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EAST WEST BANCORP INC - Quarter Report: 2009 September (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q
 

Mark One

 

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

 

For the quarterly period ended September 30, 2009

 

or

 

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

 

For the transition period from                 to                .

 

Commission file number 000-24939

 

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4703316

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

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

(Address of principal executive offices) (Zip Code)

 

(626) 768-6000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 91,732,640 shares of common stock as of October 31, 2009.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

4

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

4-7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8-39

 

 

 

 

 

Item 2.

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

40-79

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

79

 

 

 

 

 

Item 4.

Controls and Procedures

79-80

 

 

 

 

PART II - OTHER INFORMATION

81

 

 

 

 

Item 1.

Legal Proceedings

81

 

 

 

 

 

Item 1A.

Risk Factors

81-82

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

83

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

83

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

83

 

 

 

 

 

Item 5.

Other Information

83

 

 

 

 

 

Item 6.

Exhibits

83-84

 

 

 

 

SIGNATURE

85

 

2



Table of Contents

 

Forward-Looking Statements

 

Certain matters discussed in this Quarterly 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 and financial condition.  The Company’s actual results, performance, or achievements may differ significantly from the results, performance, or achievements expected or implied in such forward-looking statements.  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 critical accounting policies and judgments;

 

·                  changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies;

 

·                  changes in the equity and debt securities markets;

 

·                  changes in competitive pressures on financial institutions;

 

·                  effect of additional provision for loan losses;

 

·                  effect of any acquisitions we may make;

 

·                  effect of any goodwill impairment;

 

·                  fluctuations of our stock price;

 

·                  success and timing of our business strategies;

 

·                  impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity;

 

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

 

·                  political developments, wars or other hostilities that may disrupt or increase volatility in securities or otherwise affect economic conditions.

 

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2008 Form 10-K under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “RISK FACTORS” in this Form 10-Q.  The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

 

3



Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

132,569

 

$

144,486

 

Short-term investments

 

460,665

 

734,367

 

Interest-bearing deposits in other banks

 

320,860

 

228,441

 

Securities purchased under resale agreements

 

75,000

 

50,000

 

Investment securities held-to-maturity, at amortized cost (with fair value of $799,729 at September 30, 2009 and $123,105 at December 31, 2008)

 

781,331

 

122,317

 

Investment securities available-for-sale, at fair value (with amortized cost of $1,496,992 at September 30, 2009 and $2,189,570 at December 31, 2008)

 

1,457,023

 

2,040,194

 

Loans receivable, net of allowance for loan losses of $230,650 at September 30, 2009 and $178,027 at December 31, 2008

 

8,156,838

 

8,069,377

 

Investment in Federal Home Loan Bank stock, at cost

 

86,729

 

86,729

 

Investment in Federal Reserve Bank stock, at cost

 

36,785

 

27,589

 

Other real estate owned, net

 

24,185

 

38,302

 

Investment in affordable housing partnerships

 

60,546

 

48,141

 

Premises and equipment, net

 

55,011

 

60,184

 

Due from customers on acceptances

 

5,414

 

5,538

 

Premiums on deposits acquired, net

 

17,904

 

21,190

 

Goodwill

 

337,438

 

337,438

 

Cash surrender value of life insurance policies

 

97,511

 

94,745

 

Deferred tax assets

 

156,047

 

184,588

 

Accrued interest receivable and other assets

 

224,074

 

129,190

 

TOTAL

 

$

12,485,930

 

$

12,422,816

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Customer deposit accounts:

 

 

 

 

 

Noninterest-bearing

 

$

1,397,217

 

$

1,292,997

 

Interest-bearing

 

7,271,340

 

6,848,962

 

Total customer deposits

 

8,668,557

 

8,141,959

 

Federal funds purchased

 

3,022

 

28,022

 

Federal Home Loan Bank advances

 

923,216

 

1,353,307

 

Securities sold under repurchase agreements

 

1,019,450

 

998,430

 

Notes payable

 

7,111

 

16,506

 

Bank acceptances outstanding

 

5,414

 

5,538

 

Long-term debt

 

235,570

 

235,570

 

Accrued interest payable, accrued expenses and other liabilities

 

101,808

 

92,718

 

Total liabilities

 

10,964,148

 

10,872,050

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 8)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative convertible, 200,000 shares issued and 85,741 shares outstanding in 2009 and 196,505 shares outstanding in 2008; Series B, cumulative, 306,546 shares issued and outstanding in 2009 and 2008.

 

367,922

 

472,311

 

Common stock, $0.001 par value, 200,000,000 shares authorized; 98,442,732 and 70,377,989 shares issued in 2009 and 2008, respectively; 91,693,532 and 63,745,624 shares outstanding in 2009 and 2008, respectively.

 

98

 

70

 

Additional paid in capital

 

929,558

 

695,521

 

Retained earnings

 

351,721

 

572,172

 

Treasury stock, at cost — 6,749,200 shares in 2009 and 6,632,365 shares in 2008

 

(104,338

)

(102,817

)

Accumulated other comprehensive loss, net of tax

 

(23,179

)

(86,491

)

Total stockholders’ equity

 

1,521,782

 

1,550,766

 

TOTAL

 

$

12,485,930

 

$

12,422,816

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

114,512

 

$

131,682

 

$

336,997

 

$

425,113

 

Investment securities held-to-maturity

 

12,060

 

 

31,077

 

 

Investment securities available-for-sale

 

16,425

 

23,141

 

57,101

 

75,923

 

Securities purchased under resale agreements

 

2,153

 

1,276

 

4,695

 

5,533

 

Interest-bearing deposits in other banks

 

1,454

 

5

 

4,678

 

14

 

Short-term investments

 

402

 

1,953

 

2,663

 

3,093

 

Investment in Federal Reserve Bank stock

 

552

 

415

 

1,604

 

1,122

 

Investment in Federal Home Loan Bank stock

 

366

 

1,390

 

365

 

4,153

 

Total interest and dividend income

 

147,924

 

159,862

 

439,180

 

514,951

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Customer deposit accounts

 

26,970

 

40,757

 

94,933

 

136,546

 

Federal Home Loan Bank advances

 

11,172

 

17,140

 

38,191

 

54,363

 

Securities sold under repurchase agreements

 

12,140

 

12,063

 

36,016

 

33,881

 

Long-term debt

 

1,760

 

2,957

 

6,211

 

9,675

 

Federal funds purchased

 

2

 

430

 

8

 

2,176

 

Total interest expense

 

52,044

 

73,347

 

175,359

 

236,641

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES

 

95,880

 

86,515

 

263,821

 

278,310

 

PROVISION FOR LOAN LOSSES

 

159,244

 

43,000

 

388,666

 

183,000

 

NET INTEREST (LOSS) INCOME AFTER PROVISION FOR LOAN LOSSES

 

(63,364

)

43,515

 

(124,845

)

95,310

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST (LOSS) INCOME

 

 

 

 

 

 

 

 

 

Impairment loss on investment securities

 

(45,199

)

(53,567

)

(82,846

)

(63,512

)

Less: Noncredit-related impairment loss recorded in other comprehensive income

 

20,950

 

 

20,950

 

 

Net impairment loss on investment securities recognized in earnings

 

(24,249

)

(53,567

)

(61,896

)

(63,512

)

Branch fees

 

4,679

 

4,285

 

14,463

 

12,725

 

Net gain on sale of investment securities

 

2,177

 

 

7,378

 

7,767

 

Letters of credit fees and commissions

 

1,984

 

2,319

 

5,768

 

7,472

 

Ancillary loan fees

 

1,227

 

1,783

 

4,812

 

3,908

 

Income from life insurance policies

 

1,090

 

1,029

 

3,269

 

3,081

 

Net gain on sale of loans

 

8

 

144

 

19

 

2,272

 

Other operating income

 

1,204

 

457

 

1,902

 

2,088

 

Total noninterest (loss) income

 

(11,880

)

(43,550

)

(24,285

)

(24,199

)

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

15,875

 

17,520

 

49,492

 

66,578

 

Occupancy and equipment expense

 

6,262

 

6,817

 

19,950

 

20,364

 

Deposit insurance premiums and regulatory assessments

 

6,057

 

1,678

 

18,950

 

5,191

 

Other real estate owned expense

 

767

 

2,123

 

16,480

 

3,520

 

Loan-related expense

 

2,197

 

2,361

 

5,274

 

5,967

 

Amortization of investments in affordable housing partnerships

 

1,709

 

1,886

 

5,121

 

5,521

 

Legal expense

 

1,323

 

855

 

4,856

 

3,890

 

Data processing

 

1,079

 

1,055

 

3,362

 

3,386

 

Amortization and impairment loss on premiums on deposits acquired

 

1,069

 

1,581

 

3,286

 

6,145

 

Deposit-related expenses

 

948

 

1,231

 

2,863

 

3,416

 

Impairment loss on goodwill

 

 

272

 

 

858

 

Other operating expenses

 

8,778

 

11,147

 

25,748

 

32,235

 

Total noninterest expense

 

46,064

 

48,526

 

155,382

 

157,071

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE BENEFIT FROM INCOME TAXES

 

(121,308

)

(48,561

)

(304,512

)

(85,960

)

BENEFIT FROM INCOME TAXES

 

(52,777

)

(17,355

)

(126,790

)

(33,911

)

Net loss before extraordinary item

 

(68,531

)

(31,206

)

(177,722

)

(52,049

)

Impact of desecuritization (Note 7)

 

 

 

5,366

 

 

NET LOSS AFTER EXTRAORDINARY ITEM

 

(68,531

)

(31,206

)

(183,088

)

(52,049

)

PREFERRED STOCK DIVIDENDS, INDUCEMENT, AND AMORTIZATION OF PREFERRED STOCK DISCOUNT

 

(10,620

)

(4,089

)

(42,986

)

(4,089

)

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS

 

$

(79,151

)

$

(35,295

)

$

(226,074

)

$

(56,138

)

 

 

 

 

 

 

 

 

 

 

LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS

 

 

 

 

 

 

 

 

 

BASIC

 

$

(0.91

)

$

(0.56

)

$

(3.19

)

$

(0.90

)

DILUTED

 

$

(0.91

)

$

(0.56

)

$

(3.19

)

$

(0.90

)

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.01

 

$

0.10

 

$

0.04

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

BASIC

 

86,538

 

62,675

 

70,967

 

62,586

 

DILUTED

 

86,538

 

62,675

 

70,967

 

62,586

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Paid In

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Capital

 

 

 

Additional

 

 

 

 

 

Comprehensive

 

 

 

Total

 

 

 

Preferred

 

Preferred

 

Common

 

Paid In

 

Retained

 

Treasury

 

Loss,

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Stock

 

Stock

 

Capital

 

Earnings

 

Stock

 

Net of Tax

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 1, 2008

 

$

 

 

 

$

70

 

$

652,297

 

$

657,183

 

$

(98,925

)

$

(38,802

)

 

 

$

1,171,823

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

(52,049

)

 

 

 

 

$

(52,049

)

(52,049

)

Net unrealized loss on investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,797

)

(33,797

)

(33,797

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(85,846

)

 

 

Cumulative effect of change in accounting principle pursuant to adoption of ASC 715-60 (previously EITF 06-4)

 

 

 

 

 

 

 

 

 

(479

)

 

 

 

 

 

 

(479

)

Stock compensation costs

 

 

 

 

 

 

 

4,515

 

 

 

 

 

 

 

 

 

4,515

 

Tax provision from stock plans

 

 

 

 

 

 

 

(238

)

 

 

 

 

 

 

 

 

(238

)

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

 

 

 

194,068

 

 

 

 

 

 

 

 

 

 

 

 

 

194,068

 

Conversion of 2,600 shares of Preferred Stock

 

 

 

(2,523

)

 

 

 

 

 

 

 

 

 

 

 

 

(2,523

)

Issuance of 168,983 shares of Common Stock from converted 2,600 shares of Preferred Stock

 

 

 

 

 

 

 

2,523

 

 

 

 

 

 

 

 

 

2,523

 

Issuance of 400,834 shares pursuant to various stock plans and agreements

 

 

 

 

 

 

 

1,623

 

 

 

 

 

 

 

 

 

1,623

 

Issuance of 18,361 shares pursuant to Director retainer fee

 

 

 

 

 

 

 

219

 

 

 

 

 

 

 

 

 

219

 

Cancellation of 102,058 shares due to forfeitures of issued restricted stock

 

 

 

 

 

 

 

3,238

 

 

 

(3,238

)

 

 

 

 

 

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 preferred stock

 

 

 

 

 

 

 

 

 

(4,089

)

 

 

 

 

 

 

(4,089

)

Dividends paid on common stock

 

 

 

 

 

 

 

 

 

(19,005

)

 

 

 

 

 

 

(19,005

)

BALANCE, SEPTEMBER 30, 2008

 

$

 

$

191,545

 

$

70

 

$

666,475

 

$

581,561

 

$

(102,171

)

$

(72,599

)

 

 

$

1,264,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, DECEMBER 31, 2008

 

$

 

$

472,311

 

$

70

 

$

695,521

 

$

572,172

 

$

(102,817

)

$

(86,491

)

 

 

$

1,550,766

 

Cumulative effect adjustment for reclassification of the previously recognized noncredit-related impairment loss on investment securities

 

 

 

 

 

 

 

 

 

8,110

 

 

 

(8,110

)

 

 

 

BALANCE, JANUARY 1, 2009

 

$

 

$

472,311

 

$

70

 

$

695,521

 

$

580,282

 

$

(102,817

)

$

(94,601

)

 

 

$

1,550,766

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss after extraordinary item for the year

 

 

 

 

 

 

 

 

 

(183,088

)

 

 

 

 

$

(183,088

)

(183,088

)

Net unrealized gain on investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

53,021

 

53,021

 

53,021

 

Net unrealized loss as a result of desecuritization

 

 

 

 

 

 

 

 

 

 

 

 

 

30,551

 

30,551

 

30,551

 

Noncredit-related impairment loss on investment securities recorded in the current year

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,150

)

(12,150

)

(12,150

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(111,666

)

 

 

Stock compensation costs

 

 

 

 

 

 

 

4,370

 

 

 

 

 

 

 

 

 

4,370

 

Tax provision from stock plans

 

 

 

 

 

 

 

(498

)

 

 

 

 

 

 

 

 

(498

)

Preferred stock issuance and conversion cost

 

 

 

(180

)

 

 

 

 

 

 

 

 

 

 

 

 

(180

)

Common stock issuance cost

 

 

 

 

 

 

 

(5,535

)

 

 

 

 

 

 

 

 

(5,535

)

Induced conversion of 110,764 shares of Preferred Stock

 

 

 

(107,474

)

 

 

 

 

 

 

 

 

 

 

 

 

(107,474

)

Issuance of 9,968,760 shares of Common Stock from converted 110,764 shares of Preferred Stock

 

 

 

 

 

10

 

107,464

 

 

 

 

 

 

 

 

 

107,474

 

Issuance of 5,000,000 shares Common Stock from Private Placement

 

 

 

 

 

5

 

27,495

 

 

 

 

 

 

 

 

 

27,500

 

Issuance of 12,650,000 shares Common Stock from Public Offering

 

 

 

 

 

12

 

80,316

 

 

 

 

 

 

 

 

 

80,328

 

Issuance of 423,597 shares pursuant to various stock plans and agreements

 

 

 

 

 

1

 

399

 

 

 

 

 

 

 

 

 

400

 

Issuance of 22,386 shares pursuant to Director retainer fee

 

 

 

 

 

 

 

219

 

 

 

 

 

 

 

 

 

219

 

Cancellation of 60,578 shares due to forfeitures of issued restricted stock

 

 

 

 

 

 

 

1,467

 

 

 

(1,467

)

 

 

 

 

 

Purchase of 11,166 shares of treasury stock due to the vesting of restricted stock

 

 

 

 

 

 

 

 

 

 

 

(54

)

 

 

 

 

(54

)

Amortization of Series B preferred stock discount

 

 

 

3,265

 

 

 

 

 

(3,265

)

 

 

 

 

 

 

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

(21,381

)

 

 

 

 

 

 

(21,381

)

Common stock dividends

 

 

 

 

 

 

 

 

 

(2,487

)

 

 

 

 

 

 

(2,487

)

Inducement of preferred stock conversion

 

 

 

 

 

 

 

18,340

 

(18,340

)

 

 

 

 

 

 

 

BALANCE, SEPTEMBER 30, 2009

 

$

 

$

367,922

 

$

98

 

$

929,558

 

$

351,721

 

$

(104,338

)

$

(23,179

)

 

 

$

1,521,782

 

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

 

 

(In thousands)

 

Disclosure of reclassification amounts:

 

 

 

 

 

Unrealized holding gain (loss) on securities arising during the period, net of tax (expense) benefit of $ (37,620) in 2009 and $ 47,887 in 2008

 

$

51,952

 

$

(66,129

)

Less: Reclassification adjustment for gain included in net loss, net of tax expense of $(22,898) in 2009 and $(23,413) in 2008

 

31,620

 

32,332

 

Net unrealized gain (loss) on securities, net of tax (expense) benefit of $ (60,518) in 2009 and $ 24,474 in 2008

 

$

83,572

 

$

(33,797

)

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net loss after extraordinary item

 

$

(183,088

)

$

(52,049

)

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

 

 

 

 

 

Depreciation and amortization

 

16,847

 

12,754

 

Impairment loss on goodwill

 

 

858

 

Credit related impairment loss on investment securities available-for-sale

 

61,896

 

63,512

 

Impairment loss on other equity investment

 

581

 

 

Stock compensation costs

 

4,370

 

4,515

 

Deferred tax benefit

 

(16,886

)

(78,929

)

Provision for loan losses and impact of desecuritization

 

397,929

 

183,000

 

Provision for loan loss on other real estate owned

 

17,670

 

2,121

 

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

 

(2,827

)

(8,570

)

Federal Home Loan Bank stock dividends

 

 

(3,777

)

Originations of loans held for sale

 

(33,248

)

(42,100

)

Proceeds from sale of loans held for sale

 

33,318

 

42,458

 

Tax provision from stock plans

 

498

 

238

 

Net change in accrued interest receivable and other assets

 

(11,050

)

25,755

 

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

 

(97,694

)

(5,485

)

Total adjustments

 

371,404

 

196,350

 

Net cash provided by operating activities

 

188,316

 

144,301

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Net decrease in loans receivable

 

318,232

 

265,375

 

Purchases of:

 

 

 

 

 

Interest-bearing deposits in other banks

 

(417,909

)

(495

)

Securities purchased under resale agreements

 

(50,000

)

 

Investment securities held-to-maturity

 

(697,768

)

 

Investment securities available-for-sale

 

(1,314,263

)

(1,657,219

)

Loans receivable

 

(350,000

)

 

Federal Home Loan Bank stock

 

 

(9,400

)

Federal Reserve Bank stock

 

(9,196

)

(5,904

)

Investments in affordable housing partnerships

 

(22

)

 

Premises and equipment

 

(433

)

(3,173

)

Proceeds from:

 

 

 

 

 

Sale of investment securities

 

336,710

 

376,148

 

Sale/call of securities purchased under resale agreements

 

25,000

 

100,000

 

Sale of loans receivable

 

105,227

 

148,254

 

Sale of other real estate owned

 

51,807

 

28,084

 

Sale of premises and equipment

 

8

 

85

 

Maturity of interest-bearing deposits in other banks

 

325,494

 

 

Repayments, maturity and redemption of investment securities

 

1,040,828

 

1,011,854

 

Dividends/redemption of Federal Home Loan Bank stock

 

182

 

12,000

 

Acquisitions, net of cash paid

 

 

(1,158

)

Net cash (used in) provided by investing activities

 

(636,103

)

264,451

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net proceeds from (payment for):

 

 

 

 

 

Deposits

 

526,598

 

257,435

 

Issuance of short-term borrowings

 

(3,980

)

(544,320

)

Proceeds from:

 

 

 

 

 

Issuance of long-term borrowings

 

 

250,000

 

Issuance of preferred stock

 

 

200,000

 

Issuance of common stock from public offering

 

80,328

 

 

Issuance of common stock from private placement

 

27,500

 

 

Issuance of common stock pursuant to various stock plans and agreements

 

400

 

1,623

 

Payment for:

 

 

 

 

 

Repayment of long-term borrowings

 

(430,000

)

(170,000

)

Repayment of notes payable on affordable housing investments

 

(9,395

)

(7,091

)

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

 

(54

)

(8

)

Issuance and conversion costs of preferred stock & common stock

 

(5,715

)

(5,932

)

Cash dividends on preferred stock

 

(20,530

)

(4,089

)

Cash dividends on common stock

 

(2,486

)

(19,005

)

Tax provision from stock plans

 

(498

)

(238

)

Net cash provided by (used in) financing activities

 

162,168

 

(41,625

)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(285,619

)

367,127

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

878,853

 

160,347

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

593,234

 

$

527,474

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

184,054

 

231,717

 

Income tax payments, net of refunds

 

(13,126

)

39,743

 

Noncash investing and financing activities:

 

 

 

 

 

Desecuritization of loans receivable

 

635,614

 

 

Loans to facilitate sales of loans receivable

 

130,509

 

52,500

 

Transfers to real estate owned/affordable housing partnership

 

116,124

 

46,614

 

Loans to facilitate sales of real estate owned

 

38,605

 

 

Issuance of common stock in lieu of Board of Director retainer fees

 

219

 

219

 

Afforadable housing investment financed through notes payable

 

 

3,000

 

Purchase accounting adjustment in connection with acquisition

 

 

2,298

 

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For Nine Months Ended September 30, 2009 and 2008

(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 Accounting Standards Codification (“ASC”) 810, (previously FASB Interpretation No. 46(R), 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 nine months ended September 30, 2009 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.  Events subsequent to the condensed consolidated balance sheet date have been evaluated through November 3, 2009, the date the financial statements are available to be issued, for inclusion in the accompanying financial statements.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Certain prior year balances have been reclassified to conform to current year presentation.

 

2.              SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Standards

 

In December 2007, the FASB issued ASC 805 (previously SFAS No. 141(R), Business Combinations).  ASC 805 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.  ASC 805 is effective for business combinations occurring on or after the beginning of the fiscal year beginning on or after December 15, 2008.  ASC 805, effective for the Company on January 1, 2009, applies to all transactions or other events in which the Company obtains control of one or more businesses.  Management will assess each transaction on a case-by-case basis as they occur.

 

In December 2007, the FASB issued ASC 810-10 (previously SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51).  This Statement requires

 

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that noncontrolling or minority interests in subsidiaries be presented in the consolidated statement of financial position within equity, but separate from the parents’ equity, and that the amount of the consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income.  ASC 810-10 is effective for fiscal years beginning on or after December 15, 2008.  The adoption of this guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

In February 2008, the FASB issued ASC 860-10-35-2 and ASC 860-10-40-42 (previously FASB Staff Position 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.  ASC 860-10-35-2 and ASC 860-10-40-42 provide 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 guidance 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 adoption of this guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

In February 2008, the FASB issued ASC 820-10 (previously 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.  The adoption of this additional guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

In March 2008, the FASB issued ASC 815-10-50 (previously SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities).  ASC 815-10-50 requires specific disclosures regarding the location and amounts of derivative instruments in the financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the financial position, financial performance, and cash flows of the Company.  It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged.  The adoption of this guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

In April 2008, the FASB directed the FASB Staff to issue ASC 350-30-35-1 (previously FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets).  ASC 350-30-35-1 amends the factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under ASC 350 (previously SFAS 142, “Goodwill and Other Intangible Assets”).  ASC 350-30-35-1 is intended to improve the consistency between the useful life of a recognized intangible asset under ASC 350 and the period of expected cash flows used to measure the fair value of the asset under ASC 805 and other GAAP.  ASC 350-30-35-1  is effective for fiscal years beginning after December 15, 2008.  Earlier application is not permitted.  The adoption of this guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

In June 2008, the FASB issued ASC 260-10-45 (previously FSP EITF 03-06-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities).  ASC 260-10-45 requires all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends to be considered participating securities and requires entities to apply the two-class method of computing basic and diluted earnings per share.  This guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  Early adoption

 

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is prohibited.  The adoption of this guidance did not have a material effect on the Company’s basic and diluted earnings per share calculation.

 

In December 2008, the FASB issued ASC-10-50 (previously FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) About Transfers of Financial Assets and Interests in Variable Interest Entities”).  This disclosure-only ASC improves the transparency of transfers of financial assets and an enterprise’s involvement with variable interest entities (VIEs), including qualifying special-purpose entities (QSPEs).  The disclosures required by this ASC are intended to provide greater transparency to financial statement users about a transferor’s continuing involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying SPEs.  This ASC shall be effective for the first reporting period ending after December 15, 2008, with earlier application encouraged, and shall be applied for each annual and interim reporting period thereafter.  The disclosure requirements related to the adoption of this guidance are presented in Note 3 and Note 8 of the Company’s condensed consolidated financial statements.

 

In January 2009, the FASB issued ASC 325-40 (previously FSP EITF 99-20-1), Amendments to the Impairment Guidance of EITF Issue No. 99-20, which revises the other-than-temporary-impairment (“OTTI”) guidance on beneficial interests in securitized financial assets that are within the scope of EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets).  ASC 325-40 amends Issue 99-20, to more closely align its OTTI guidance with ASC 320-10 (previously FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities), by (1) removing the notion of a “market participant” and (2) inserting a “probable” concept related to the estimation of a beneficial interest’s cash flows.  ASC 325-40 is effective prospectively for interim and annual periods ending after December 15, 2008.  Retrospective application of this ASC is prohibited.  The adoption of this guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

In April 2009, the FASB issued ASC 320-10-65 (previously FSP FAS 115-2 and FAS 124, Recognition and Presentation of Other-Than-Temporary Impairments), which makes changes to the timing of loss recognition and earnings for debt and similar investment securities classified as either “available-for-sale” or “held-to-maturity”.  The ASC provides that if an entity intends to sell an impaired debt security prior to recovery of its amortized cost basis, or if it is more likely than not that it will have to sell the security prior to recovery, then the full amount of the impairment is to be classified as other-than-temporary and recognized in earnings.  Otherwise, the portion of the impairment loss deemed to constitute a credit loss is considered an OTTI loss to be reported in earnings. The non-credit loss portion is recognized in other comprehensive income.  This ASC also requires entities to initially apply the provisions of the standard to the noncredit portion of previously recorded OTTI impaired securities, existing as of the date of initial adoption, by making a cumulative-effect adjustment from the opening balance of retained earnings to other comprehensive income in the period of adjustment.  Upon adoption of ASC 320-10-65, the Company reclassified the noncredit portion of previously recognized OTTI totaling $8.1 million, net of tax, from the opening balance of retained earnings to other comprehensive income.  Additionally, upon implementation of this ASC as of March 31, 2009, the Company recorded $200 thousand, on a pre-tax basis, of the credit portion of OTTI through earnings and $7.6 million, net of tax, of the non-credit portion of OTTI in other comprehensive income.

 

In April 2009, the FASB issued ASC 820-10-65 (previously FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly), which provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased.  ASC 820-10-65 also requires additional disclosures relating to fair value measurement inputs and valuation techniques, as well as providing disclosures for all debt and equity investment securities by major security types rather than by major security categories that should be

 

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based on the nature and risks of the security during both interim and annual periods.  The adoption of this ASC resulted in additional disclosures which are presented in Note 3 of the Company’s condensed consolidated financial statements.

 

In April 2009, the FASB issued ASC 820-10-50, (previously FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments), which increases the frequency of fair value disclosures from an annual basis only to a quarterly basis.  The guidance will require public entities to disclose in their interim financial statements the fair value of all financial instruments within the scope of ASC 825 (previously SFAS No. 107, Disclosures about Fair Value of Financial Instruments), as well as the methods and significant assumptions used to estimate the fair value of those instruments.  The ASC shall be effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity may early adopt this ASC only if it also elects to early adopt ASC 820-10-65 and ASC 320-10-65.  This ASC does not require disclosures for earlier periods presented for comparative periods at initial adoption.  In periods after initial adoption, this ASC requires comparative disclosures only for periods ending after the initial adoption.  The adoption of this ASC on June 30, 2009 resulted in additional disclosures which are presented in Note 3 of the Company’s condensed consolidated financial statements.

 

In May 2009, the FASB issued ASC 855, (previously SFAS No. 165, Subsequent Events).  ASC 855 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement preparation process.  Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date.  ASC 855 also requires entities to disclose the date through which subsequent events have been evaluated.  ASC 855 was effective for interim and annual reporting periods ending after June 15, 2009.  The adoption of this guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, Accounting for Transfers of Financial Assets, which amends Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets.  It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.  It is effective for financial statements issued for fiscal years beginning after November 15, 2009, and early adoption is prohibited.  The Company is currently evaluating the impact that this statement will have on its financial condition, results of operations, or cash flows.

 

In June 2009, the FASB issued ASC 810 (previously SFAS No. 167, Amendments to FASB Interpretation No. 46(R)), which is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.  It is effective for financial statements issued for fiscal years beginning after November 15, 2009, and early adoption is prohibited.  The Company does not expect the adoption of this guidance to have a material effect on its financial condition, results of operations, or cash flows.

 

In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“GAAP”) — a replacement of FASB Statement No. 162 (“Codification”)).  This Codification is the source of

 

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authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  All of the contents of the Codification carries the same level of authority, effectively superseding SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles.  In other words, the GAAP hierarchy has been modified to include only two levels of GAAP: authoritative and nonauthoritative.  The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented.  The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  In order to ease the transition to the Codification, the Company has provided the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

 

In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value, which provides guidance on measuring the fair value of liabilities under FASB ASC 820.  ASU 2009-05 reaffirms that fair value measurement of a liability assumes the transfer of a liability to a market participant as of the measurement date.  ASU 2009-05 is effective for the first interim reporting period after issuance.  The Company does not expect the adoption of this guidance to have a material effect on its financial condition, results of operations, or cash flows.

 

3.              FAIR VALUE

 

The Company adopted ASC 820 effective January 1, 2008, which  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 portfolio, equity swap agreements, derivatives payable, mortgage servicing assets, and impaired loans.

 

The Company adopted ASC 820-10 effective January 1, 2009, which provided for a one-year deferral of the implementation of ASC 820 for other nonfinanical assets and liabilities, effective for fiscal years beginning after November 15, 2008.  For the Company, this includes other real estate owned (“OREO”).

 

Upon adoption of ASC 820-10-65 effective March 31, 2009, the Company has provided additional disclosures relating to fair value measurement inputs and valuation techniques as well as providing disclosures for all debt and equity investment securities by major security types rather than by major security categories that should be based on the nature and risks of the security during both interim and annual periods.

 

Fair value is defined as 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:

 

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·                  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 debt and agency mortgage-backed securities, municipal securities, U.S. Government sponsored enterprise preferred stock securities, trust preferred securities, equity swap agreements, and OREO.

 

·                  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, pooled trust preferred securities, and derivatives payable.

 

In determining the appropriate hierarchy levels, the Company performs a detailed analysis of assets and liabilities that are subject to fair value disclosure.  The following table presents both financial and non-financial assets and liabilities that are measured at fair value on a recurring and non-recurring basis.  These assets and liabilities are reported on the consolidated balance sheets at their fair values as of September 30, 2009.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

 

 

 

Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of September 30, 2009

 

 

 

Fair Value
Measurements

September 30, 2009

 

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

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

 

 

(In Thousands)

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

2,215

 

$

2,215

 

$

 

$

 

U.S. Government agency securities and U.S. Government sponsored enterprise debt securities

 

476,735

 

 

476,735

 

 

U.S. Government agency securities and U.S. Government sponsored enterprise residential mortgage-backed securities

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

26,980

 

 

26,980

 

 

Residential mortgage-backed securities

 

772,374

 

 

772,374

 

 

Municipal securities

 

17,926

 

 

17,926

 

 

Other residential mortgage-backed securities

 

 

 

 

 

 

 

 

 

Investment grade

 

26,992

 

 

26,992

 

 

Non-investment grade

 

15,534

 

 

 

15,534

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

Investment grade

 

103,278

 

 

102,418

 

860

 

Non-investment grade

 

11,701

 

 

6,210

 

5,491

 

U.S. Government sponsored enterprise equity securities

 

3,288

 

 

3,288

 

 

Total investment securities available-for-sale

 

$

1,457,023

 

$

2,215

 

$

1,432,923

 

$

21,885

 

Equity swap agreements

 

$

13,728

 

 

 

$

13,728

 

 

 

Derivatives payable

 

(13,733

)

 

 

 

 

(13,733

)

 

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Table of Contents

 

 

 

Assets Measured at Fair Value on a Non-Recurring Basis for the Three Months Ended September 30, 2009

 

 

 

 

 

Fair Value
Measurements
September 30, 2009

 

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

 

Significant Other
Observable Inputs
(Level 2)

 

Significant Unobservable
Inputs
(Level 3)

 

Total Gains
(Losses)

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing Assets

 

$

9,060

 

$

 

$

 

$

9,060

 

$

(20

)

Impaired Loans

 

119,413

 

 

 

119,413

 

(54,541

)

OREO

 

16,092

 

 

16,092

 

 

(4,644

)

 

 

 

Assets Measured at Fair Value on a Non-Recurring Basis for the Nine Months Ended September 30, 2009

 

 

 

 

 

Fair Value
Measurements
September 30, 2009

 

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

 

Significant Other
Observable Inputs
(Level 2)

 

Significant Unobservable
Inputs
(Level 3)

 

Total Gains
(Losses)

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing Assets

 

$

9,060

 

$

 

$

 

$

9,060

 

$

660

 

Impaired Loans

 

140,756

 

 

 

140,756

 

(81,547

)

OREO

 

16,920

 

 

16,920

 

 

(6,792

)

 

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.  The following table provides a reconciliation of the beginning and ending balances for available-for-sale investment securities by major security type and for major asset and liability categories measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009:

 

 

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

Residential
Mortgage-Backed

 

Corporate Debt Securities

 

 

 

 

 

 

 

Securities

 

 

 

Non-

 

 

 

 

 

Total

 

Non-Investment
Grade

 

Investment
Grade

 

Investment
Grade

 

Derivatives
Payable

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, July 1, 2009

 

$

32,460

 

$

16,628

 

$

1,245

 

$

14,587

 

$

(13,323

)

Total gains or (losses) (1)

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

(24,164

)

1

 

5

 

(24,170

)

(410

)

Included in other comprehensive loss (unrealized) (2)

 

12,604

 

(1,095

)

(374

)

14,073

 

 

 

Purchases, issuances, sales, settlements (3)

 

985

 

 

(16

)

1,001

 

 

 

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

 

 

 

 

 

 

 

Ending balance, September 30, 2009

 

$

21,885

 

$

15,534

 

$

860

 

$

5,491

 

$

(13,733

)

Changes in unrealized losses included in earnings relating to assets and liabilities still held at September 30, 2009

 

$

(23,839

)

$

 

$

 

$

(24,249

)

$

410

 

 

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Investment Securities Available-for-Sale

 

 

 

 

 

 

 

Residential
Mortgage-Backed Securities

 

Corporate Debt Securities

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

Non-

 

 

 

 

 

 

 

 

 

Investment

 

Investment

 

Investment

 

Investment

 

Residual

 

Derivatives

 

 

 

Total

 

Grade

 

Grade

 

Grade

 

Grade

 

Securities

 

Payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, January 1, 2009

 

$624,351

 

$527,109

 

$10,216

 

$1,294

 

$35,670

 

$50,062

 

$(14,142

)

Total gains or (losses) (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

(55,119

)

2,629

 

193

 

12

 

(61,810

)

3,857

 

409

 

Included in other comprehensive loss (unrealized) (2)

 

105,387

 

101,456

 

1,363

 

(408

)

27,996

 

(25,020

)

 

 

Purchases, issuances, sales, settlements (3)

 

(652,734

)

(613,582

)

(13,850

)

(38

)

3,635

 

(28,899

)

 

 

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

 

 

(17,612

)

17,612

 

 

 

 

 

 

Ending balance, September 30, 2009

 

$21,885

 

$—

 

$15,534

 

$860

 

$5,491

 

$—

 

$(13,733

)

Changes in unrealized losses included in earnings relating to assets and liabilities still held at September 30, 2009

 

$(62,305

)

$—

 

$—

 

$—

 

$(61,896

)

$—

 

$(409

)

 


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 consolidated statements of operations.

 

2)              Unrealized gains or losses as well as the noncredit portion of OTTI on investment securities are reported in accumulated other comprehensive loss, net of tax, in the 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.  In May 2009, the Company desecuritized its portfolio of private-label mortgage backed securities resulting in a $635.6 million decrease in Level 3 investment grade mortgage-backed securities for the nine months ended September 30, 2009.

 

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-SaleThe 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.

 

The Company’s Level 3 available-for-sale securities include one private-label mortgage-backed security and certain pooled trust preferred securities.  The fair values of the private-label mortgage-backed security and pooled trust preferred securities have traditionally been based on the average of at least two quoted market prices obtained from independent external brokers since broker quotes in an active market are given the highest priority.  However, as a result of the global financial crisis and illiquidity in the U.S. markets, the market for these securities has become increasingly inactive since mid-2007.  It is the Company’s view that current broker prices on the private-label mortgage-backed security and certain pooled trust preferred securities are based on forced liquidation or distressed sale values in very inactive markets that are not representative of the economic value of these securities.  As such, the fair value of the private-label mortgage-backed security and pooled trust preferred securities have been below cost since the advent of the financial crisis.  Additionally, most, if not all, of these broker quotes are nonbinding.  The Company considered whether to place little, if any, weight on transactions that are not orderly when estimating fair value.  Although length of time and severity of impairment are among

 

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the factors to consider when determining whether a security that is other-than-temporarily impaired, the private-label mortgage backed security and pooled trust preferred securities have only exhibited deep declines in value since the credit crisis began.  The Company therefore believes that this is an indicator that the decline in price is solely a result of the lack of liquidity in the market for these securities and the broker quotes received stem from distressed sale transactions.

 

For the private-label mortgage-backed security, the Company determined fair value by using the appropriate combination of the market approach reflecting current broker prices and a discounted cash flow approach.  The values resulting from each approach (i.e. market and income approaches) were weighted to derive the final fair value on the private-label mortgage-backed security.  For the pooled trust preferred securities, the fair value was derived based on discounted cash flow analyses.  In order to determine the appropriate discount rate used in calculating fair values derived from the income method for the private-label mortgage-backed security and pooled trust preferred securities, the Company has made assumptions using an exit pricing approach related to the implied rate of return which have been adjusted for general changes in market rates, estimated changes in credit quality and liquidity risk premium, specific non-performance and default experience in the collateral underlying the securities.  The gains and losses recorded in the period are recognized in noninterest income.   During the second quarter of 2009, the private-label mortgage-backed security was downgraded from investment grade to non-investment grade.

 

In May 2009, the desecuritization of the Company’s Level 3 private-label mortgage backed securities resulted in a $635.6 million increase in single and multifamily loans receivable and is reflected in the decrease of Level 3 investment grade mortgage-backed investment securities for the nine months ended September 30, 2009 Level 3 reconciliation table described above.

 

Equity Swap Agreements – The Company has entered into several equity swap agreements with a major investment brokerage firm to hedge against market fluctuations in a promotional equity index certificate of deposit product offered to bank customers.  This deposit product, which has a term of 5 years or 5½ years, pays interest based on the performance of the Hang Seng China Enterprises Index (“HSCEI”).  The fair value of these equity swap agreements is based on the income approach.  The fair value is based on the change in the value of the HSCEI and the volatility of the call option over the life of the individual swap agreement.  The option value is derived based on the volatility, the interest rate and the time remaining to maturity of the call option.  The Company’s consideration of its counterparty’s credit risk resulted in a $26 thousand adjustment to the valuation of the equity swap agreements for the quarter ended September 30, 2009.  The valuation of equity swap agreements falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of these derivative contracts.

 

Derivatives Payable — The Company’s derivatives payable are recorded in conjunction with the certificate of deposits (“host instrument”) that pays interest based on changes in the HSCEI and are included in interest-bearing deposits on the consolidated balance sheets.  The fair value of these embedded derivatives is based on the income approach.  The Company’s consideration of its own credit risk resulted in a $21 thousand adjustment to the valuation of the derivative liabilities, and a net gain of $10 thousand was recognized in noninterest income as the net difference between the valuation of the equity swap agreements and derivatives payable for the quarter ended September 30, 2009.  The valuation of the derivatives payable falls within Level 3 of the fair value hierarchy since the significant inputs used in deriving the fair value of these derivative contracts are not directly observable.

 

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

 

16



Table of Contents

 

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.  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 — The Company’s impaired loans are generally measured using the fair value of the underlying collateral, which is determined based on the most recent valuation information received, which may be adjusted based on factors such as the Company’s historical knowledge and changes in market conditions from the time of valuation.  Impaired loans fall within Level 3 of the fair value hierarchy since they are measured at fair value based on the most recent valuation information received on the underlying collateral.

 

Other Real Estate Owned (“OREO”) — The Company’s OREO represents properties acquired through foreclosure or through full or partial satisfaction of loans, are considered held-for-sale, and are recorded at the lower of cost or estimated fair value at the time of foreclosure.  The fair values of OREO properties are based on third-party appraisals, broker price opinions or accepted written offers.  These valuations are reviewed and approved by the Company’s appraisal department, credit review, or OREO department.  OREO properties are classified as Level 2 assets in the fair value hierarchy.  The OREO balance of $24.2 million included in the condensed consolidated balance sheets as of September 30, 2009 is recorded net of estimated disposal costs.

 

Fair Value of Financial Instruments

 

The Company adopted ASC 820-10-50 effective June 30, 2009, which increases the frequency of fair value disclosures from an annual basis only to a quarterly basis.  The carrying amounts and fair values of the Company’s financial instruments as of September 30, 2009 and December 31, 2008 were as follows:

 

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Table of Contents

 

 

 

As of September 30, 2009

 

As of December 31, 2008

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Notional or

 

Estimated

 

Notional or

 

Estimated

 

 

 

Contract Amount

 

Fair Value

 

Contract Amount

 

Fair Value

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

132,569

 

$

132,569

 

$

144,486

 

$

144,486

 

Short-term investments

 

460,665

 

460,665

 

734,367

 

734,367

 

Interest-bearing deposits in other banks

 

320,860

 

320,865

 

228,441

 

228,353

 

Securities purchased under resale agreements

 

75,000

 

86,292

 

50,000

 

51,581

 

Investment securities held-to-maturity

 

781,331

 

799,729

 

122,317

 

123,105

 

Investment securities available-for-sale

 

1,457,023

 

1,457,023

 

2,040,194

 

2,040,194

 

Loans receivable, net

 

8,156,838

 

8,064,302

 

8,069,377

 

8,036,406

 

Investment in Federal Home Loan Bank stock

 

86,729

 

86,729

 

86,729

 

86,729

 

Investment in Federal Reserve Bank stock

 

36,785

 

36,785

 

27,589

 

27,589

 

Accrued interest receivable

 

51,025

 

51,025

 

46,230

 

46,230

 

Equity swap agreements

 

38,828

 

13,728

 

43,453