EAST WEST BANCORP INC - Quarter Report: 2009 September (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
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 |
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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 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 |
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Accelerated filer x |
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Non-accelerated filer o |
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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 issuers common stock on the latest practicable date: 91,732,640 shares of common stock as of October 31, 2009.
4 |
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4-7 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
8-39 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
40-79 |
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79 |
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79-80 |
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81 |
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81 |
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81-82 |
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83 |
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83 |
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83 |
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83 |
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83-84 |
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85 |
2
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 Companys 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 Companys 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
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, |
|
||
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|
2009 |
|
2008 |
|
||
ASSETS |
|
|
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|
|
||
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 |
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
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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 |
|
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Securities sold under repurchase agreements |
|
1,019,450 |
|
998,430 |
|
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Notes payable |
|
7,111 |
|
16,506 |
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Bank acceptances outstanding |
|
5,414 |
|
5,538 |
|
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Long-term debt |
|
235,570 |
|
235,570 |
|
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Accrued interest payable, accrued expenses and other liabilities |
|
101,808 |
|
92,718 |
|
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Total liabilities |
|
10,964,148 |
|
10,872,050 |
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COMMITMENTS AND CONTINGENCIES (Note 8) |
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STOCKHOLDERS EQUITY |
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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 |
|
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Additional paid in capital |
|
929,558 |
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695,521 |
|
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Retained earnings |
|
351,721 |
|
572,172 |
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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 |
|
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TOTAL |
|
$ |
12,485,930 |
|
$ |
12,422,816 |
|
See accompanying notes to condensed consolidated financial statements.
4
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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INTEREST AND DIVIDEND INCOME |
|
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Loans receivable, including fees |
|
$ |
114,512 |
|
$ |
131,682 |
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$ |
336,997 |
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$ |
425,113 |
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Investment securities held-to-maturity |
|
12,060 |
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|
31,077 |
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|
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Investment securities available-for-sale |
|
16,425 |
|
23,141 |
|
57,101 |
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75,923 |
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Securities purchased under resale agreements |
|
2,153 |
|
1,276 |
|
4,695 |
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5,533 |
|
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Interest-bearing deposits in other banks |
|
1,454 |
|
5 |
|
4,678 |
|
14 |
|
||||
Short-term investments |
|
402 |
|
1,953 |
|
2,663 |
|
3,093 |
|
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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 |
|
||||
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|
|
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|
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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
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.
6
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.
7
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 Companys 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
8
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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
9
is prohibited. The adoption of this guidance did not have a material effect on the Companys 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 enterprises 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 transferors continuing involvement with transferred financial assets and an enterprises 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 Companys 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 interests 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 Companys 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
10
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 Companys 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 Companys 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 Companys 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 entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys 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
11
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:
12
· 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 |
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
||||
|
|
(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 |
) |
13
|
|
Assets Measured at Fair Value on a Non-Recurring Basis for the Three Months Ended September 30, 2009 |
|
|
|
|||||||||||
|
|
Fair Value |
|
Quoted
Prices in Active |
|
Significant
Other |
|
Significant
Unobservable |
|
Total Gains |
|
|||||
|
|
(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 |
|
Quoted
Prices in Active |
|
Significant
Other |
|
Significant
Unobservable |
|
Total Gains |
|
|||||
|
|
(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 |
|
Corporate Debt Securities |
|
|
|
|||||||
|
|
|
|
Securities |
|
|
|
Non- |
|
|
|
|||||
|
|
Total |
|
Non-Investment |
|
Investment |
|
Investment |
|
Derivatives |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
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 |
|
14
|
|
Investment Securities Available-for-Sale |
|
|
|
||||||||||
|
|
|
|
Residential |
|
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-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.
The Companys 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 Companys 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
15
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 Companys 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 Companys consideration of its counterpartys 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 Companys 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 Companys 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
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys financial instruments as of September 30, 2009 and December 31, 2008 were as follows:
17
|
|
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 |
|