Bank continues to service the underlying loans. In light of the current challenges facing the
24
entire financial services industry, reducing our loan to deposit ratio to 100% will be a major focus for the Company during 2008. We plan to achieve this goal by selling loans if terms are attractive, continuing to grow deposits, and using excess available funds to pay down borrowings.
Total consolidated assets at March 31, 2008 decreased 1% to $11.76 billion, compared with $11.85 billion at December 31, 2007. The primary driver of this decrease was a 7%, or $138.9 million, decline in available-for-sale investment securities at March 31, 2008. Also during the first quarter of 2008, we terminated a resale agreement amounting to $100.0 million prior to the stated termination date of January 5, 2017. In conjunction with the early termination of this agreement, we received $1.0 million from the counterparty.
Total average assets increased 10% to $11.79 billion during the first quarter of 2008, compared to $10.76 billion for the same quarter in 2007, due primarily to growth in average loans and available-for-sale securities. Total average loans grew 10% to $8.96 billion during the quarter ended March 31, 2008, with double-digit increases in all major loan sectors, except for multifamily real estate loans due to $620.3 million in multifamily loan securitizations since the first quarter of 2007. Total average investment securities increased 12% to $1.84 billion during the quarter ended March 31, 2008 primarily due to $784.4 million in both single family and multifamily loan securitizations since the first quarter of 2007. Total average deposits rose 3% during the first quarter of 2008 to $7.33 billion, compared to $7.09 billion for the same quarter in 2007. Except for money market deposits and time deposits less than $100 thousand, all deposit categories grew during the first quarter of 2008, with the largest dollar impact coming from time deposits $100 thousand or greater and noninterest bearing demand deposits.
We continue to be well-capitalized under all regulatory guidelines with a Tier 1 risk-based capital ratio of 8.78%, a total risk-based capital ratio of 10.59%, and a Tier 1 leverage ratio of 8.58% at March 31, 2008. In anticipation of further disruptions in the financial markets and further declines in housing prices, we raised $200.0 million in additional capital in April 2008 through the sale of convertible preferred stock and received approximately $194.5 million in net proceeds after deducting underwriting discounts, commissions and offering expenses. Dividends will be payable quarterly on a non-cumulative basis commencing on August 1, 2008 at a per annum rate of 8% on the liquidation preference of $1,000 per share. 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 Companys common stock. 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 Companys common stock at the then applicable conversion rate. We believe the additional capital infusion will position the Company for stronger growth as the economy strengthens and it will bring the Banks total risk-based capital ratio in excess of 12%, well above the regulatory requirement of 10% for well-capitalized banks.
Results of Operations
We reported first quarter 2008 net income of $5.0 million, or $0.08 per basic and diluted share, compared with $42.1 million, or $0.69 per basic share and $0.68 per diluted share, reported during the first quarter of 2007. The 88% decrease in net income is primarily attributable to the $55.0 million in provision for loan losses recorded during the first quarter of 2008. In comparison, no provisions for loan losses were recorded during the same period in 2007. Our annualized return on average total assets decreased to 0.17% for the quarter ended March 31, 2008, from 1.57% for the same period in 2007. The annualized return on average stockholders equity decreased to 1.74% for the first quarter of 2008, compared with 16.48% for the first quarter of 2007.
25
Components of Net Income
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
|
|
(In millions) |
|
||||
Net interest income |
|
$ |
99.6 |
|
$ |
98.6 |
|
Provision for loan losses |
|
(55.0 |
) |
|
|
||
Noninterest income |
|
15.9 |
|
12.5 |
|
||
Noninterest expense |
|
(52.9 |
) |
(42.3 |
) |
||
Provision for income taxes |
|
(2.6 |
) |
(26.7 |
) |
||
Net income |
|
$ |
5.0 |
|
$ |
42.1 |
|
|
|
|
|
|
|
||
Annualized return on average total assets |
|
0.17 |
% |
1.57 |
% |
||
Annualized return on average stockholders equity |
|
1.74 |
% |
16.48 |
% |
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income for the first quarter of 2008 totaled $99.6 million, a 1% increase over net interest income of $98.6 million for the same period in 2007.
Although both total interest and dividend income and total interest expense remained relatively flat during the quarter ended March 31, 2008 relative to the same period in 2007, net interest margin, defined as taxable equivalent net interest income divided by average earning assets, decreased 32 basis points to 3.63% during the first quarter of 2008, compared with 3.95% during the first quarter of 2007. The decline in the net interest margin reflects the 300 basis point decrease in the federal funds rate since August 2007 as well as sustained pricing competition in the deposit market.
The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the three months ended March 31, 2008 and 2007:
26
|
|
Three Months Ended March 31, |
|
||||||||||||||
|
|
2008 |
|
2007 |
|
||||||||||||
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
||||
|
|
Average |
|
|
|
Yield/ |
|
Average |
|
|
|
Yield/ |
|
||||
|
|
Volume |
|
Interest |
|
Rate (1) |
|
Volume |
|
Interest |
|
Rate (1) |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments (2) |
|
$ |
76,540 |
|
$ |
538 |
|
2.82 |
% |
$ |
7,710 |
|
$ |
100 |
|
5.26 |
% |
Securities purchased under resale agreements (3) |
|
64,286 |
|
2,553 |
|
15.93 |
% |
195,574 |
|
3,786 |
|
7.85 |
% |
||||
Investment securities available-for-sale (4) (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
1,771,601 |
|
26,004 |
|
5.89 |
% |
1,640,374 |
|
22,779 |
|
5.63 |
% |
||||
Tax-exempt (6) |
|
67,479 |
|
1,441 |
|
8.54 |
% |
8,815 |
|
165 |
|
7.49 |
% |
||||
Loans receivable (4) (7) |
|
8,955,257 |
|
155,434 |
|
6.96 |
% |
8,177,378 |
|
158,163 |
|
7.84 |
% |
||||
FHLB and FRB stock |
|
115,646 |
|
1,609 |
|
5.58 |
% |
86,449 |
|
1,228 |
|
5.76 |
% |
||||
Total interest-earning assets |
|
11,050,809 |
|
187,579 |
|
6.81 |
% |
10,116,300 |
|
186,221 |
|
7.47 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
150,469 |
|
|
|
|
|
147,486 |
|
|
|
|
|
||||
Allowance for loan losses |
|
(90,086 |
) |
|
|
|
|
(78,190 |
) |
|
|
|
|
||||
Other assets |
|
677,699 |
|
|
|
|
|
573,438 |
|
|
|
|
|
||||
Total assets |
|
$ |
11,788,891 |
|
|
|
|
|
$ |
10,759,034 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Checking accounts |
|
$ |
437,804 |
|
$ |
1,367 |
|
1.25 |
% |
$ |
415,759 |
|
$ |
1,722 |
|
1.68 |
% |
Money market accounts |
|
1,094,698 |
|
8,464 |
|
3.10 |
% |
1,315,539 |
|
13,575 |
|
4.18 |
% |
||||
Savings deposits |
|
471,437 |
|
1,454 |
|
1.24 |
% |
364,592 |
|
624 |
|
0.69 |
% |
||||
Time deposits less than $100,000 |
|
938,282 |
|
8,841 |
|
3.78 |
% |
991,517 |
|
9,551 |
|
3.91 |
% |
||||
Time deposits $100,000 or greater |
|
3,027,580 |
|
32,127 |
|
4.26 |
% |
2,761,135 |
|
33,490 |
|
4.92 |
% |
||||
Fed funds purchased |
|
165,686 |
|
1,378 |
|
3.34 |
% |
148,185 |
|
1,970 |
|
5.39 |
% |
||||
FHLB Advances |
|
1,747,313 |
|
19,682 |
|
4.52 |
% |
1,193,231 |
|
14,866 |
|
5.05 |
% |
||||
Securities sold under repurchase agreements |
|
1,001,186 |
|
10,529 |
|
4.22 |
% |
975,000 |
|
8,394 |
|
3.49 |
% |
||||
Long-term debt |
|
235,570 |
|
3,723 |
|
6.34 |
% |
184,481 |
|
3,382 |
|
7.43 |
% |
||||
Total interest-bearing liabilities |
|
9,119,556 |
|
87,565 |
|
3.85 |
% |
8,349,439 |
|
87,574 |
|
4.25 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demand deposits |
|
1,359,837 |
|
|
|
|
|
1,244,697 |
|
|
|
|
|
||||
Other liabilities |
|
152,338 |
|
|
|
|
|
143,193 |
|
|
|
|
|
||||
Stockholders equity |
|
1,157,160 |
|
|
|
|
|
1,021,705 |
|
|
|
|
|
||||
Total liabilities and stockholders equity |
|
$ |
11,788,891 |
|
|
|
|
|
$ |
10,759,034 |
|
|
|
|
|
||
Interest rate spread |
|
|
|
|
|
2.96 |
% |
|
|
|
|
3.22 |
% |
||||
Net interest income and net margin (6) |
|
|
|
$ |
100,014 |
|
3.63 |
% |
|
|
$ |
98,647 |
|
3.95 |
% |
(1) Annualized.
(2) Includes short-term securities purchased under resale agreements.
(3) The terms for the purchase of securities under resale agreements range from ten to fifteen years.
(4) Includes amortization of premium and accretion of discounts on investment securities and loans receivable totaling $(347) thousand and $(874) thousand for the three months ended March 31, 2008, and 2007, respectively. Also includes the amortization of deferred loan fees totaling $975 thousand and $1.5 million for the three months ended March 31, 2008 and 2007, respectively.
(5) Average balances exclude unrealized gains or losses on available for sales securities.
(6) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. As of March 31, 2008, the total interest income and average yield rate on an unadjusted basis for tax-exempt investment securities available-for-sale is $1.0 million and 6.20%, respectively. As of March 31, 2007, the total interest income and average yield rate on an unadjusted basis for tax-exempt investment securities available-for sale is $121 thousand and 5.49%, respectively.
(7) Average balances include nonperforming loans.
27
Analysis of Changes in Net Interest Income
Changes in net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the periods indicated. The total change for each category of interest-earning asset and interest-bearing liability is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). Nonaccrual loans are included in average loans used to compute this table.
|
|
Three Months Ended March 31, |
|
|||||||
|
|
2008 vs. 2007 |
|
|||||||
|
|
Total |
|
Changes Due to |
|
|||||
|
|
Change |
|
Volume (1) |
|
Rates (1) |
|
|||
|
|
(In thousands) |
|
|||||||
INTEREST-EARNING ASSETS: |
|
|
|
|
|
|
|
|||
Short-term investments |
|
$ |
438 |
|
$ |
504 |
|
$ |
(66 |
) |
Securities purchased under resale agreements |
|
(1,233 |
) |
(3,583 |
) |
2,350 |
|
|||
Investment securities available-for-sale |
|
|
|
|
|
|
|
|||
Taxable |
|
3,225 |
|
1,883 |
|
1,342 |
|
|||
Tax-exempt (2) |
|
1,276 |
|
1,250 |
|
26 |
|
|||
Loans receivable |
|
(2,729 |
) |
14,303 |
|
(17,032 |
) |
|||
FHLB and FRB stock |
|
381 |
|
602 |
|
(221 |
) |
|||
Total interest and dividend income |
|
$ |
1,358 |
|
$ |
14,959 |
|
$ |
(13,601 |
) |
|
|
|
|
|
|
|