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 |
|
13,853 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Customer deposit accounts: |
|
|
|
|
|
|
|
|
|
||||
Demand, savings and money market deposits |
|
4,428,646 |
|
4,008,980 |
|
3,399,817 |
|
3,141,126 |
|
||||
Time deposits |
|
4,239,911 |
|
4,248,498 |
|
4,742,142 |
|
4,750,957 |
|
||||
Federal funds purchased |
|
3,022 |
|
3,022 |
|
28,022 |
|
28,022 |
|
||||
Federal Home Loan Bank advances |
|
923,216 |
|
943,118 |
|
1,353,307 |
|
1,397,081 |
|
||||
Securities sold under repurchase agreements |
|
1,019,450 |
|
1,264,807 |
|
998,430 |
|
1,204,329 |
|
||||
Notes payable |
|
7,111 |
|
7,111 |
|
16,506 |
|
16,506 |
|
||||
Accrued interest payable |
|
10,283 |
|
10,283 |
|
18,977 |
|
18,977 |
|
||||
Long-term debt |
|
235,570 |
|
89,972 |
|
235,570 |
|
120,325 |
|
||||
Derivatives payable |
|
38,828 |
|
13,733 |
|
43,453 |
|
14,142 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Off-balance sheet financial instruments: |
|
|
|
|
|
|
|
|
|
||||
Commitments to extend credit |
|
1,100,083 |
|
10,615 |
|
1,469,513 |
|
16,001 |
|
||||
Standby letters of credit |
|
642,452 |
|
3,699 |
|
656,979 |
|
3,614 |
|
||||
Commercial letters of credit |
|
32,290 |
|
(76 |
) |
39,426 |
|
(204 |
) |
||||
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below:
Cash and Due From Banks The carrying amounts approximate fair values due to the short-term nature of these instruments.
Short-Term Investments -The fair values of short-term investments generally approximate their book values due to their short maturities.
Interest-Bearing Deposits in Other Banks The fair values of interest-bearing deposits in other banks is based on the discounted cash flow approach. The discount rate is derived from the Banks time deposit rate curve.
18
Securities Purchased Under Resale Agreements For securities purchased under resale agreements with original maturities of 90 days or less, the carrying amounts generally approximate fair values due to the short-term nature of these instruments. At September 30, 2009 and December 31, 2008, the securities purchased under resale agreements are long-term in nature and the fair value is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates and taking into consideration the call features of each instrument.
Investment Securities Held-To-Maturity The fair values of the investment securities held-to-maturity are generally determined by reference to the average of at least two quoted market prices obtained from independent external brokers or 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.
Investment Securities Available-For-Sale The fair values of the investment securities available-for-sale are generally determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values. For the private-label mortgage-backed security, the fair value was derived based on a combination of broker prices and discounted cash flow analyses that is weighted as deemed appropriate. For the pooled trust preferred securities, the fair values were derived based on discounted cash flow analyses.
Loans Receivable, net - The fair value of loans is determined based on the discounted cash flow approach. The discount rate is derived from the associated yield curve plus spreads, and reflects the offering rates in the market for loans with similar financial characteristics. No adjustments have been made for changes in credit within the loan portfolio. It is managements opinion that the allowance for loan losses pertaining to performing and nonperforming loans results in a fair valuation of such loans.
Federal Home Loan Bank and Federal Reserve Bank Stock - The carrying amount of the Federal Home Loan Bank stock approximates fair value and its redemption price of $100 per share. The carrying value of the Federal Reserve Bank stock approximates fair value as the stock may be sold back at its carrying value.
Accrued Interest Receivable - The carrying amount of accrued interest receivable approximates fair value due to its short-term nature.
Equity Swap Agreements The fair value of the derivative contracts is provided by an independent third party and is determined based on the change in 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 of the option, interest rate and time remaining to the maturity. The Company has also considered the counterpartys credit risk in determining the valuation.
Deposits The fair value of deposits is determined based on the discounted cash flow approach. The discount rate is derived from the associated yield curve, plus spread, if any. For core deposits, the cash outflows are projected by the decay rate based on the Banks core deposit premium study. Cash flows for all non-time deposits are discounted using the LIBOR yield curve. For time deposits, the cash flows are based on the contractual runoff and are discounted by the Banks current offering rates, plus spread.
Federal Funds Purchased The carrying amounts approximate fair values due to the short-term nature of these instruments.
19
Federal Home Loan Bank Advances The fair value of FHLB advances is estimated based on the discounted value of contractual cash flows, using rates currently offered by the FHLB of San Francisco for fixed-rate credit advances with similar remaining maturities at each reporting date.
Securities Sold Under Repurchase Agreements For securities sold under repurchase agreements with original maturities of 90 days or less, the carrying amounts approximate fair values due to the short-term nature of these instruments. At September 30, 2009 and December 31, 2008, most of the securities sold under repurchase agreements are long-term in nature and the fair values of securities sold under repurchase agreements are calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates and taking into consideration the call features of each instrument.
Notes Payable The carrying amount of notes payable approximates fair value as these notes are payable on demand.
Accrued Interest Payable - The carrying amount of accrued interest payable approximates fair value due to its short-term nature.
Long-Term Debt The fair values of long-term debt are estimated by discounting the cash flows through maturity based on current market rates the Bank would pay for new issuances.
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. The Companys derivatives payable are estimated using the income approach. The Company has also considered its own credit risk in determining the valuation.
Commitments to Extend Credit, Standby and Commercial Letters of Credit - The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterpartys credit standing.
The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.
4. STOCK-BASED COMPENSATION
The Company issues stock-based compensation to certain employees, officers and directors under share-based compensation plans. The adoption of ASC 505 and ASC 718 (previously SFAS No. 123(R), Share-Based Payment), on January 1, 2006 has resulted in incremental stock-based compensation expense. Since the Company has previously recognized compensation expense on restricted stock awards, the incremental stock-based compensation expense recognized pursuant to ASC 505 and ASC 718 relates only to issued and unvested stock option grants.
During the three and nine months ended September 30, 2009, total compensation cost recognized in the consolidated statements of operations related to stock options and restricted stock awards amounted to $1.5 million and $4.4 million, respectively, with related tax benefits of $614 thousand and $1.8 million, respectively. During the three and nine months ended September 30, 2008, total compensation cost recognized in the consolidated statements of operations related to stock options and
20
restricted stock awards amounted to $1.5 million and $4.5 million, respectively, with related tax benefits of $630 thousand and $1.9 million, respectively.
Stock Options
The Company issues fixed stock options to certain employees, officers, and directors. Stock options are issued at the current market price on the date of grant with a three-year or four-year vesting period and contractual terms of 7 years. Stock options issued prior to July 2002 had contractual terms of 10 years. The Company issues new shares upon the exercise of stock options.
A summary of activity for the Companys stock options as of and for the nine months ended September 30, 2009 is presented below:
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
Weighted |
|
Average |
|
Aggregate |
|
||
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
||
|
|
|
|
Exercise |
|
Contractual |
|
Value |
|
||
|
|
Shares |
|
Price |
|
Term |
|
(In thousands) (1) |
|
||
Outstanding at beginning of period |
|
2,588,968 |
|
$ |
20.67 |
|
|
|
|
|
|
Granted |
|
43,942 |
|
6.83 |
|
|
|
|
|
||
Exercised |
|
(6,198 |
) |
5.95 |
|
|
|
|
|
||
Forfeited |
|
(620,001 |
) |
17.23 |
|
|
|
|
|
||
Outstanding at end of period |
|
2,006,711 |
|
$ |
21.48 |
|
3.57 years |
|
$ |
196 |
|
Vested or expected to vest |
|
1,941,416 |
|
$ |
21.46 |
|
3.51 years |
|
$ |
183 |
|
Exercisable at end of period |
|
1,079,689 |
|
$ |
21.01 |
|
2.15 years |
|
$ |
69 |
|
(1) Includes in-the-money options only.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
September 30, |
|
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Expected term (1) |
|
|
(5) |
|
(5) |
4 years |
|
4 years |
|
Expected volatility (2) |
|
|
(5) |
|
(5) |
60.5 |
% |
27.9 |
% |
Expected dividend yield (3) |
|
|
(5) |
|
(5) |
0.6 |
% |
1.2 |
% |
Risk-free interest rate (4) |
|
|
(5) |
|
(5) |
1.8 |
% |
2.6 |
% |
(1) The expected term (estimated period of time outstanding) of stock options granted was estimated using the historical exercise behavior of employees.
(2) The expected volatility was based on historical volatility for a period equal to the stock options expected term.
(3) The expected dividend yield is based on the Companys prevailing dividend rate at the time of grant.
(4) The risk-free rate is based on the U.S. Treasury strips in effect at the time of grant equal to the stock options expected term.
(5) The Company did not issue any stock options during the third quarter of 2009 and 2008.
During the three and nine months ended September 30, 2009 and 2008, information related to stock options is presented as follows:
21
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Weighted average fair value of stock options granted during the period |
|
$ |
|
(1) |
$ |
|
(1) |
$ |
3.00 |
|
$ |
4.27 |
|
Total intrinsic value of options exercised (in thousands) |
|
8 |
|
43 |
|
13 |
|
380 |
|
||||
Total fair value of options vested (in thousands) |
|
74 |
|
103 |
|
1,512 |
|
1,325 |
|
||||
(1) The Company did not issue any stock options during the third quarter of 2009 and 2008.
As of September 30, 2009, total unrecognized compensation cost related to stock options amounted to $2.5 million. The cost is expected to be recognized over a weighted average period of 2.8 years.
Restricted Stock
In addition to stock options, the Company also grants restricted stock awards to directors, certain officers and employees. The restricted shares awarded become fully vested after three to five years of continued employment from the date of grant. The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases.
A summary of the activity for restricted stock as of September 30, 2009, including changes during the nine months then ended, is presented below:
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
Shares |
|
Price |
|
|
Outstanding at beginning of period |
|
753,165 |
|
$ |
29.35 |
|
Granted |
|
328,407 |
|
7.42 |
|
|
Vested |
|
(32,609 |
) |
37.87 |
|
|
Forfeited |
|
(105,669 |
) |
30.45 |
|
|
Outstanding at end of period |
|
943,294 |
|
$ |
21.30 |
|
The weighted average fair values of restricted stock awards granted during the nine months ended September 30, 2009 and 2008 were $7.42 and $19.66, respectively.
As of September 30, 2009, total unrecognized compensation cost related to restricted stock awards amounted to $9.3 million. This cost is expected to be recognized over a weighted average period of 2.6 years.
22
5. INVESTMENT SECURITIES
An analysis of the held-to-maturity and available-for-sale investment securities portfolio is presented as follows:
|
|
As of September 30, 2009 |
|
||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
|
||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
|
|
(In thousands) |
|
||||||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
||||
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
$ |
252,638 |
|
$ |
530 |
|
$ |
(1,145 |
) |
$ |
252,023 |
|
Municipal securities |
|
36,118 |
|
1,720 |
|
|
|
37,838 |
|
||||
Other residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
75,033 |
|
1,909 |
|
(115 |
) |
76,827 |
|
||||
Non-investment grade |
|
30,461 |
|
|
|
(1,770 |
) |
28,691 |
|
||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
377,947 |
|
17,417 |
|
(89 |
) |
395,275 |
|
||||
Non-investment grade |
|
4,625 |
|
|
|
(59 |
) |
4,566 |
|
||||
Other securities |
|
4,509 |
|
|
|
|
|
4,509 |
|
||||
Total investment securities held-to-maturity |
|
$ |
781,331 |
|
$ |
21,576 |
|
$ |
(3,178 |
) |
$ |
799,729 |
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury securities |
|
$ |
2,214 |
|
$ |
1 |
|
$ |
|
|
$ |
2,215 |
|
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
474,896 |
|
2,311 |
|
(472 |
) |
476,735 |
|
||||
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities |
|
|
|
|
|
|
|
|
|
||||
Commercial mortgage-backed securities |
|
26,107 |
|
873 |
|
|
|
26,980 |
|
||||
Residential mortgage-backed securities |
|
752,671 |
|
19,705 |
|
(2 |
) |
772,374 |
|
||||
Municipal securities |
|
17,759 |
|
193 |
|
(26 |
) |
17,926 |
|
||||
Other residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
27,099 |
|
|
|
(107 |
) |
26,992 |
|
||||
Non-investment grade |
|
21,329 |
|
|
|
(5,795 |
) |
15,534 |
|
||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
102,052 |
|
2,534 |
|
(1,308 |
) |
103,278 |
|
||||
Non-investment grade (1) |
|
69,824 |
|
|
|
(58,123 |
) |
11,701 |
|
||||
U.S. Government sponsored enterprise equity securities |
|
3,041 |
|
468 |
|
(221 |
) |
3,288 |
|
||||
Total investment securities available-for-sale |
|
$ |
1,496,992 |
|
$ |
26,085 |
|
$ |
(66,054 |
) |
$ |
1,457,023 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total investment securities |
|
$ |
2,278,323 |
|
$ |
47,661 |
|
$ |
(69,232 |
) |
$ |
2,256,752 |
|
|
|
As of December 31, 2008 |
|
||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
|
||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
|
|
(In thousands) |
|
||||||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
||||
Municipal securities |
|
$ |
5,772 |
|
$ |
118 |
|
$ |
|
|
$ |
5,890 |
|
Corporate debt securities |
|
116,545 |
|
904 |
|
(234 |
) |
117,215 |
|
||||
Total investment securities held-to-maturity |
|
$ |
122,317 |
|
$ |
1,022 |
|
$ |
(234 |
) |
$ |
123,105 |
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury securities |
|
$ |
2,505 |
|
$ |
8 |
|
$ |
|
|
$ |
2,513 |
|
U.S. Government agency securities and U.S. Government sponsored enterprise debt securities |
|
1,020,355 |
|
4,762 |
|
(1,183 |
) |
1,023,934 |
|
||||
U.S. Government agency securities and U.S. Government sponsored enterprise mortgage-backed securities |
|
373,690 |
|
6,758 |
|
(397 |
) |
380,051 |
|
||||
Other mortgage-backed securities |
|
645,940 |
|
|
|
(108,614 |
) |
537,326 |
|
||||
Corporate debt securities (1) |
|
116,127 |
|
266 |
|
(73,849 |
) |
42,544 |
|
||||
U.S. Government sponsored enterprise equity securities (1) |
|
3,340 |
|
|
|
(2,156 |
) |
1,184 |
|
||||
Residual securities |
|
25,043 |
|
25,019 |
|
|
|
50,062 |
|
||||
Other securities (1) |
|
2,570 |
|
10 |
|
|
|
2,580 |
|
||||
Total investment securities available-for-sale |
|
$ |
2,189,570 |
|
$ |
36,823 |
|
$ |
(186,199 |
) |
$ |
2,040,194 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total investment securities |
|
$ |
2,311,887 |
|
$ |
37,845 |
|
$ |
(186,433 |
) |
$ |
2,163,299 |
|
(1) As of December 31, 2008, the Company recorded an OTTI charge of $13.6 million for corporate debt securities, $55.3 million for U.S. Government sponsored enterprise equity securities, and $4.3 million for other securities. Upon adoption of ASC 320, the Company reclassified the noncredit portion of previously recognized OTTI for pooled trust preferred securities totaling $8.1 million, on a net of tax basis, from the opening balance of retained earnings to other comprehensive income as of March 31, 2009. Additionally, the Company recorded $61.9 million, on a pre-tax basis, of the credit portion of OTTI through earnings and $12.2 million, net of tax, of the non-credit portion of OTTI for pooled trust preferred securities in other comprehensive income for the nine months ended September 30, 2009.
23
The fair values of 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. The Company performs a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of fair value. The procedures include, but are not limited to, initial and ongoing review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes. The Company assesses that prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models developed that are based on spreads, and when available, market indices. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon available market data, the price received from third parties is adjusted accordingly.
Prices from third-party pricing services are often unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding.
As a result of the global financial crisis and illiquidity in the U.S. markets, the Company believes current broker prices obtained 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. 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, in light of these circumstances, the Company has modified its approach in determining the fair values of these securities. For the pooled trust preferred securities, the Company believes that the cash flow analyses which demonstrate that the realizable value of these securities are equal to their carrying values should be the primary factor considered when making a judgment about other-than-temporary impairment. 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. In calculating the fair value derived from the income approach, the Company made assumptions related to the implied rate of return, general change in market rates, estimated changes in credit quality and liquidity risk premium, specific non-performance and default experience in the collateral underlying the security, as well as broker discount rates.
The following tables show the Companys rollforward of the amount related to credit losses for the three and nine months ended September 30, 2009:
|
|
Three Months Ended |
|
|
|
|
(In thousands) |
|
|
Beginning balance, July 1, 2009 |
|
$ |
(37,647 |
) |
Additions of OTTI that was not previously recognized |
|
(3,855 |
) |
|
Additional increases to the amount related to the credit loss for which an OTTI was previously recognized |
|
(20,394 |
) |
|
Ending balance, September 30, 2009 |
|
$ |
(61,896 |
) |
24
|
|
Nine
Months Ended |
|
|
|
|
(In thousands) |
|
|
Beginning balance, January 1, 2009 |
|
$ |
|
|
Additions of OTTI that was not previously recognized |
|
(29,084 |
) |
|
Additional increases to the amount related to the credit loss for which an OTTI was previously recognized |
|
(32,812 |
) |
|
Ending balance, September 30, 2009 |
|
$ |
(61,896 |
) |
The following table shows the Companys investment portfolios gross unrealized losses and related fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2009 and December 31, 2008:
25
|
|
As of September 30, 2009 |
|
||||||||||||||||
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
||||||
|
|
(in thousands) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
$ |
126,494 |
|
$ |
(1,145 |
) |
$ |
|
|
$ |
|
|
$ |
126,494 |
|
$ |
(1,145 |
) |
Other residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment grade |
|
17,106 |
|
(115 |
) |
|
|
|
|
17,106 |
|
(115 |
) |
||||||
Non-investment grade |
|
28,691 |
|
(1,770 |
) |
|
|
|
|
28,691 |
|
(1,770 |
) |
||||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment grade |
|
4,039 |
|
(89 |
) |
|
|
|
|
4,039 |
|
(89 |
) |
||||||
Non-investment grade |
|
4,566 |
|
(59 |
) |
|
|
|
|
4,566 |
|
(59 |
) |
||||||
Total temporarily impaired securities held-to-maturity |
|
$ |
180,896 |
|
$ |
(3,178 |
) |
$ |
|
|
$ |
|
|
$ |
180,896 |
|
$ |
(3,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Treasury securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
34,528 |
|
(472 |
) |
|
|
|
|
34,528 |
|
(472 |
) |
||||||
U.S. Government agency and U.S. Government sponsored enterprise residenial mortgage-backed securities |
|
5,091 |
|
(2 |
) |
|
|
|
|
5,091 |
|
(2 |
) |
||||||
Municipal securities |
|
2,430 |
|
(26 |
) |
|
|
|
|
2,430 |
|
(26 |
) |
||||||
Other residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment grade |
|
26,992 |
|
(107 |
) |
|
|
|
|
26,992 |
|
(107 |
) |
||||||
Non-investment grade |
|
|
|
|
|
15,534 |
|
(5,795 |
) |
15,534 |
|
(5,795 |
) |
||||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment grade |
|
11,927 |
|
(76 |
) |
860 |
|
(1,232 |
) |
12,787 |
|
(1,308 |
) |
||||||
Non-investment grade (1) |
|
419 |
|
(10,230 |
) |
11,282 |
|
(47,893 |
) |
11,701 |
|
(58,123 |
) |
||||||
U.S. Government sponsored enterprise equity securities |
|
|
|
|
|
1,786 |
|
(221 |
) |
1,786 |
|
(221 |
) |
||||||
Total temporarily impaired securities available-for-sale |
|
$ |
81,387 |
|
$ |
(10,913 |
) |
$ |
29,462 |
|
$ |
(55,141 |
) |
$ |
110,849 |
|
$ |
(66,054 |
) |
Total temporarily impaired securities |
|
$ |
262,283 |
|
$ |
(14,091 |
) |
$ |
29,462 |
|
$ |
(55,141 |
) |
$ |
291,745 |
|
$ |
(69,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
||||||||||||||||
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
|
||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
||||||
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
||||||
|
|
(in thousands) |
|
||||||||||||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate debt securities |
|
$ |
40,057 |
|
$ |
(234 |
) |
$ |
|
|
$ |
|
|
$ |
40,057 |
|
$ |
(234 |
) |
Total temporarily impaired securities held-to-maturity |
|
$ |
40,057 |
|
$ |
(234 |
) |
$ |
|
|
$ |
|
|
$ |
40,057 |
|
$ |
(234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government agency securities and U.S. Government sponsored enterprise debt securities |
|
$ |
143,727 |
|
$ |
(1,183 |
) |
$ |
|
|
$ |
|
|
$ |
143,727 |
|
$ |
(1,183 |
) |
U.S. Government agency securities and U.S. Government sponsored enterprise mortgage-backed securities |
|
72,245 |
|
(397 |
) |
|
|
|
|
72,245 |
|
(397 |
) |
||||||
Other mortgage-backed securities |
|
17,984 |
|
(3,339 |
) |
519,090 |
|
(105,275 |
) |
537,074 |
|
(108,614 |
) |
||||||
Corporate debt securities |
|
4,016 |
|
(2,946 |
) |
34,611 |
|
(70,903 |
) |
38,627 |
|
(73,849 |
) |
||||||
U.S. Government sponsored enterprise equity securities |
|
1,184 |
|
(2,156 |
) |
|
|
|
|
1,184 |
|
(2,156 |
) |
||||||
Total temporarily impaired securities available-for-sale |
|
$ |
239,156 |
|
$ |
(10,021 |
) |
$ |
553,701 |
|
$ |
(176,178 |
) |
$ |
792,857 |
|
$ |
(186,199 |
) |
Total temporarily impaired securities |
|
$ |
279,213 |
|
$ |
(10,255 |
) |
$ |
553,701 |
|
$ |
(176,178 |
) |
$ |
832,914 |
|
$ |
(186,433 |
) |
(1) For the nine months ended September 30, 2009, the Company recorded $21.0 million, on a pre-tax basis, of the non-credit portion of OTTI for pooled trust preferred securities in other comprehensive income, which is included as gross unrealized losses.
Corporate Debt Securities (Available-for-Sale)
The majority of unrealized losses in the available-for-sale portfolio at September 30, 2009 are related to pooled trust preferred debt securities. As of September 30, 2009, the Company had $6.4 million in pooled trust preferred debt securities available-for-sale, representing less than 1% of the total investment securities available-for-sale portfolio. In April 2009, except for one security which was downgraded but remained at investment grade status, the ratings for the other twelve pooled trust
26
preferred securities were downgraded to non-investment grade status due to increased deferral and default activity from the issuers of the underlying debt collateralizing these instruments. As of September 30, 2009, these debt instruments had gross unrealized losses amounting to $55.4 million, or 90% of the total amortized cost basis of these securities, comprised of $34.4 million in gross unrealized losses and $21.0 million, or $12.2 million on a net of tax basis, in noncredit-related impairment losses recorded during the first nine months of 2009 pursuant to the provisions of ASC 320-10-65.
Almost all of the pooled trust preferred securities held by the Company have underlying collateral issued by banks and insurance companies. Continued deterioration in market conditions have resulted in many more small banks either deferring or defaulting on their trust preferred debt during the third quarter of 2009. As a result of diminishing collateral values, deteriorating cash flows, and increasing estimates of future deferrals and defaults, the Company recorded an impairment loss of $45.2 million on its portfolio of trust preferred securities during the third quarter of 2009, of which $24.2 million was a pre-tax credit loss recorded through earnings. The remaining $21.0 million, or $12.2 million on a net of tax basis, in noncredit-related impairment loss was recorded in other comprehensive income as of September 30, 2009. The Company determined the amount of credit-related impairment by discounting the expected future cash flows with the effective yield of the security in accordance with generally accepted accounting principles. During the first quarter of 2009, the Company recorded an impairment loss of $13.4 million on a non-investment grade pooled trust preferred security. During the second quarter of 2009, the Company recorded an impairment loss of $100.8 million on its portfolio of trust preferred securities, of which $37.4 million was a pre-tax credit loss recorded in other comprehensive income. As of March 31, 2009, of the total impairment loss amount, $200 thousand was a pretax credit loss recorded through earnings. The remaining $13.2 million, or $7.6 million on a net of tax basis, in noncredit-related impairment loss was recorded in other comprehensive income.
During 2008 and 2007, the Company recorded $13.6 million and $405 thousand, respectively, in non-credit related impairment losses on three pooled trust preferred securities due to rating downgrades caused by increases in market spreads, concerns regarding the housing market, and lack of liquidity in the market. None of these securities have experienced any credit-related losses for which OTTI was previously recorded. Upon the implementation of ASC 320-10-65, the Company reclassified the combined $14.0 million, or $8.1 million on a net of tax basis, in noncredit-related OTTI impairment losses recognized during 2008 and 2007 from the opening balance of retained earnings to other comprehensive income as of March 31, 2009.
Mortgage-backed Securities (Held-to-Maturity)
As of September 30, 2009, the aggregate fair value of the non-agency held-to-maturity mortgage-backed securities amounted to $105.5 million. These securities are collateralized by single family loans and secured by first liens on these residential properties. During the second and third quarter of 2009, three mortgage-backed securities were downgraded from investment grade to non-investment grade. Except for these three non-investment grade securities, the remaining held-to-maturity mortgage-backed securities are investment grade. As of September 30, 2009, these debt instruments had gross unrealized losses for less than twelve months amounting to $1.9 million, or 2% of the aggregate amortized cost basis of held-to-maturity mortgage-backed securities, comprised of $1.8 million and $115 thousand that are non-investment grade and investment grade, respectively.
The decline in fair values of these securities is due to widening market spreads, concerns regarding the downturn in the housing market, and lack of liquidity in the market. However, these securities have strong credit support, low loan-to-values, low delinquency, and low OREO ratios. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases. As such, the Company does not deem these securities to be other-than-temporarily impaired as of September 30, 2009.
27
Mortgage-backed Securities (Available-for-Sale)
As of September 30, 2009, the Company had one private-label available-for-sale mortgage-backed security with a fair value of $15.5 million, with a gross unrealized loss of $5.8 million, or 27% of the amortized cost basis of this security, for more than 12 months. During the second quarter of 2009, this security was downgraded from investment grade to non-investment grade. This security is collateralized by single family loans and secured by the first lien on these residential properties. Additionally, any principal and interest shortfall that may arise from the deterioration of the collateral will be covered by a monoline insurance provider. The Company does not intend to sell this security and it is not more likely than not that the Company will be required to sell this security before recovery of its amortized cost basis. As such, the Company does not deem this security to be other-than-temporarily impaired as of September 30, 2009.
In May 2009, the Company desecuritized its private-label mortgage backed securities which resulted in a $635.6 million increase in single and multifamily loans receivable with a corresponding decrease in available-for-sale investment securities. These single family and multifamily loans were previously originated by the Company and were securitized in 2006 and 2007 for additional liquidity purposes. All of the resulting securities were retained by the Company in its available-for-sale investment portfolio. The Companys decision to desecuritize these securities was prompted by the mark-to-market adjustments recorded on these securities that were based on price points observed in the general market for mortgage-backed securities that were not reflective of the better credit quality of the underlying loans. These loans had very low overall delinquency rates as of September 30, 2009. The accumulated mark-to-market adjustments on these securities, recorded in other comprehensive income, were negatively impacting the Companys tangible common equity. The desecuritization added $30.6 million to the Companys tangible common equity.
Government-Sponsored Equity Preferred Stock (Available-for Sale)
In September 2008, liquidity and credit concerns led the U.S. Federal Government to assume a conservatorship role in Fannie Mae and Freddie Mac. The rating on Fannie Mae and Freddie Mac preferred stock securities was downgraded from investment grade to non-investment grade status reflecting the cessation of dividend payments on these securities. These securities are non-cumulative perpetual preferred stock in which unpaid dividends do not accumulate. The purchase agreement between the U.S. Treasury and these government-sponsored entities contains a covenant prohibiting the payment of dividends on existing preferred stock. As the assessment on the status of any resumption in dividend payments on these securities was uncertain, the Company recorded $55.3 million in OTTI charges on Fannie Mae and Freddie Mac preferred stock securities in 2008. As of September 30, 2009, the fair value of these preferred stock securities was $3.3 million. Gross unrealized losses on these securities amounted to $221 thousand as of September 30, 2009, or 7% of the aggregate amortized cost basis of these securities. The outlook for these preferred securities remains stable. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases. As such, the Company does not deem these remaining securities to be other-than-temporarily impaired as of September 30, 2009.
The Company has thirteen individual securities that have been in a continuous unrealized loss position for twelve months or longer as of September 30, 2009. These securities are comprised of ten corporate debt securities with a total fair value of $12.1 million, two government-sponsored equity preferred securities with a total fair value of $1.8 million and one mortgage-backed security with a fair value of $15.5 million. As of September 30, 2009, there were also 28 securities that have been in a continuous unrealized loss position for less than twelve months. The unrealized losses on these securities are primarily attributed to changes in interest rates as well as the liquidity crisis that has impacted all
28
financial industries. The issuers of these securities have not, to the Companys knowledge, established any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. As such, the Company does not deem these securities to be other-than-temporarily impaired as of September 30, 2009.
The scheduled maturities of investment securities at September 30, 2009 are presented as follows:
|
|
Held-to-maturity |
|
Available-for-sale |
|
||||||||
|
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
|
||||
(In thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
||||
Due within one year |
|
$ |
220,132 |
|
$ |
222,276 |
|
$ |
325,308 |
|
$ |
316,192 |
|
Due after one year through five years |
|
305,649 |
|
320,941 |
|
151,933 |
|
154,067 |
|
||||
Due after five years through ten years |
|
52,040 |
|
53,800 |
|
116,058 |
|
119,026 |
|
||||
Due after ten years |
|
203,510 |
|
202,712 |
|
900,651 |
|
864,450 |
|
||||
Indeterminate maturity |
|
|
|
|
|
3,042 |
|
3,288 |
|
||||
Total |
|
$ |
781,331 |
|
$ |
799,729 |
|
$ |
1,496,992 |
|
$ |
1,457,023 |
|
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill remained at $337.4 million at September 30, 2009 and December 31, 2008. Goodwill is tested for impairment on an annual basis, or more frequently as events occur, or as current circumstances and conditions warrant. The Company records impairment losses as charges to noninterest expense and adjustments to the carrying value of goodwill. Subsequent reversals of goodwill impairment are prohibited.
During the third quarter of 2009, both the U.S. and global financial markets continued to experience volatility and the effect of such volatility continued to unfavorably impact the market prices of banking stocks, including the Companys. As of September 30, 2009, the Companys market capitalization based on total outstanding common and preferred shares was $1.08 billion and its total stockholders equity was $1.52 billion. As a result, the Company performed an impairment analysis as of September 30, 2009 to determine whether and to what extent, if any, recorded goodwill was impaired. The analysis compared the fair value of each of the reporting units, including goodwill, to the respective carrying amounts. If the carrying amount of the reporting unit, including goodwill exceeds the fair value of that reporting unit, then further testing for goodwill impairment is performed.
During the first quarter of 2009, the Company re-aligned its management reporting structure and identified three business divisions that meet the criteria of an operating segment in accordance with generally accepted accounting principles. The Companys three operating segments are Retail Banking, Commercial Banking, and Other. The Company determined that there were no additional reporting units below each operating segment and therefore the reporting units are equivalent to the operating segments. See Note 10 to the Companys condensed consolidated financial statements presented elsewhere in this report for a further discussion of the revised business segments.
In order to determine the fair value of the reporting units, a combined income and market approach was used. Under the income approach, the Company provided a net income projection for the next 5 years plus a terminal growth rate was used to calculate the discounted cash flows and the present value of the reporting units. Under the market approach, the fair value was calculated using the current fair values of comparable peer banks of similar size, geographic footprint and focus. The market
29
capitalizations and multiples of these peer banks were used to calculate the market price of the Company and each reporting unit. The fair value was also subject to a control premium adjustment, which is the cost savings that a purchaser of the reporting units could achieve by eliminating duplicative costs. Under the combined income and market approaches, the value from each approach was appropriately weighted to determine the fair value. As a result of this analysis, the Company determined that there was no goodwill impairment at September 30, 2009 as the fair values of all reporting units exceeded the current carrying amounts of the goodwill. No assurance can be given that goodwill will not be written down in future periods. The Company recorded goodwill impairment of $858 thousand as a charge to earnings during the first nine months of 2008.
The Company also has premiums on acquired deposits which represent the intangible value of depositor relationships resulting from deposit liabilities assumed from various acquisitions. Other intangibles are tested for impairment on an annual basis, or more frequently as events occur, or as current circumstances and conditions warrant. The gross carrying amount of deposit premiums totaled $43.0 million as of September 30, 2009 and December 31, 2008, with related accumulated amortization expense amounting to $24.3 million and $21.0 million, respectively, as of September 30, 2009 and December 31, 2008. During the first quarter of 2008, the Company recorded an $855 thousand impairment loss on deposit premiums initially recorded for the Desert Community Bank acquisition due to higher than anticipated runoffs in certain deposit categories. The Company amortizes premiums on acquired deposits based on the projected useful lives of the related deposits.
The following table provides the estimated amortization expense of premiums on acquired deposits for 2009 and the succeeding four years as follows:
Estimate
For The Year Ending |
|
Amount |
|
|
|
|
(In thousands) |
|
|
2009 |
|
$ |
1,058 |
|
2010 |
|
3,858 |
|
|
2011 |
|
3,378 |
|
|
2012 |
|
2,602 |
|
|
2013 |
|
1,707 |
|
|
7. ALLOWANCE FOR LOAN LOSSES
The following table summarizes activity in the allowance for loan losses for the periods indicated:
30
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(in thousands) |
|
(in thousands) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||
Allowance balance, beginning of period |
|
$ |
223,700 |
|
$ |
168,413 |
|
$ |
178,027 |
|
$ |
88,407 |
|
Allowance for unfunded loan commitments and letters of credit |
|
(1,051 |
) |
5,437 |
|
(617 |
) |
5,669 |
|
||||
Provision for loan losses |
|
159,244 |
|
43,000 |
|
388,666 |
|
183,000 |
|
||||
Impact of desecuritization |
|
|
|
|
|
9,262 |
|
|
|
||||
Chargeoffs: |
|
|
|
|
|
|
|
|
|
||||
Single family real estate |
|
8,371 |
|
1,023 |
|
26,487 |
|
1,732 |
|
||||
Multifamily real estate |
|
7,235 |
|
1,006 |
|
11,333 |
|
1,442 |
|
||||
Commercial real estate |
|
23,715 |
|
666 |
|
39,574 |
|
666 |
|
||||
Land |
|
40,397 |
|
21,024 |
|
86,519 |
|
42,442 |
|
||||
Construction |
|
56,354 |
|
16,138 |
|
134,880 |
|
40,429 |
|
||||
Commercial business |
|
17,696 |
|
4,401 |
|
50,873 |
|
18,136 |
|
||||
Automobile |
|
6 |
|
63 |
|
41 |
|
226 |
|
||||
Other consumer |
|
109 |
|
34 |
|
1,727 |
|
74 |
|
||||
Total chargeoffs |
|
153,883 |
|
44,355 |
|
351,434 |
|
105,147 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Recoveries: |
|
|
|
|
|
|
|
|
|
||||
Single family real estate |
|
337 |
|
1 |
|
563 |
|
3 |
|
||||
Multifamily real estate |
|
4 |
|
|
|
222 |
|
|
|
||||
Commercial and industrial real estate |
|
610 |
|
3 |
|
1,207 |
|
1,905 |
|
||||
Land |
|
409 |
|
1,896 |
|
825 |
|
|
|
||||
Construction |
|
768 |
|
2,581 |
|
1,734 |
|
2,581 |
|
||||
Commercial business |
|
484 |
|
177 |
|
2,132 |
|
714 |
|
||||
Automobile |
|
14 |
|
2 |
|
45 |
|
23 |
|
||||
Other consumer |
|
14 |
|
|
|
18 |
|
|
|
||||
Total recoveries |
|
2,640 |
|
4,660 |
|
6,746 |
|
5,226 |
|
||||
Net chargeoffs |
|
151,243 |
|
39,695 |
|
344,688 |
|
99,921 |
|
||||
Allowance balance, end of period |
|
$ |
230,650 |
|
$ |
177,155 |
|
$ |
230,650 |
|
$ |
177,155 |
|
Average loans outstanding |
|
$ |
8,471,766 |
|
$ |
8,451,517 |
|
$ |
8,305,602 |
|
$ |
8,725,596 |
|
Total gross loans outstanding, end of period |
|
$ |
8,419,475 |
|
$ |
8,289,433 |
|
$ |
8,419,475 |
|
$ |
8,289,433 |
|
Annualized net chargeoffs to average loans |
|
7.14 |
% |
1.88 |
% |
5.53 |
% |
1.53 |
% |
||||
Allowance for loan losses to total gross loans, end of period |
|
2.74 |
% |
2.14 |
% |
2.74 |
% |
2.14 |
% |
At September 30, 2009, the allowance for loan losses amounted to $230.7 million, or 2.74% of total loans, compared with $178.0 million or 2.16% of total loans at December 31, 2008, and $177.2 million, or 2.14% of total gross loans as of September 30, 2008. The increase in the allowance for loan losses is primarily due to the $388.7 million in provisions for loan losses recorded during the nine months ended September 30, 2009 and $9.3 million in allowance for losses recorded during the second quarter of 2009 in conjunction with the desecuritization of single family and multifamily loans completed in May 2009. This compares to $183.0 million in provisions for loan losses recorded during the nine months ended September 30, 2008. During the third quarter of 2009, the Company sold $180.6 million in problem loans and $25.7 million in OREO properties. Year to date through September 30, 2009, the Company has sold $313.3 million in problem loans and $105.5 million in OREO properties. These sales of problem assets have resulted in net chargeoffs of $60.1 million and $91.9 million for the third quarter of 2009 and first nine months of 2009, respectively, and increased loan loss provisions. During the first nine months of 2009, the Company recorded $344.7 million in net chargeoffs, compared to $99.9 million in net chargeoffs recorded during the first nine months of 2008. Throughout the course of 2008 and the first nine months of 2009, the Company has actively reduced its total exposure to land and construction loans by $2.03 billion, or 63%. As of September 30, 2009, land and construction loan balances were
31
reduced to $415.2 million and $654.1 million, respectively, from $576.6 million and $1.26 billion, respectively, as of December 31, 2008.
8. COMMITMENTS AND CONTINGENCIES
Credit Extensions - In the normal course of business, the Company has various outstanding commitments to extend credit that are not reflected in the accompanying condensed consolidated financial statements. As of September 30, 2009 and December 31, 2008, respectively, undisbursed loan commitments amounted to $1.10 billion and $1.47 billion, respectively. Commercial and standby letters of credit amounted to $674.7 million and $696.4 million as of September 30, 2009 and December 31, 2008, respectively.
Guarantees From time to time, the Company securitizes loans with recourse in the ordinary course of business. For loans that have been securitized with recourse, the recourse component is considered a guarantee. When the Company securitizes a loan with recourse, it commits to stand ready to perform if the loan defaults, and to make payments to remedy the default. As of September 30, 2009, total loans securitized with recourse amounted to $485.6 million and were comprised of $54.0 million in single family loans with full recourse and $431.5 million in multifamily loans with limited recourse. In comparison, total loans securitized with recourse amounted to $544.5 million at December 31, 2008, comprised of $62.4 million in single family loans with full recourse and $482.1 million in multifamily loans with limited recourse. The recourse provision on multifamily loans is limited to 2.5% of the top loss on the underlying loans. All of these transactions represent securitizations with Fannie Mae. The Companys recourse reserve related to loan securitizations totaled $1.7 million as of September 30, 2009 and $1.1 million as of December 31, 2008, and is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Despite the challenging conditions in the real estate market, the Company continues to experience relatively minimal losses from the single family and multifamily loan portfolios.
The Company also sells or securitizes loans without recourse that may have to be subsequently repurchased if a defect that occurred during the loan origination process results in a violation of a representation or warranty made in connection with the securitization or sale of the loan. When a loan sold or securitized to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred and if such defects give rise to a violation of a representation or warranty made to the investor in connection with the sale or securitization. If such a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. As of September 30, 2009 and December 31, 2008, the amount of loans sold without recourse totaled $708.2 million and $693.5 million, respectively. Total loans securitized without recourse amounted to $362.1 million and $1.04 billion, respectively, at September 30, 2009 and December 31, 2008. The decrease in loans securitized without recourse at September 30, 2009, is due to the desecuritization of the Companys private label mortgage backed securities during May 2009 which resulted in an increase of $635.6 million of single and multifamily loans with a corresponding decrease in investment securities available-for-sale. The loans sold or securitized without recourse represent the unpaid principal balance of the Companys loans serviced for others portfolio.
Litigation Neither the Company nor the Bank is involved in any material legal proceedings at September 30, 2009. The Bank, from time to time, is a party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. After taking into consideration information furnished by counsel to the Company and the Bank, management believes that the resolution of such
32
issues will not have a material adverse impact on the financial position, results of operations, or liquidity of the Company or the Bank.
9. STOCKHOLDERS EQUITY
Series A Preferred Stock Offering - In April 2008, the Company issued 200,000 shares of 8% Non-Cumulative Perpetual Convertible Preferred Stock, Series A (Series A), with a liquidation preference of $1,000 per share. The Company received $194.1 million of additional Tier 1 qualifying capital, after deducting stock issuance costs. The holders of the Series A preferred stock have the right at any time to convert each share of Series A preferred stock into 64.9942 shares of the Companys common stock, plus cash in lieu of fractional shares. This represents an initial conversion price of approximately $15.39 per share of common stock or a 22.5% conversion premium based on the closing price of the Companys common stock on April 23, 2008 of $12.56 per share. On or after May 1, 2013, the Company will have the right, under certain circumstances, to cause the Series A preferred stock to be converted into shares of the Companys common stock. Dividends on the Series A preferred stock, if declared, will accrue and be payable quarterly in arrears at a rate per annum equal to 8% on the liquidation preference of $1,000 per share, on February 15, May 15, August 15 and November 15 of each year. The proceeds from this offering were used to augment the Companys liquidity and capital positions and reduce its borrowings.
In July 2009, the Company completed the exchange of approximately 111 thousand shares of Series A preferred stock into about 10 million shares of common stock with certain shareholders. This transaction was accounted for as an induced conversion with the settlement of shares occurring in July 2009. The Company recorded a preferred dividend of $18.3 million during the nine months ended 2009 which represents the additional consideration or inducement given to these shareholders in excess of the carrying value of the Series A preferred stock. As a result of these exchange transactions, the Companys tangible common equity increased by an aggregate of $107.5 million net of original stock issuance costs.
Series B Preferred Stock Offering - On December 5, 2008, the Company issued 306,546 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (Series B), with a liquidation preference of $1,000 per share. The Company received $306.5 million of additional Tier 1 qualifying capital from the U.S. Treasury by participating in the U.S.Treasurys Capital Purchase Program (TCPP). The Series B preferred shares will pay cumulative dividends at a rate of 5% per annum until the fifth anniversary of the investment date and thereafter at a rate of 9% per annum. The Series B preferred shares are transferable by the U.S. Treasury at any time. Subject to the approval of the Federal Reserve Board, the Series B preferred shares may be reacquired by the Company at 100% of liquidation preference (plus any accrued and unpaid dividends).
Warrants During 2008, in conjunction with the Series B preferred stock offering, the Company issued warrants with an initial price of $15.15 per share of common stock for which the warrant may be exercised, with an allocated fair value of $25.2 million. The warrant may be exercised at any time on or before December 5, 2018. The U.S. Treasury may not transfer a portion of the warrants with respect to more than one-half of the original number of shares of common stock until the earlier of the successful completion of an offering of replacement Tier 1 capital of at least $306.5 million and December 31, 2009. The warrants, and all rights under the warrants, are otherwise transferable. As of September 30, 2009, there were 3,035,109 warrants outstanding.
Private Sales of Common Stock On July 14, 2009, in private placement transactions, two customers of the Bank purchased 5,000,000 newly issued shares of the Companys common stock at a price of $5.50 per share. The Company received net proceeds of approximately $26.0 million, net of
33
stock issuance costs, in conjunction with this common stock offering. The Company has registered these shares for resale to the public.
Public Offering of Common Stock - On July 24, 2009, the Company completed a public offering of 11 million shares of its common stock priced at $6.35. The underwriter also exercised its option to purchase an additional 1.65 million shares of the Companys common stock. The Company received net proceeds of approximately $76.7 million, net of stock issuance costs, in conjunction with this common stock offering.
Stock Repurchase Program During 2007, the Companys Board of Directors authorized a new stock repurchase program to buy back up to $80.0 million of the Companys common stock. The Company did not repurchase any shares during the nine months ended September 30, 2009 in connection with this stock repurchase program.
Quarterly Dividends On July 15, 2009, the Companys Board of Directors declared third quarter preferred stock cash dividends of $20.00 per share on its Series A preferred stock payable on or about August 1, 2009 to shareholders of record on July 15, 2009. On August 17, 2009, the Companys Board of Directors declared and paid quarterly preferred cash dividends of $12.50 on its Series B preferred shares. Total cash dividends accrued and paid in conjunction with the Companys Series A and B preferred stock amounted to $5.9 million and $21.4 million during the three and nine months ended September 30, 2009, respectively.
On July 15, 2009, the Companys Board of Directors also declared quarterly common stock cash dividends of $0.01 per share payable on or about August 26, 2009 to shareholders of record on August 12, 2009. Cash dividends totaling $916 thousand and $2.5 million were paid to the Companys common shareholders during the third quarter and first nine months of 2009, respectively.
Earnings (Loss) Per Share (EPS) The actual number of shares outstanding at September 30, 2009 was 91,693,532. Basic EPS excludes dilution and is computed by dividing income or loss available to common stockholders by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated on the basis of the weighted average number of shares outstanding during the period plus restricted stock and shares issuable upon the assumed exercise of outstanding convertible preferred stock, common stock options and warrants, unless they have an antidilutive effect. Due to the net loss recorded during the third quarter and first nine months of 2009, incremental shares resulting from the assumed conversion, exercise, or contingent issuance of securities are not included as their effect on earnings or loss per share would be antidilutive.
The following table sets forth (loss) earnings per share calculations for the three and nine months ended September 30, 2009 and 2008:
34
|
|
Three Months Ended September 30, |
|
|||||||||||||||
|
|
2009 |
|
2008 |
|
|||||||||||||
|
|
Net loss available to |
|
Number |
|
Per Share |
|
Net loss available to |
|
Number |
|
Per Share |
|
|||||
|
|
common stockholders |
|
of Shares |
|
Amounts |
|
common stockholders |
|
of Shares |
|
Amounts |
|
|||||
|
|
(In thousands, except per share data) |
|
|||||||||||||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss before extraordinary item, as reported |
|
$ |
(68,531 |
) |
86,538 |
|
$ |
(0.79 |
) |
$ |
(31,206 |
) |
62,675 |
|
$ |
(0.50 |
) |
|
Less: Preferred stock dividends, inducement, and amortization of preferred stock discount |
|
(10,620 |
) |
|
|
|
|
(4,089 |
) |
|
|
|
|
|||||
Loss available to common stockholders before extraordinary item |
|
(79,151 |
) |
86,538 |
|
(0.91 |
) |
(35,295 |
) |
62,675 |
|
(0.56 |
) |
|||||
Extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss available to common stockholders after extraordinary item |
|
$ |
(79,151 |
) |
$ |
86,538 |
|
$ |
(0.91 |
) |
$ |
(35,295 |
) |
62,675 |
|
$ |
(0.56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss available to common stockholders before extraordinary item |
|
$ |
(79,151 |
) |
86,538 |
|
$ |
(0.91 |
) |
$ |
(35,295 |
) |
62,675 |
|
$ |
(0.56 |
) |
|
Extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss available to common stockholders after extraordinary item |
|
$ |
(79,151 |
) |
$ |
86,538 |
|
$ |
(0.91 |
) |
$ |
(35,295 |
) |
62,675 |
|
$ |
(0.56 |
) |
|
|
Nine Months Ended September 30, |
|
|||||||||||||||
|
|
2009 |
|
2008 |
|
|||||||||||||
|
|
Net loss available to |
|
Number |
|
Per Share |
|
Net loss available to |
|
Number |
|
Per Share |
|
|||||
|
|
common stockholders |
|
of Shares |
|
Amounts |
|
common stockholders |
|
of Shares |
|
Amounts |
|
|||||
|
|
(In thousands, except per share data) |
|
|||||||||||||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss before extraordinary item, as reported |
|
$ |
(177,722 |
) |
70,967 |
|
$ |
(2.50 |
) |
$ |
(52,049 |
) |
62,586 |
|
$ |
(0.83 |
) |
|
Less: Preferred stock dividends, inducement, and amortization of preferred stock discount |
|
(42,986 |
) |
|
|
|
|
(4,089 |
) |
|
|
|
|
|||||
Loss available to common stockholders before extraordinary item |
|
(220,708 |
) |
70,967 |
|
(3.11 |
) |
(56,138 |
) |
62,586 |
|
(0.90 |
) |
|||||
Extraordinary item |
|
(5,366 |
) |
70,967 |
|
(0.08 |
) |
|
|
|
|
|
|
|||||
Net loss available to common stockholders after extraordinary item |
|
$ |
(226,074 |
) |
$ |
70,967 |
|
$ |
(3.19 |
) |
$ |
(56,138 |
) |
62,586 |
|
$ |
(0.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss available to common stockholders before extraordinary item |
|
$ |
(220,708 |
) |
70,967 |
|
$ |
(3.11 |
) |
$ |
(56,138 |
) |
62,586 |
|
$ |
(0.90 |
) |
|
Extraordinary item |
|
(5,366 |
) |
70,967 |
|
(0.08 |
) |
|
|
|
|
|
|
|||||
Net loss available to common stockholders after extraordinary item |
|
$ |
(226,074 |
) |
70,967 |
|
$ |
(3.19 |
) |
$ |
(56,138 |
) |
62,586 |
|
$ |
(0.90 |
) |
|
The following outstanding convertible preferred stock, stock options, and restricted stock for the three and nine months ended September 30, 2009 and 2008, respectively, were excluded from the computation of diluted EPS because including them would have had an antidilutive effect:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
(In thousands) |
|
(In thousands) |
|
||||
Convertible preferred stock |
|
6,169 |
|
12,955 |
|
10,547 |
|
7,617 |
|
Stock options |
|
1,922 |
|
2,435 |
|
1,964 |
|
1,995 |
|
Restricted stock |
|
583 |
|
710 |
|
802 |
|
651 |
|
35
10. BUSINESS SEGMENTS
The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company overall. The Company had previously identified five operating segments for purposes of management reporting: retail banking, commercial lending, treasury, residential lending, and other. The Banks strategic focus has been shifting and evolving over the last several years which has influenced how the chief operating decision maker views the Companys business operations and assesses its economic performance. Specifically, the Companys business focus has culminated in a two-segment core business structure: Retail Banking and Commercial Banking. A third segment, which is comprised of a combination of previous operating segmentsTreasury and Other, provides broad administrative support to these two core segments. As a result of this evolution in the Companys strategic focus, the Company realigned its segment methodology during the first quarter of 2009, and identified these three business divisions as meeting the criteria of an operating segment. The objective of combining certain segments under a new reporting structure was to better align the Companys service structure with its customer base, and to provide a platform to more efficiently manage the complexities and challenges impacting the Companys current business environment.
The Retail Banking segment focuses primarily on retail operations through the Banks branch network. The Commercial Banking segment, which includes commercial real estate, primarily generates commercial loans through the efforts of the commercial lending offices located in the Banks northern and southern California production offices. Furthermore, the Companys Commercial Banking segment also offers a wide variety of international finance and trade services and products. The former residential lending segment has been combined with the Retail Banking segment due to the consumer-centric nature of the products and services offered by these two segments as well as the synergistic relationship between these two units in generating consumer mortgage loans. The remaining centralized functions, including the former Treasury segment, and eliminations of intersegment amounts have been aggregated and included in Other.
Given the significant decline in short-term and long-term interest rates since 2007, the Company reassessed its transfer pricing assumptions during the first quarter of 2009 to be consistent with its goal of growing core deposits and originating profitable, good credit quality loans. Changes to the Companys funds transfer pricing assumptions were made with the intent to promote core deposit growth and, given the Banks recent credit experience, to better reflect the current risk profiles of various loan categories within the credit portfolio. Transfer pricing assumptions and methodologies are reviewed at least annually to ensure that the Companys process is reflective of current market conditions. The transfer pricing process is formulated with the goal of incenting loan and deposit growth that is consistent with the Companys overall growth objectives as well as provide a reasonable and consistent basis for the measurement of the Companys business segments and product net interest margins. Changes to the Companys transfer pricing assumptions and methodologies are approved by the Asset Liability Committee.
36
The changes in transfer pricing assumptions that the Company implemented during the first quarter of 2009 have not been reflected in the segment results for 2008 since these changes were adopted on a prospective basis. The Company has, however, performed a high level assessment of the impact of these transfer pricing assumption changes to the various operating segments. Based on this assessment, the Company determined that the full year impact of these changes was not significant overall, and would have been favorable to the segment pretax profit (loss) results for the Retail Banking and Commercial banking segments but unfavorable to the Other segment during 2008. Additionally, the changes in transfer pricing assumptions implemented during the first quarter of 2009 would not have altered the conclusion of the goodwill impairment test performed as of September 30, 2008, had these assumptions been retroactively implemented during 2008.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies described in Note 1 of the Companys Annual Report on Form 10-K for the year ended December 31, 2008. Operating segment results are based on the Companys internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs and the provision for loan losses. Net interest income is based on the Companys internal funds transfer pricing system which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business. Indirect costs, including overhead expense, are allocated to the segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume. The provision for credit losses is allocated based on actual chargeoffs for the period as well as average loan balance for each segment during the period. The Company evaluates overall performance based on profit or loss from operations before income taxes excluding nonrecurring gains and losses.
The following tables present the operating results and other key financial measures for the individual operating segments for the three and nine months ended September 30, 2009 and 2008:
37
|
|
Three Months Ended September 30, 2009 |
|
||||||||||
|
|
Retail |
|
Commercial |
|
|
|
|
|
||||
|
|
Banking |
|
Banking |
|
Other |
|
Total |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
$ |
55,364 |
|
$ |
61,039 |
|
$ |
31,521 |
|
$ |
147,924 |
|
Charge for funds used |
|
(17,024 |
) |
(16,822 |
) |
(36,441 |
) |
(70,287 |
) |
||||
Interest spread on funds used |
|
38,340 |
|
44,217 |
|
(4,920 |
) |
77,637 |
|
||||
Interest expense |
|
(21,648 |
) |
(3,680 |
) |
(26,716 |
) |
(52,044 |
) |
||||
Credit on funds provided |
|
32,132 |
|
3,157 |
|
34,998 |
|
70,287 |
|
||||
Interest spread on funds provided |
|
10,484 |
|
(523 |
) |
8,282 |
|
18,243 |
|
||||
Net interest income (expense) |
|
$ |
48,824 |
|
$ |
43,694 |
|
$ |
3,362 |
|
$ |
95,880 |
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for loan losses |
|
$ |
65,184 |
|
$ |
94,060 |
|
$ |
|
|
$ |
159,244 |
|
Depreciation, amortization and accretion |
|
2,512 |
|
1,354 |
|
1,409 |
|
5,275 |
|
||||
Goodwill |
|
320,566 |
|
16,872 |
|
|
|
337,438 |
|
||||
Segment pretax (loss) profit |
|
(44,984 |
) |
(56,767 |
) |
(19,557 |
) |
(121,308 |
) |
||||
Segment assets |
|
4,292,102 |
|
4,660,368 |
|
3,533,460 |
|
12,485,930 |
|
|
|
Three Months Ended September 30, 2008 |
|
||||||||||
|
|
Retail |
|
Commercial |
|
|
|
|
|
||||
|
|
Banking |
|
Banking |
|
Other |
|
Total |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
$ |
60,292 |
|
$ |
79,833 |
|
$ |
19,737 |
|
$ |
159,862 |
|
Charge for funds used |
|
(28,222 |
) |
(35,898 |
) |
(37,888 |
) |
(102,008 |
) |
||||
Interest spread on funds used |
|
32,070 |
|
43,935 |
|
(18,151 |
) |
57,854 |
|
||||
Interest expense |
|
(32,494 |
) |
(3,454 |
) |
(37,399 |
) |
(73,347 |
) |
||||
Credit on funds provided |
|
49,598 |
|
3,867 |
|
48,543 |
|
102,008 |
|
||||
Interest spread on funds provided |
|
17,104 |
|
413 |
|
11,144 |
|
28,661 |
|
||||
Net interest income (expense) |
|
$ |
49,174 |
|
$ |
44,348 |
|
$ |
(7,007 |
) |
$ |
86,515 |
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for loan losses |
|
$ |
22,604 |
|
$ |
20,396 |
|
$ |
|
|
$ |
43,000 |
|
Depreciation, amortization and accretion |
|
2,577 |
|
196 |
|
(120 |
) |
2,653 |
|
||||
Goodwill |
|
320,464 |
|
16,867 |
|
|
|
337,331 |
|
||||
Segment pretax (loss) profit |
|
(9,698 |
) |
9,078 |
|
(47,941 |
) |
(48,561 |
) |
||||
Segment assets |
|
4,027,073 |
|
5,229,446 |
|
2,465,797 |
|
11,722,316 |
|
|
|
Nine Months Ended September 30, 2009 |
|
||||||||||
|
|
Retail |
|
Commercial |
|
|
|
|
|
||||
|
|
Banking |
|
Banking |
|
Other |
|
Total |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
$ |
164,304 |
|
$ |
185,437 |
|
$ |
89,439 |
|
$ |
439,180 |
|
Charge for funds used |
|
(48,702 |
) |
(48,926 |
) |
(145,265 |
) |
(242,893 |
) |
||||
Interest spread on funds used |
|
115,602 |
|
136,511 |
|
(55,826 |
) |
196,287 |
|
||||
Interest expense |
|
(73,196 |
) |
(12,942 |
) |
(89,221 |
) |
(175,359 |
) |
||||
Credit on funds provided |
|
116,897 |
|
12,479 |
|
113,517 |
|
242,893 |
|
||||
Interest spread on funds provided |
|
43,701 |
|
(463 |
) |
24,296 |
|
67,534 |
|
||||
Net interest income (expense) |
|
$ |
159,303 |
|
$ |
136,048 |
|
$ |
(31,530 |
) |
$ |
263,821 |
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for loan losses |
|
$ |
144,561 |
|
$ |
244,105 |
|
$ |
|
|
$ |
388,666 |
|
Depreciation, amortization and accretion |
|
8,584 |
|
3,226 |
|
5,037 |
|
16,847 |
|
||||
Goodwill |
|
320,566 |
|
16,872 |
|
|
|
337,438 |
|
||||
Segment pretax (loss) profit |
|
(84,964 |
) |
(136,334 |
) |
(83,214 |
) |
(304,512 |
) |
||||
Segment assets |
|
4,292,102 |
|
4,660,368 |
|
3,533,460 |
|
12,485,930 |
|
|
|
Nine Months Ended September 30, 2008 |
|
||||||||||
|
|
Retail |
|
Commercial |
|
|
|
|
|
||||
|
|
Banking |
|
Banking |
|
Other |
|
Total |
|
||||
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
$ |
205,251 |
|
$ |
253,950 |
|
$ |
55,750 |
|
$ |
514,951 |
|
Charge for funds used |
|
(104,691 |
) |
(123,884 |
) |
(79,163 |
) |
(307,738 |
) |
||||
Interest spread on funds used |
|
100,560 |
|
130,066 |
|
(23,413 |
) |
207,213 |
|
||||
Interest expense |
|
(109,582 |
) |
(10,813 |
) |
(116,246 |
) |
(236,641 |
) |
||||
Credit on funds provided |
|
167,118 |
|
13,748 |
|
126,872 |
|
307,738 |
|
||||
Interest spread on funds provided |
|
57,536 |
|
2,935 |
|
10,626 |
|
71,097 |
|
||||
Net interest income (expense) |
|
$ |
158,096 |
|
$ |
133,001 |
|
$ |
(12,787 |
) |
$ |
278,310 |
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for loan losses |
|
$ |
70,392 |
|
$ |
112,608 |
|
$ |
|
|
$ |
183,000 |
|
Depreciation, amortization and accretion |
|
9,641 |
|
627 |
|
2,486 |
|
12,754 |
|
||||
Goodwill |
|
320,464 |
|
16,867 |
|
|
|
337,331 |
|
||||
Segment pretax (loss) profit |
|
(5,907 |
) |
(13,396 |
) |
(66,657 |
) |
(85,960 |
) |
||||
Segment assets |
|
4,027,073 |
|
5,229,446 |
|
2,465,797 |
|
11,722,316 |
|
38
11. SUBSEQUENT EVENTS
Dividend Payout
On October 19, 2009, the Companys Board of Directors approved the payment of fourth quarter dividends of $20.00 per share on the Companys Series A preferred stock. The dividend is payable on or about November 1, 2009 to shareholders of record as of October 15, 2009. Additionally, on October 19, 2009, the Board declared a dividend of $0.01 per share on the Companys common stock payable on or about November 24, 2009 to shareholders of record as of November 10, 2009.
The Board has also authorized the payment of fourth quarter dividends of $12.50 per share on the Companys Series B Preferred Stock to be paid on November15, 2009.
39
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West Bancorp, Inc. and its subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008, and the condensed consolidated financial statements and accompanying notes presented elsewhere in this report.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In addition, certain accounting policies require significant judgment in applying complex accounting principles to individual transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements.
The following is a summary of the areas which require more judgment and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact the results of operations.
· fair valuation of financial instruments;
· investment securities;
· allowance for loan losses;
· other real estate owned;
· loan sales;
· goodwill impairment; and
· share-based compensation
· income taxes and deferred tax asset valuation
Our significant accounting policies are described in greater detail in our 2008 Annual Report on Form 10-K in the Critical Accounting Policies section of Managements Discussion and Analysis and in Note 1 to the Consolidated Financial StatementsSignificant Accounting Policies which are essential to understanding Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview
During the third quarter of 2009, we continued to sustain losses brought about by the prolonged recessionary climate and the downturn in the real estate market. As a result of our strategy to accelerate the resolution of problem assets, we recorded a net loss of $68.5 million or $(0.91) per share, largely due to $159.2 million in loan loss provisions and $24.2 million in other than temporary impairment (OTTI) losses on our pooled trust preferred securities. Despite the ongoing economic challenges, we ended the
40
quarter with record deposits and strong levels of both capital and the allowance for loan losses. Our core profitability (refer to the non-GAAP reconciliation of our loss before benefit from income taxes to core pre-tax operating income below) and liquidity position also remain strong, and our net interest margin has notably improved.
Building on the initiatives that we commenced in the second quarter of 2009, we completed several transactions during the third quarter of 2009 to further strengthen capital and increased tangible common equity. In July 2009, we completed the exchange of approximately 111 thousand shares of Series A preferred stock for approximately 10 million shares of our common stock, resulting in $107.5 million of additional tangible common equity net of original stock issuance costs. In July 2009, we entered into private placement transactions to sell 5 million newly issued shares of common stock at a price of $5.50 per share increasing tangible common equity by $26.0 million net of stock issuance costs. Also in July 2009, we completed a public offering of 12.65 million shares of our common stock for which the Company received total proceeds of approximately $76.7 million net of stock issuance costs. The combined impact of our comprehensive capital plan initiatives has resulted in a $240.8 million increase to tangible common equity, net of stock issuance costs. As of September 30, 2009, our total risk-based capital ratio was 15.13% or $512.4 million more than the 10.00% regulatory requirement for well-capitalized banks. Our Tier 1 risk-based capital ratio of 13.08% and our Tier 1 leverage ratio of 10.62% as of September 30, 2009 also significantly exceeded regulatory guidelines for well-capitalized banks.
During the third quarter of 2009, we continued to manage our exposure to problem assets through sales of $206.3 million in problem loans and other real estate owned (OREO) as well as a reduction in land and construction loan balances of $355.6 million, or 25% from June 30, 2009. Total delinquent loans decreased for the second consecutive quarter, declining $71.8 million or 24% as of September 30, 2009 relative to June 30, 2009. Specifically, loans 30 to 59 days delinquent decreased 63% or $37.3 million, 60 to 89 day delinquent loans decreased 30% or $27.1 million, and 90 or more day delinquent loans decreased 5.0% or $7.4 million, as of September 30, 2009 relative to June 30, 2009. The decline in delinquent loans is primarily due to the sale, payoff and resolution of problem assets. During the third quarter of 2009, we sold $180.6 million in loans and $25.7 million in OREO properties. These sales of problem assets have resulted in net chargeoffs of $60.1 million and $91.9 million for the third quarter of 2009 and first nine months of 2009, respectively. Our proactive actions to identify and manage our exposure to problem assets have resulted in elevated chargeoff levels throughout 2008 and 2009. If the REO is sold shortly after it is received in a foreclosure, the adjustment made to the loss is charged against or credit to the allowance for loan losses, if deemed material. Total net chargeoffs amounted to $151.2 million during the third quarter of 2009, compared to $133.9 million and $59.6 million during the second and first quarters of 2009, respectively. At September 30, 2009, the allowance for loan losses amounted to $230.7 million or 2.74% of total gross loans, compared to $223.7 million or 2.62% as of June 30, 2009, and $195.5 million or 2.42% as of March 31, 2009. We recorded $159.2 million in loan loss provisions during the third quarter of 2009, compared to $151.4 million and $43.0 million recorded during the second quarter of 2009 and third quarter of 2008, respectively.
Nonperforming assets totaled $230.2 million representing 1.84% of total assets at September 30, 2009. This compares to $189.4 million or 1.49% at June 30, 2009 and $286.6 million or 2.28% of total assets at March 31, 2009. Nonperforming assets as of September 30, 2009 are comprised of nonaccrual loans totaling $204.4 million, OREO totaling $24.2 million, and accruing loans past due 90 days or more of $1.6 million. Total nonaccrual loans increased 26% to $204.4 million as of September 30, 2009 from $162.2 million as of June 30, 2009 but decreased 18% from $248.0 million as of March 31, 2009. Included in nonaccrual loans as of September 30, 2009 are loans totaling $66.0 million which were not 90 days past due as of September 30, 2009, but have been classified as nonaccrual due to concerns surrounding collateral values and future collectibility. The increase in nonperforming assets at September 30, 2009, relative to June 30, 2009, was largely due to increases in nonaccrual land loans that
41
are current or otherwise less than 90 days delinquent. These loans were placed on nonaccrual status to proactively manage these problem assets. We also had $116.5 million and $89.5 million in total performing restructured loans as of September 30, 2009 and June 30, 2009, respectively, which were excluded from nonperforming assets.
Included in the $116.5 million total restructured loans as of September 30, 2009 were $104.1 million in performing A/B notes. In A/B note restructurings, the original loan is bifurcated into two notes where the A note represents the portion of the original loan which allows for acceptable loan-to-value and debt coverage on the collateral and is expected to be collected in full and the B note represents the portion of the original loan which is the shortfall in value and is fully charged off. The A/B notes balance as of September 30, 2009 is comprised of A note balances only. The A notes are performing loans at market interest rates that have demonstrated sustained repayment and performance with adequate collateral and cash flows and are accruing interest. In accordance with generally accepted accounting principles, A notes must be disclosed as troubled debt restructurings until the beginning of the next fiscal year.
In addition to the loan loss provision of $159.2 million posted during the third quarter of 2009, we also recorded $24.2 million in OTTI losses on our pooled trust preferred securities prompted by diminishing collateral values, deteriorating cash flows, and increased deferrals and defaulted payments from many small banks that issued these instruments. We also recorded $767 thousand in OREO expenses during the quarter ended September 30, 2009. Excluding these items, our core pre-tax operating income before extraordinary item was $63.0 million for the third quarter of 2009. This compares to $56.0 million and $50.1 million in core pre-tax operating income during the second quarter of 2009 and third quarter of 2008, respectively. We believe that core pre-tax operating income is a strong indicator of our stable core earnings. Although a non-GAAP measure, a reconciliation of our loss before benefit from income taxes to core pre-tax operating income is as follows:
|
|
Three Months Ended |
|
|||||||
|
|
September 30, 2009 |
|
June 30, 2009 |
|
September 30, 2008 |
|
|||
|
|
(In thousands) |
|
|||||||
Loss before benefit for income taxes |
|
$ |
(121,308 |
) |
$ |
(147,273 |
) |
$ |
(48,561 |
) |
Add: |
|
|
|
|
|
|
|
|||
Provision for loan losses |
|
159,244 |
|
151,422 |
|
43,000 |
|
|||
Impairment loss on investment securities |
|
24,249 |
|
37,447 |
|
53,567 |
|
|||
FDIC special assessment |
|
|
|
5,700 |
|
|
|
|||
Other real estate owned expense |
|
767 |
|
8,682 |
|
2,123 |
|
|||
Core pre-tax operating income |
|
$ |
62,952 |
|
$ |
55,978 |
|
$ |
50,129 |
|
Net interest income amounted to $95.9 million during the quarter ended September 30, 2009, compared with $88.3 million during the second quarter of 2009 and $86.5 million during the third quarter of 2008. Our net interest margin increased to 3.20% during the third quarter of 2009 relative to 2.98% during the second quarter of 2009 and 3.10% during the third quarter of 2008. The increase in our net interest margin can be attributed to the maturity of higher cost CDs, new core deposits at lower costs, the maturity and paydown of FHLB advances, the impact from the desecuritization, and higher yields realized on investable funds and new loans. We anticipate our net interest margin to increase during the remainder of 2009 as we continue to increase our core deposit base and pay down higher cost FHLB advances.
Total noninterest loss amounted to $(11.9) million during the third quarter of 2009, compared with noninterest loss of $(26.2) million during the second quarter of 2009 and $(43.6) million during the third quarter of 2008. During the third quarter of 2009 we recorded $24.2 million in OTTI losses, compared with $37.4 million and $53.6 million in such losses recorded during the second quarter of 2009 and the third quarter of 2008, respectively. Core noninterest income amounted to $10.2 million during
42
the third quarter of 2009, compared with $9.5 million and $9.8 million recorded during the second quarter of 2009 and the third quarter of 2008, respectively. We believe that core noninterest income is a strong indicator of our stable core earnings. Although a non-GAAP measure, a reconciliation of our noninterest income to core noninterest income is as follows:
|
|
Three Months Ended |
|
|||||||
|
|
September 30, 2009 |
|
June 30, 2009 |
|
September 30, 2008 |
|
|||
|
|
(In thousands) |
|
|||||||
Noninterest loss |
|
$ |
(11,880 |
) |
$ |
(26,199 |
) |
$ |
(43,550 |
) |
Add: |
|
|
|
|
|
|
|
|||
Impairment loss on investment securities |
|
24,249 |
|
37,447 |
|
53,567 |
|
|||
Subtract: |
|
|
|
|
|
|
|
|||
Net gain on sale of investment securities |
|
(2,177 |
) |
(1,680 |
) |
|
|
|||
Net gain on fixed assets |
|
(25 |
) |
(25 |
) |
(44 |
) |
|||
Net gain on sale of loans |
|
(8 |
) |
(3 |
) |
(144 |
) |
|||
Core noninterest income |
|
$ |
10,159 |
|
$ |
9,540 |
|
$ |
9,829 |
|
Total noninterest expense amounted to $46.1 million during the third quarter of 2009, compared with $57.9 million and $48.5 million recorded during the second quarter of 2009 and the third quarter of 2008, respectively. The decrease in noninterest expense during the third quarter of 2009 relative to the second quarter of 2009 is primarily due to lower losses on sales, writedowns and expenses on OREO properties as well as lower deposit insurance premiums and regulatory assessments. During the second quarter of 2009, we accrued $5.7 million in special FDIC assessments that was paid on September 30, 2009. There were no special assessments recorded during the third quarter of 2009. Our efficiency ratio, which represents noninterest expense (excluding amortization and/or impairment losses on intangible assets and investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income, excluding impairment losses on investment securities, was 39.99% during the third quarter of 2009 compared with 55.12% during the second quarter of 2009 and 46.40% during the third quarter of 2008. We will continue to explore various cost management opportunities during the remainder of 2009 and beyond.
Total consolidated assets at September 30, 2009 slightly increased to $12.49 billion, compared with $12.42 billion at December 31, 2008. Similarly, total average assets increased to $12.64 billion during the third quarter of 2009, compared to $12.62 billion and $11.71 billion during the second quarter of 2009 and the third quarter of 2008, respectively. Growth in average short-term investments and average held-to-maturity investment securities accounted for the majority of the increase in total average assets during the first three quarters of 2009 relative to the third quarter of 2008. The increases in average short-term investments and held-to-maturity investment securities can be attributed to proceeds received in conjunction with our issuance of Series B preferred stock during December 2008, notable increases in our deposit base during the first three quarters of 2009, as well as the reinvestment of a portion of our loan payoffs into short-term securities and investment securities. Total average deposits grew to $8.66 billion during the third quarter of 2009, compared to $8.44 billion and $7.47 billion during the second quarter of 2009 and the third quarter of 2008, respectively, with the largest increase coming from money market accounts.
During the third quarter of 2009, we continued to experience deposit growth with total deposits increasing to a record $8.67 billion as of September 30, 2009, representing a 6% or $526.6 million, increase over year-end 2008. This increase in total deposits was predominantly due to a 30% or $1.03 billion increase in our core deposit base as of September 30, 2009 relative to December 31, 2008. Since mid-2008, we have experienced strong deposit momentum through both our retail branch network and our commercial deposit platforms despite volatile and challenging market conditions. As a result of this increase in core deposits, we were able to reduce our reliance on higher cost brokered time deposits and pay down higher cost FHLB advances which decreased $430.1 million or 32% to $923.2 million as of September 30, 2009. We intend to pay down maturing FHLB advances totaling $200.0 million during
43
the remainder of 2009. These FHLB advances currently have interest rates ranging from 4% to over 5%. Our cost of deposits has steadily declined in conjunction with the growth of our core deposit base, decreasing 23 basis points to 1.24% during the third quarter of 2009, relative to the second quarter of 2009, and decreasing 90 basis points since the quarter ended December 31, 2008. Similarly, our cost of funds decreased 24 basis points to 1.88% during the third quarter of 2009, from 2.12% for the second quarter of 2009, and decreased 89 basis points since the quarter ended December 31, 2008.
Our liquidity position remains strong. Our total borrowing capacity and holdings of cash and due from banks, short-term investments and interest-bearing deposits in other banks amounted to $3.85 billion as of September 30, 2009, compared to $3.97 billion as of June 30, 2009 and $3.94 billion as of March 31, 2009. As of September 30, 2009, we had $132.6 million in cash and due from banks, $320.9 million in interest-bearing deposits, $460.7 million in short-term investments, and approximately $2.94 billion in available borrowing capacity from various sources including the Federal Home Loan Bank, the Federal Reserve Bank, and federal funds facilities with several financial institutions. We believe that our liquidity position is more than sufficient to meet our operating expenses, borrowing needs and other obligations.
As of September 30, 2009, we updated our goodwill impairment analysis to determine whether and to what extent our goodwill asset was impaired. As a result of this updated analysis, we determined that there was no goodwill impairment at September 30, 2009.
On July 15, 2009, the Board of Directors declared third quarter dividends on our common stock and remaining Series A preferred stock. We will continue to review our dividend policy quarterly in light of the current economic environment.
We continue to explore opportunities for growth and expansion both organically and by acquisition, including FDIC-assisted acquisitions for banks which fail and are placed in receivership. During the third quarter of 2009, we opened a Representative Office in Taipei. Our growing physical presence in Asia includes a full service branch in Hong Kong and Representative Offices in Beijing and Shanghai. With our increasing presence in Asia, we will be better able to facilitate our customers lending and overall banking needs.
Results of Operations
Net loss for the third quarter of 2009 totaled $(68.5) million, compared with net loss of $(31.2) million for the third quarter of 2008. On a per basic and diluted share basis, net loss was $(0.91) and $(0.56) during the third quarters of 2009 and 2008, respectively. During the third quarter of 2009, our operating results were significantly impacted by $159.2 million in loan loss provisions and $24.2 million in credit-related impairment loss on investment securities, partially offset by a $52.8 million benefit from income taxes. In comparison, we recorded $43.0 million in loan loss provisions and $53.6 million in impairment losses on investment securities, partially offset by a $17.4 million benefit from income taxes during the third quarter of 2008. Our annualized return on average total assets decreased to (2.17%) for the quarter ended September 30, 2009, from (1.07%) for the same period in 2008. The annualized return on average stockholders equity decreased to (17.76%) for the third quarter of 2009, compared with (10.06%) for the third quarter of 2008.
We incurred a net loss after extraordinary item for the nine months ended September 30, 2009 of $(183.1) million, or $(3.19) loss per basic and diluted share, compared with net loss of $(52.0) million, or $(0.90) loss per basic and diluted share, reported during the corresponding period in 2008. The net loss reported during the first nine months of 2009 was primarily due to the $388.7 million in loan loss provisions and $61.9 million in credit-related impairment losses on investment securities, partially offset
44
by a $126.8 million benefit from income taxes. In comparison, we recorded $183.0 million in loan loss provisions recorded during the first nine months of 2008 and $63.5 million in impairment losses on investment securities, partially offset by a $33.9 million benefit from income taxes. Our annualized return on average total assets decreased to (1.94%) for the first nine months ended September 30, 2009, compared to (0.59%) for the same period in 2008. The annualized return on average total stockholders equity decreased to (15.87%) for the first nine months of 2009, compared with (5.75%) for the same period in 2008.
Components of Net Loss
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(In millions) |
|
(In millions) |
|
||||||||
Net interest income |
|
$ |
95.9 |
|
$ |
86.5 |
|
$ |
263.8 |
|
$ |
278.3 |
|
Provision for loan losses |
|
(159.2 |
) |
(43.0 |
) |
(388.7 |
) |
(183.0 |
) |
||||
Noninterest (loss) income |
|
(11.9 |
) |
(43.6 |
) |
(24.3 |
) |
(24.2 |
) |
||||
Noninterest expense |
|
(46.1 |
) |
(48.5 |
) |
(155.4 |
) |
(157.1 |
) |
||||
Benefit from income taxes |
|
52.8 |
|
17.4 |
|
126.9 |
|
34.0 |
|
||||
Net loss before extraordinary item |
|
(68.5 |
) |
(31.2 |
) |
(177.7 |
) |
(52.0 |
) |
||||
Impact of desecuritization, net of tax |
|
|
|
|
|
5.4 |
|
|
|
||||
Net loss after extraordinary item |
|
$ |
(68.5 |
) |
$ |
(31.2 |
) |
$ |
(183.1 |
) |
$ |
(52.0 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Annualized return on average total assets |
|
-2.17 |
% |
-1.07 |
% |
-1.94 |
% |
-0.59 |
% |
||||
Annualized return on average total equity |
|
-17.76 |
% |
-10.06 |
% |
-15.87 |
% |
-5.75 |
% |
||||
Annualized return on average common equity |
|
-27.12 |
% |
-13.49 |
% |
-27.46 |
% |
-6.83 |
% |
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest earned on loans, investment securities and other earning assets less the interest expense on deposits, borrowings and other interest-bearing liabilities. Net interest income for the third quarter of 2009 totaled $95.9 million, an 11% increase over net interest income of $86.5 million same period in 2008. For the first nine months of 2009, net interest income decreased 5% to $263.8 million, compared to $278.3 million for the same period in 2008.
Net interest margin, defined as net interest income divided by average earning assets, increased 10 basis points to 3.20% during the quarter ended September 30, 2009, from 3.10% during the third quarter of 2008. The increase in our net interest margin can be attributed to the maturity of higher cost CDs, new core deposits at lower costs, the maturity and paydown of FHLB advances, the impact from the desecuritization, and higher yields realized on investable funds and new loans. The net interest margin for the first nine months of 2009 decreased 38 basis points to 2.97%, compared with 3.35% during the same period in 2008. The decline in the net interest margin for the first three quarters of 2009 relative to the same period in 2008 reflects the steep decrease in the federal funds target rate during 2008, the actions we took to resolve our problem assets, and the reinvestment of net loan payoffs into lower yielding investment securities and other short-term investments.
The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the three months ended September 30, 2009 and 2008:
45
|
|
Three Months Ended September 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
||||
|
|
Average |
|
|
|
Yield/ |
|
Average |
|
|
|
Yield/ |
|
||||
|
|
Volume |
|
Interest |
|
Rate (1) |
|
Volume |
|
Interest |
|
Rate (1) |
|
||||
|
|
(in thousands) |
|
||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments |
|
$ |
387,753 |
|
$ |
402 |
|
0.41 |
% |
$ |
340,228 |
|
$ |
1,953 |
|
2.28 |
% |
Interest-bearing deposits in other banks |
|
509,774 |
|
1,454 |
|
1.12 |
% |
495 |
|
5 |
|
4.01 |
% |
||||
Securities purchased under resale agreements |
|
91,033 |
|
2,153 |
|
9.25 |
% |
50,000 |
|
1,276 |
|
10.12 |
% |
||||
Investment securities (2)(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
761,615 |
|
11,886 |
|
6.24 |
% |
|
|
|
|
|
|
||||
Tax-exempt (4)(5) |
|
22,727 |
|
256 |
|
4.51 |
% |
|
|
|
|
|
|
||||
Available-for-sale (3)(4)(5) |
|
1,543,004 |
|
16,425 |
|
4.22 |
% |
2,126,894 |
|
23,315 |
|
4.35 |
% |
||||
Loans receivable (2)(6) |
|
8,471,766 |
|
114,512 |
|
5.36 |
% |
8,451,517 |
|
131,682 |
|
6.18 |
% |
||||
FHLB and FRB stock |
|
123,514 |
|
918 |
|
2.97 |
% |
114,281 |
|
1,803 |
|
6.26 |
% |
||||
Total interest-earning assets |
|
11,911,186 |
|
148,006 |
|
4.93 |
% |
11,083,415 |
|
160,034 |
|
5.73 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
124,708 |
|
|
|
|
|
136,018 |
|
|
|
|
|
||||
Allowance for loan losses |
|
(244,542 |
) |
|
|
|
|
(171,025 |
) |
|
|
|
|
||||
Other assets |
|
843,925 |
|
|
|
|
|
660,736 |
|
|
|
|
|
||||
Total assets |
|
$ |
12,635,277 |
|
|
|
|
|
$ |
11,709,144 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Checking accounts |
|
$ |
342,922 |
|
$ |
286 |
|
0.33 |
% |
$ |
399,866 |
|
$ |
659 |
|
0.65 |
% |
Money market accounts |
|
2,160,722 |
|
6,830 |
|
1.25 |
% |
1,046,721 |
|
5,664 |
|
2.15 |
% |
||||
Savings deposits |
|
421,844 |
|
608 |
|
0.57 |
% |
449,687 |
|
929 |
|
0.82 |
% |
||||
Time deposits less than $100,000 |
|
1,090,647 |
|
5,572 |
|
2.03 |
% |
1,151,876 |
|
7,932 |
|
2.73 |
% |
||||
Time deposits $100,000 or greater |
|
3,308,057 |
|
13,674 |
|
1.64 |
% |
3,045,325 |
|
25,573 |
|
3.33 |
% |
||||
Federal funds purchased |
|
1,385 |
|
2 |
|
0.57 |
% |
87,606 |
|
430 |
|
1.95 |
% |
||||
FHLB advances |
|
1,046,056 |
|
11,172 |
|
4.24 |
% |
1,541,799 |
|
17,140 |
|
4.41 |
% |
||||
Securities sold under repurchase agreements |
|
1,018,321 |
|
12,140 |
|
4.66 |
% |
1,000,273 |
|
12,063 |
|
4.78 |
% |
||||
Long-term debt |
|
235,570 |
|
1,760 |
|
2.92 |
% |
235,570 |
|
2,957 |
|
4.98 |
% |
||||
Total interest-bearing liabilities |
|
9,625,524 |
|
52,044 |
|
2.15 |
% |
8,958,723 |
|
73,347 |
|
3.25 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demand deposits |
|
1,335,131 |
|
|
|
|
|
1,375,103 |
|
|
|
|
|
||||
Other liabilities |
|
130,800 |
|
|
|
|
|
134,809 |
|
|
|
|
|
||||
Stockholders equity |
|
1,543,822 |
|
|
|
|
|
1,240,509 |
|
|
|
|
|
||||
Total liabilities and stockholders equity |
|
$ |
12,635,277 |
|
|
|
|
|
$ |
11,709,144 |
|
|
|
|
|
||
Interest rate spread |
|
|
|
|
|
2.78 |
% |
|
|
|
|
2.48 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest income and net interest margin |
|
|
|
$ |
95,962 |
|
3.20 |
% |
|
|
$ |
86,687 |
|
3.10 |
% |
(1) Annualized.
(2) Includes amortization of premium and accretion of discounts on investment securities and loans receivable totaling $(1.6) million and $(3.3) million for the three months ended September 30, 2009 and 2008, respectively. Also includes the amortization of deferred loan fees totaling $(1.9) million and $284 thousand for the three months ended September 30, 2009 and 2008, respectively.
(3) Average balances exclude unrealized gains or losses on available-for-sale securities.
(4) Total interest income and average yield rate on an unadjusted basis for tax-exempt investment securities held-to-maturity is $174 thousand and 3.06% for the three months ended September 30, 2009, respectively, and none for the three months ended September 30, 2008. Total interest income and average yield rate on an unadjusted basis for investment securities available-for-sale is $16.4 million and 4.22% for the three months ended September 30, 2009, respectively. Total interest income and average yield rate on an unadjusted basis for investment securities available-for-sale is $23.1 million and 4.32% for the three months ended September 30, 2008, respectively.
(5) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
(6) Average balances include nonperforming loans.
46
The following table presents the net interest spread, net interest margin, average balances, interest income and expense and the average yields and rates by asset and liability component for the nine months ended September 30, 2009 and 2008:
|
|
Nine Months Ended September 30, |
|
||||||||||||||
|
|
2009 |
|
2008 |
|
||||||||||||
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
||||
|
|
Average |
|
|
|
Yield/ |
|
Average |
|
|
|
Yield/ |
|
||||
|
|
Volume |
|
Interest |
|
Rate (1) |
|
Volume |
|
Interest |
|
Rate (1) |
|
||||
|
|
(in thousands) |
|
||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments |
|
$ |
405,387 |
|
$ |
2,663 |
|
0.88 |
% |
$ |
181,675 |
|
$ |
3,093 |
|
2.27 |
% |
Interest-bearing deposits in other banks |
|
430,382 |
|
4,678 |
|
1.45 |
% |
495 |
|
14 |
|
3.77 |
% |
||||
Securities purchased under resale agreements |
|
64,286 |
|
4,695 |
|
9.63 |
% |
76,898 |
|
5,533 |
|
9.58 |
% |
||||
Investment securities (3)(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
646,936 |
|
30,464 |
|
6.28 |
% |
|
|
|
|
|
|
||||
Tax-exempt (2)(5) |
|
20,737 |
|
907 |
|
5.83 |
% |
|
|
|
|
|
|
||||
Available-for-sale (2)(4)(5) |
|
1,878,815 |
|
57,101 |
|
4.06 |
% |
1,986,124 |
|
76,814 |
|
5.15 |
% |
||||
Loans receivable (3)(6) |
|
8,305,602 |
|
336,997 |
|
5.42 |
% |
8,725,596 |
|
425,113 |
|
6.49 |
% |
||||
FHLB and FRB stock |
|
122,369 |
|
1,969 |
|
2.15 |
% |
115,839 |
|
5,275 |
|
6.07 |
% |
||||
Total interest-earning assets |
|
11,874,514 |
|
439,474 |
|
4.95 |
% |
11,086,627 |
|
515,842 |
|
6.20 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
120,493 |
|
|
|
|
|
136,708 |
|
|
|
|
|
||||
Allowance for loan losses |
|
(210,015 |
) |
|
|
|
|
(132,548 |
) |
|
|
|
|
||||
Other assets |
|
799,008 |
|
|
|
|
|
664,711 |
|
|
|
|
|
||||
Total assets |
|
$ |
12,584,000 |
|
|
|
|
|
$ |
11,755,498 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Checking accounts |
|
$ |
351,933 |
|
$ |
1,003 |
|
0.38 |
% |
$ |
416,636 |
|
$ |
2,707 |
|
0.87 |
% |
Money market accounts |
|
1,826,626 |
|
18,664 |
|
1.37 |
% |
1,081,520 |
|
20,246 |
|
2.49 |
% |
||||
Savings deposits |
|
416,011 |
|
1,969 |
|
0.63 |
% |
463,172 |
|
3,341 |
|
0.96 |
% |
||||
Time deposits less than $100,000 |
|
1,194,374 |
|
22,137 |
|
2.48 |
% |
1,018,609 |
|
24,333 |
|
3.18 |
% |
||||
Time deposits $100,000 or greater |
|
3,391,653 |
|
51,160 |
|
2.02 |
% |
3,073,775 |
|
85,919 |
|
3.72 |
% |
||||
Federal funds purchased |
|
2,889 |
|
8 |
|
0.37 |
% |
115,370 |
|
2,176 |
|
2.51 |
% |
||||
FHLB advances |
|
1,200,713 |
|
38,191 |
|
4.25 |
% |
1,622,429 |
|
54,363 |
|
4.46 |
% |
||||
Securities sold under repurchase agreements |
|
1,007,912 |
|
36,016 |
|
4.71 |
% |
1,000,750 |
|
33,881 |
|
4.51 |
% |
||||
Long-term debt |
|
235,570 |
|
6,211 |
|
3.48 |
% |
235,570 |
|
9,675 |
|
5.47 |
% |
||||
Total interest-bearing liabilities |
|
9,627,681 |
|
175,359 |
|
2.44 |
% |
9,027,831 |
|
236,641 |
|
3.49 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demand deposits |
|
1,292,852 |
|
|
|
|
|
1,379,975 |
|
|
|
|
|
||||
Other liabilities |
|
125,183 |
|
|
|
|
|
141,275 |
|
|
|
|
|
||||
Stockholders equity |
|
1,538,284 |
|
|
|
|
|
1,206,417 |
|
|
|
|
|
||||
Total liabilities and stockholders equity |
|
$ |
12,584,000 |
|
|
|
|
|
$ |
11,755,498 |
|
|
|
|
|
||
Interest rate spread |
|
|
|
|
|
2.51 |
% |
|
|
|
|
2.71 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest income and net interest margin |
|
|
|
$ |
264,115 |
|
2.97 |
% |
|
|
$ |
279,201 |
|
3.35 |
% |
(1) Annualized.
(2) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
(3) Includes amortization of premium and accretion of discounts on investment securities and loans receivable totaling $(3.3) million and $(5.4) million for the nine months ended September 30, 2009, and 2008, respectively. Also includes the amortization of deferred loan fees totaling $(4.6) million and $2.1 million for the nine months ended September 30, 2009 and 2008, respectively.
(4) Average balances exclude unrealized gains or losses on available-for-sale securities.
(5) Total interest income and average yield rate on an unadjusted basis for tax-exempt investment securities held-to-maturity is $613 thousand and 3.94% for the nine months ended September 30, 2009, respectively, and none for the nine months ended September 30, 2008. Total interest income and average yield rate on an unadjusted basis for investment securities available-for-sale is $57.1 million and 4.06% for the nine months ended September 30, 2009, and $75.9 million and 5.09% for the nine months ended September 30, 2008, respectively.
(6) Average balances include nonperforming loans.
47
Analysis of Changes in Net Interest Income
Changes in net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the periods indicated. The total change for each category of interest-earning asset and interest-bearing liability is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). Nonaccrual loans are included in average loans used to compute this table.
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||||||||
|
|
2009 vs. 2008 |
|
2009 vs. 2008 |
|
||||||||||||||
|
|
Total |
|
Changes Due to |
|
Total |
|
Changes Due to |
|
||||||||||
|
|
Change |
|
Volume (1) |
|
Rates (1) |
|
Change |
|
Volume (1) |
|
Rates (1) |
|
||||||
|
|
(In thousands) |
|
(In thousands) |
|
||||||||||||||
INTEREST-EARNING ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Short-term investments |
|
$ |
(1,551 |
) |
$ |
240 |
|
$ |
(1,791 |
) |
$ |
(430 |
) |
$ |
2,235 |
|
$ |
(2,665 |
) |
Interest-bearing deposits in other banks |
|
1,449 |
|
1,455 |
|
(6 |
) |
4,664 |
|
4,678 |
|
(14 |
) |
||||||
Securities purchased under resale agreements |
|
877 |
|
977 |
|
(100 |
) |
(838 |
) |
(937 |
) |
99 |
|
||||||
Investment securities held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Taxable |
|
11,886 |
|
|
|
|
|
30,464 |
|
|
|
|
|
||||||
Tax-exempt (2) |
|
256 |
|
|
|
|
|
907 |
|
|
|
|
|
||||||
Investment securities available-for-sale (2) |
|
(6,890 |
) |
(6,047 |
) |
(843 |
) |
(19,713 |
) |
(3,544 |
) |
(16,169 |
) |
||||||
Loans receivable |
|
(17,170 |
) |
315 |
|
(17,485 |
) |
(88,116 |
) |
(19,981 |
) |
(68,135 |
) |
||||||
FHLB and FRB stock |
|
(885 |
) |
135 |
|
(1,020 |
) |
(3,306 |
) |
279 |
|
(3,585 |
) |
||||||
Total interest and dividend income |
|
$ |
(12,028 |
) |
$ |
(2,925 |
) |
$ |
(21,245 |
) |
$ |
(76,368 |
) |
$ |
(17,270 |
) |
$ |
(90,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Checking accounts |
|
$ |
(373 |
) |
$ |
(83 |
) |
$ |
(290 |
) |
$ |
(1,704 |
) |
$ |
(370 |
) |
$ |
(1,334 |
) |
Money market accounts |
|
1,166 |
|
4,226 |
|
(3,060 |
) |
(1,582 |
) |
10,059 |
|
(11,641 |
) |
||||||
Savings deposits |
|
(321 |
) |
(55 |
) |
(266 |
) |
(1,372 |
) |
(315 |
) |
(1,057 |
) |
||||||
Time deposits less than $100,000 |
|
(2,360 |
) |
(403 |
) |
(1,957 |
) |
(2,196 |
) |
3,739 |
|
(5,935 |
) |
||||||
Time deposits $100,000 or greater |
|
(11,899 |
) |
2,044 |
|
(13,943 |
) |
(34,759 |
) |
8,048 |
|
(42,807 |
) |
||||||
Federal funds purchased |
|
(428 |
) |
(249 |
) |
(179 |
) |
(2,168 |
) |
(1,157 |
) |
(1,011 |
) |
||||||
FHLB advances |
|
(5,968 |
) |
(5,318 |
) |
(650 |
) |
(16,172 |
) |
(13,684 |
) |
(2,488 |
) |
||||||
Securities sold under resale agreements |
|
78 |
|
216 |
|
(138 |
) |
2,135 |
|
230 |
|
1,905 |
|
||||||
Long-term debt |
|
(1,198 |
) |
|
|
(1,198 |
) |
(3,464 |
) |
|
|
(3,464 |
) |
||||||
Total interest expense |
|
(21,303 |
) |
378 |
|
(21,681 |
) |
(61,282 |
) |
6,550 |
|
(67,832 |
) |
||||||
CHANGE IN NET INTEREST INCOME |
|
$ |
9,275 |
|
$ |
(3,303 |
) |
$ |
436 |
|
$ |
(15,086 |
) |
$ |
(23,820 |
) |
$ |
(22,637 |
) |
(1) Change in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume.
(2) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate. Total change on an unadjusted basis for tax-exempt investment securities held-to-maturity is $174 thousand, and there is no total change due to volume and rates on an unadjusted basis for tax-exempt investment securities held-to-maturity for the three months ended September 30, 2009 vs. 2008. Total change on an unadjusted basis for investment securities available-for-sale is $(6.7) million, and total changes due to volume and rates on an unadjusted basis for investment securities available-for-sale is $(6.0) million and $(754) thousand for the three months ended September 30, 2009 vs. 2008, respectively.
Total change on an unadjusted basis for tax-exempt investment securities held-to-maturity is $613 thousand, and there is no total change due to volume and rates on an unadjusted basis for tax-exempt investment securities held-to-maturity for the nine months ended September 30, 2009 vs. 2008. Total change on an unadjusted basis for investment securities available-for-sale is $(18.8) million, and total changes due to volume and rates on an unadjusted basis for investment securities available-for-sale is $(3.1) million and $(15.7) million for the nine months ended September 30, 2009 vs. 2008, respectively.
Provision for Loan Losses
We recorded $159.2 million and $388.7 million in provisions for loan losses during the third quarter and first nine months of 2009, respectively. In comparison, we recorded $43.0 million and $183.0 million in provisions for loan losses during the third quarter and first nine months of 2008, respectively. The significant increase in loan loss provisions recorded during the third quarter of 2009 reflects our elevated chargeoff levels as we continue to manage down our exposure to problem assets. During the third quarter of 2009, our ongoing efforts to proactively identify and resolve problem assets resulted in the sale of $180.6 million in problem loans and $25.7 million in OREO properties. Losses of
48
$60.1 million realized from the sale of problem loans and OREO properties during the third quarter of 2009 are included in total chargeoffs. Gain or losses from the sale of OREO properties that are sold shortly after they are received in a foreclosure are credited or charged against the allowance for loan losses, if deemed material. In conjunction with our efforts to manage and reduce our problem assets, we recorded $151.2 million and $344.7 million in net chargeoffs during the third quarter and first nine months of 2009. This compares to $39.7 million and $99.9 million in net chargeoffs recorded during the third quarter and first nine months of 2008, respectively. Although we believe that credit challenges will continue throughout 2009, we have actively lowered our exposure to land and construction loans and our overall credit risk on these portfolios have been significantly reduced. Throughout the course of 2008 and the first nine months of 2009, we have substantially pared down both the outstanding loan balances as well as the total commitments on these loan categories by $2.03 billion or 63%. We continue to aggressively monitor delinquencies and proactively review the credit risk exposure of other segments of our loan portfolio to mitigate losses.
During May 2009, we desecuritized our private label mortgage backed securities which resulted in $635.6 million of single and multifamily loans being added to the loan portfolio with a corresponding decrease in investment securities available-for-sale. As a result of this transaction, we recorded an extraordinary loss of $5.4 million on a net of tax basis during the second quarter of 2009 which represents the allowance for loan losses on these single family and multifamily loans.
Provisions for loan losses are charged to income to bring the allowance for credit losses as well as the allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions to a level deemed appropriate by the Company based on the factors discussed under the Allowance for Loan Losses section of this report.
Noninterest (Loss) Income
Components of Noninterest (Loss) Income
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(In millions) |
|
(In millions) |
|
||||||||
Impairment loss on investment securities |
|
$ |
(24.2 |
) |
$ |
(53.6 |
) |
$ |
(61.9 |
) |
$ |
(63.5 |
) |
Branch fees |
|
4.7 |
|
4.3 |
|
14.5 |
|
12.7 |
|
||||
Net gain on investment securities |
|
2.2 |
|
|
|
7.4 |
|
7.8 |
|
||||
Letters of credit fees and commissions |
|
2.0 |
|
2.3 |
|
5.8 |
|
7.5 |
|
||||
Ancillary loan fees |
|
1.2 |
|
1.8 |
|
4.8 |
|
3.9 |
|
||||
Income from life insurance policies |
|
1.1 |
|
1.0 |
|
3.3 |
|
3.1 |
|
||||
Net gain on sale of loans |
|
|
|
0.1 |
|
|
|
2.3 |
|
||||
Other operating income |
|
1.1 |
|
0.4 |
|
1.8 |
|
2.0 |
|
||||
Total |
|
$ |
(11.9 |
) |
$ |
(43.6 |
) |
$ |
(24.3 |
) |
$ |
(24.2 |
) |
Noninterest (loss) income includes revenues earned from sources other than interest income. These sources include service charges and fees on deposit accounts, fees and commissions generated from trade finance activities and the issuance of letters of credit, ancillary fees on loans, net gains on sales of loans, investment securities, and other assets, impairment losses on investment securities and other assets, and other noninterest-related revenues.
Noninterest loss amounted to $(11.9) million during the quarter ended September 30, 2009 compared with ($43.6) million for the corresponding quarter in 2008. For the first nine months of 2009, noninterest loss totaled $(24.3) million, compared to ($24.2) million recorded during the first nine months of 2008. Included in noninterest loss during the third quarter of 2009 is a $24.2 million credit-related impairment loss on our pooled trust preferred securities recorded pursuant to the provisions of
49
ASC 320-10-65 which the Company implemented during the first quarter of 2009. During the third quarter of 2008, we recorded $53.6 million in total impairment charges, of which $47.0 million were related to Fannie Mae and Freddie Mac preferred stock and $6.6 million were related to pooled trust preferred securities. For the first nine months of 2009, total credit-related impairment losses on investment securities amounted to $61.9 million. This compares to $63.5 million in impairment losses recorded on investment securities during the first nine months of 2008.
Branch fees, which represent revenues derived from branch operations, increased 9% to $4.7 million in the third quarter of 2009, from $4.3 million for the same quarter in 2008. Similarly, branch fee income for the first nine months of 2009 increased 14% to $14.5 million, compared to $12.7 million in the same prior year period. The increase in branch-related fees can be attributed primarily to higher revenues from service and transaction charges on deposit accounts.
Letters of credit fees and commissions, which represent revenues from trade finance operations as well as fees related to the issuance and maintenance of standby letters of credit, decreased 14% to $2.0 million during the third quarter of 2009, from $2.3 million recorded during the same period in 2008. For the first nine months of 2009, letters of credit fees and commissions decreased 23% to $5.8 million, compared to $7.5 million for the first nine months of 2008. The decrease in letters of credit fees and commissions is primarily due to the decline in the volume of standby letters of credit during 2009 relative to the prior year as well as a decrease in commissions generated from trade finance activities due to the downturn in the economy.
Net gain on sales of investment securities amounted to $2.2 million during the third quarter of 2009. There were no sales of investment securities during the third quarter of 2008. During the first nine months of 2009, net gain on sales of investment securities decreased 5% to $7.4 million, from the $7.8 million recorded during the same period in 2008. Proceeds from the sale of investment securities provide additional liquidity to purchase additional investment securities, to fund loan originations, and to pay down borrowings.
Ancillary loan fees consist of revenues earned from the servicing of mortgages, fees related to the monitoring and disbursement of construction loan proceeds, and other miscellaneous loan income. Ancillary loan fees decreased 31% to $1.2 million during the third quarter of 2009, compared to $1.8 million recorded during the same period in 2008. For the first nine months of 2009, ancillary loan fees increased 23% to $4.8 million, compared to $3.9 million for the first nine months of 2008.
We had minimal secondary market activity during the first three quarters of 2009. The net gain on sales of loans recorded during 2008 is primarily due to sales of single family loans to Fannie Mae as well as bulk sales of commercial real estate loans to various third parties consummated during these periods.
50
Noninterest Expense
Components of Noninterest Expense
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(In millions) |
|
(In millions) |
|
||||||||
Compensation and employee benefits |
|
$ |
15.9 |
|
$ |
17.5 |
|
$ |
49.5 |
|
$ |
66.6 |
|
Occupancy and equipment expense |
|
6.3 |
|
6.8 |
|
20.0 |
|
20.4 |
|
||||
Deposit insurance premiums and regulatory assessments |
|
6.1 |
|
1.7 |
|
19.0 |
|
5.2 |
|
||||
Other real estate owned expense |
|
0.8 |
|
2.1 |
|
16.5 |
|
3.5 |
|
||||
Loan related expense |
|
2.2 |
|
2.4 |
|
5.3 |
|
6.0 |
|
||||
Amortization of investments in affordable housing partnerships |
|
1.7 |
|
1.9 |
|
5.1 |
|
5.5 |
|
||||
Legal expense |
|
1.3 |
|
0.9 |
|
4.9 |
|
3.9 |
|
||||
Data processing |
|
1.1 |
|
1.1 |
|
3.4 |
|
3.4 |
|
||||
Amortization and impairment loss of premiums on deposits acquired |
|
1.1 |
|
1.6 |
|
3.3 |
|
6.1 |
|
||||
Deposit-related expenses |
|
0.9 |
|
1.2 |
|
2.9 |
|
3.4 |
|
||||
Impairment loss on goodwill |
|
|
|
0.3 |
|
|
|
0.9 |
|
||||
Other operating expenses |
|
8.7 |
|
11.0 |
|
25.5 |
|
32.2 |
|
||||
Total noninterest expense |
|
$ |
46.1 |
|
$ |
48.5 |
|
$ |
155.4 |
|
$ |
157.1 |
|
Efficiency Ratio (1) |
|
39.99 |
% |
46.40 |
% |
48.67 |
% |
45.51 |
% |
(1) Represents noninterest expense, excluding the amortization and/or impairment losses of intangibles, and amortization of investments in affordable housing partnerships, divided by the aggregate of net interest income before provision for loan losses and noninterest income, excluding impairment loss on investment securities.
Noninterest expense, which is comprised primarily of compensation and employee benefits, occupancy and other operating expenses decreased 5% to $46.1 million during the third quarter of 2009, from $48.5 million for the same quarter in 2008. For the first nine months of 2009, noninterest expense decreased 1% to $155.4 million, compared with $157.1 million during the same period in 2008.
Compensation and employee benefits decreased 9% to $15.9 million during the third quarter of 2009, compared to $17.5 million for the third quarter of 2008. For the first nine months of 2009, compensation and employee benefits decreased 26% to $49.5 million, compared with $66.6 million for the first nine months of 2008. The decrease in compensation and employee benefit expenses is due to the impact of initiatives undertaken by the Company throughout the past year and 2008 to reduce overall staffing levels and lower compensation-related incentives and expenses.
Deposit insurance premiums and regulatory assessments increased to $6.1 million during the quarter ended September 30, 2009, compared with $1.7 million during the same period in 2008. For the first nine months of 2009, deposit insurance premiums and regulatory assessments increased to $19.0 million compared to $5.2 million for the same period in 2008. Increases in the FDIC deposit assessment rate during the third quarter of 2009 contributed to the increase in deposit insurance premiums and regulatory assessments during the third quarter and first nine months of 2009, relative to the same periods in 2008. Furthermore, the special assessment imposed by the Federal Deposit Insurance Corporation (FDIC) resulted in a $5.7 million impact to our pretax earnings during the second quarter of 2009 and was paid on September 30, 2009.
We recorded OREO expenses, net of OREO revenues and gains, totaling $767 thousand during the quarter ended September 30, 2009, compared with $2.1 million recorded during the same period in 2008. For the first nine months of 2009, net OREO expenses increased to $16.5 million, compared with $3.5 million in net OREO expenses during the first nine months of 2008. The $767 thousand in total OREO expenses incurred during the third quarter of 2009 is comprised of $1.1 million in various operating and maintenance expenses related to our higher volume of OREO properties, $559 thousand in valuation losses, and $920 thousand in net gains from the sale of ten OREO properties consummated during the third quarter of 2009. For the first nine months of 2009, total net OREO expenses amounting to $16.5 million were comprised of $4.0 million in various operating and maintenance expenses on
51
OREO properties, $7.5 million in valuation losses, and $5.0 million in net losses from the sale of 110 OREO properties consummated during the first nine months of 2009. As of September 30, 2009, total OREO, net amounted to $24.2 million, compared to $17.6 million as of September 30, 2008.
Amortization expense and impairment losses on premiums on deposits acquired decreased 32% to $1.1 million during the quarter ended September 30, 2009, compared with $1.6 million during the same period in 2008. For the first nine months of 2009, amortization expense and impairment losses on premiums on deposits totaled $3.3 million, compared with $6.1 million incurred during the same period in 2008. During the first quarter of 2008, we recognized an $855 thousand impairment loss on deposit premiums initially recorded for the Desert Community Bank acquisition due to higher than anticipated runoffs in certain deposit categories. In comparison, we did not record any impairment losses on deposit premiums during the first three quarters of 2009. Additionally, the amortization expense on deposit premiums related to the United National Bank and Standard Bank acquisitions decreased during the first nine months of 2009, relative to the same period in 2008. This is due to lower runoff or decay rates incorporated into our core deposit amortization model after three years following the consummation of each acquisition. The projected deposit runoff rates incorporated into the core deposit amortization models simulate the decay rates used in the Companys current asset liability model. Premiums on acquired deposits are amortized over their estimated useful lives.
Other operating expenses include advertising and public relations, telephone and postage, stationery and supplies, bank and item processing charges, insurance expenses, and other professional fees, and charitable contributions. Other operating expenses decreased 21% to $8.8 million during the quarter ended September 30, 2009, compared with $11.1 million during the same period in 2008. Similarly, other operating expenses decreased 20% to $25.7 million for the first nine months of 2009, from $32.2 million for the same period in 2008. The decrease in other operating expenses for both periods in 2009, relative to the same periods in 2008, is primarily due to various cost-cutting measures and initiatives that we undertook throughout 2008 and the first nine months of 2009.
Our efficiency ratio decreased to 39.99% for the quarter ended September 30, 2009, compared to 46.40% for the corresponding period in 2008. The decrease in our efficiency ratio during the third quarter of 2009 reflects our ongoing expense management efforts. For the first nine months of 2009, the efficiency ratio was 48.67% compared with 45.51% for the same period in 2008. The increase in our efficiency ratio for the first nine months of 2009 can be attributed largely to higher deposit insurance premiums and higher credit cycle related expenses associated with OREO/foreclosure transactions as well as lower net interest income before the provision for loan losses.
Income Taxes
The income tax benefit amounted to $52.8 million for the third quarter of 2009, representing an effective tax benefit rate of 43.5%. In comparison, the income tax benefit of $17.4 million represented an effective tax rate of 35.7% for the third quarter of 2008. Included in the income tax benefit recognized during the third quarters of 2009 and 2008 are $1.6 million and $2.0 million, respectively, in tax credits generated from our investments in affordable housing partnerships.
For the first nine months of 2009, the income tax benefit totaled $126.8 million representing an effective tax rate of 41.6%. This compares to $33.9 million income tax benefit, representing a 39.4% effective tax rate, recorded during the first nine months of 2008. For the first nine months of 2009, the income tax benefit includes $4.7 million in tax credits, compared to $5.3 million in tax credits during the same period in 2008. Due to the high degree of variability of the estimated annual effective tax rate when considering the range of projected income (loss) for the remainder of the year, we have determined that the actual year-to-date effective tax rate is the best estimate of the annual effective tax rate. Our
52
effective tax rate is derived based on our corporate statutory tax rate adjusted for permanent differences and available tax credits.
Management regularly reviews the Companys tax positions and deferred tax assets. In accordance with ASC 740-10 (previously FIN 48, Acccounting for Uncertainty in Income Taxesand interpretation of FASB Statement No. 109), the Company applies a more likely than not recognition threshold for the realization of deferred tax assets. Factors considered in this analysis include future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, and tax planning strategies. Although realization is not assured, management believes that it is more likely than not that the recorded deferred tax assets are fully recoverable.
At September 30, 2009, the total deferred tax asset amounted to $156.0 million. This compares to $184.6 million in total deferred tax asset at December 31, 2008. Our current earnings forecasts reflect that it is more likely than not that the Company will produce sufficient taxable income to realize the entire deferred tax asset as of September 30, 2009. Should the expectations of future profitability materially change or should earnings in the short term differ materially from the Companys forecast, a valuation allowance may be established if management believes any portion of the deferred tax asset will not be realized. The receivable related to the deferred tax asset is reflected in the condensed consolidated balance sheets under the caption accrued interest receivable and other assets.
Managements analysis of the deferred tax asset recognizes that the Company has incurred a cumulative loss during the preceding three-year period ended September 30, 2009 of $75.4 million, including substantial losses in 2008 and 2009. A majority of the cumulative loss has been caused by the deterioration in credit and the substantial increase to the allowance for loan losses in the past two years.
Operating Segment Results
We had previously identified five operating segments for purposes of management reporting: retail banking, commercial lending, treasury, residential lending, and other. Our strategic focus has been shifting and evolving over the last several years which has influenced how our chief operating decision maker views the Companys business operations and assesses its economic performance. Specifically, our business focus has culminated in a two-segment core business structure: Retail Banking and Commercial Banking. A third segment, which is comprised of a combination of our previous operating segmentsTreasury and Other, provides broad administrative support to these two core segments. As a result of this evolution in our strategic focus, we realigned our segment methodology during the first quarter of 2009, and identified these three business divisions as meeting the criteria of an operating segment. The objective of combining certain segments under a new reporting structure was to better align our service structure with our customer base, and to provide a platform to more efficiently manage the complexities and challenges impacting our current business environment.
The Retail Banking segment focuses primarily on retail operations through the Banks branch network. The Commercial Banking segment, which includes commercial real estate, primarily generates commercial loans through the efforts of the commercial lending offices located in the Banks northern and southern California production offices. Furthermore, the Commercial Banking segment also offers a wide variety of international finance and trade services and products. The former residential lending segment has been combined with the Retail Banking segment due to the consumer-centric nature of the products and services offered by these two segments as well as the synergistic relationship between these two units in generating consumer mortgage loans. The remaining centralized functions, including the former Treasury segment, and eliminations of intersegment amounts have been aggregated and included in Other.
53
Changes in our management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods are generally restated for comparability for changes in management structure or reporting methodologies unless it is not deemed practicable to do so.
Given the significant decline in short-term and long-term interest rates since 2007, we reassessed our transfer pricing assumptions during the first quarter of 2009 to be consistent with the Companys strategic goal of growing core deposits and originating profitable, good credit quality loans. Changes to our funds transfer pricing assumptions were made with the intent to promote core deposit growth and, given our recent credit experience, to better reflect the current risk profiles of various loan categories within our credit portfolio. Our transfer pricing assumptions and methodologies are reviewed at least annually to ensure that our process is reflective of current market conditions. Our transfer pricing process is formulated with the goal of incenting loan and deposit growth that is consistent with the Companys overall growth objectives as well as provide a reasonable and consistent basis for measurement of our business segments and product net interest margins. Changes to our transfer pricing assumptions and methodologies are approved by the Asset Liability Committee.
The changes in transfer pricing assumptions that we implemented during the first quarter of 2009 have not been reflected in the segment results for 2008 since these changes were adopted on a prospective basis. We have, however, performed a high level assessment of the impact of these transfer pricing assumption changes to the various operating segments. Based on this assessment, we determined that the full year impact of these changes was not significant overall, and would have been favorable to the segment pretax profit (loss) results for the Retail Banking and Commercial banking segments but unfavorable to the Other segment during 2008. Additionally, the changes in transfer pricing assumptions implemented during the first quarter of 2009 would not have altered the conclusion of our goodwill impairment test performed as of September 30, 2008, had these assumptions been retroactively implemented during 2008.
For more information about our segments, including information about the underlying accounting and reporting process, please see Note 10 to the condensed consolidated financial statements presented elsewhere in this report.
Retail Banking
The Retail Banking segment reported a $(45.0) million pretax loss for the quarter ended September 30, 2009, compared to a $(9.7) million pretax loss for the same quarter in 2008. The increase in pretax loss for this segment during the third quarter of 2009 is comprised of a $42.6 million increase in loan loss provision, a $1.6 million decrease in noninterest income, a $1.8 million increase in noninterest expense, and a $351 thousand decrease in net interest income.
For the nine months ended September 30, 2009, the pretax loss for the Retail Banking segment amounted to $(85.0) million, compared to the $(5.9) million in pretax loss recorded for the same period in 2008. The increase in pretax loss for this segment during the nine months ended September 30, 2009 is comprised of a $74.2 million or 105% increase in loan loss provisions, a $9.4 million or 32% decrease in noninterest income, and a $9.1 million or 10% increase in noninterest expense, partially offset by a $1.2 million or 1% increase in net interest income.
The slight increase in net interest income during the first nine months of 2009 is attributable to the interest rate floors on newly originated variable-rate loans, which partially offsets the steep decline in interest rates since 2008. The sizeable increase in loan loss provisions for this segment during the third quarter of 2009 and first nine months of 2009, relative to the same periods in 2008, were due to increased
54
chargeoff activity resulting from the downturn in the real estate housing market. Loan loss provisions are also impacted by average loan balances for each reporting segment.
Noninterest income for this segment decreased 21%, to $5.9 million for the quarter ended September 30, 2009, from $7.4 million recorded during the same period in 2008. For the first nine months of 2009, noninterest income for the retail banking segment decreased 32% to $20.4 million, compared to $29.8 million for the same period in 2008. The decrease in noninterest income for both periods is primarily due to lower loan fee income resulting from a notable decrease in our loan origination activities and lower net gain on sale of loans, partially offset by an increase in branch-related revenues pertaining to service and transaction charges on deposit accounts. Additionally, noninterest income during the first nine months of 2008 reflects the $6.1 million gain on sale of investment securities from loans originated by this segment that have been securitized as part of the Companys securitization activities.
Noninterest expense for this segment increased 7% to $28.9 million during the third quarter of 2009, compared with $27.1 million recorded during the third quarter of 2008. For the first nine months of 2009, noninterest expense increased 10% to $97.2 million, from $88.1 million for the same period in 2008. The increase in noninterest expense for both periods is primarily due to higher FDIC insurance premiums, partially offset by a decrease in compensation and employee benefits and amortization and impairment losses on premiums on deposits acquired. Higher OREO expenses further contributed to higher noninterest expense during the first nine months of 2009 relative to the same period in 2008.
Commercial Banking
The Commercial Banking segment reported a pretax loss of $(56.8) million during the quarter ended September 30, 2009, compared with pretax income of $9.1 million for the same period in 2008. For the first nine months of 2009, the pretax loss for the Commercial Banking segment amounted to $(136.3) million, compared to a pretax loss of $(13.4) million recorded during the same period in 2008. The primary driver of the increase in pretax loss for both periods for this segment is due to a significant increase in loan loss provisions resulting from increased chargeoff activity. Loan loss provisions increased 361% to $94.1 million during the third quarter of 2009, compared with $20.4 million for the same period in 2008. During the first nine months of 2009, loan loss provisions increased 117% to $244.1 million, compared with $112.6 million for the same period in 2008. Net interest income for this segment slightly decreased 1% to $43.7 million during the quarter ended September 30, 2009, compared to $44.4 million for the same period in 2008. For the first nine months of 2009, net interest income for the Commercial Banking segment amounted to $136.1 million, or a 2% increase from net interest income of $133.0 million recorded during the same period in 2008.
The slight increases in net interest income during the first nine months of 2009 is primarily due to a significant decrease in the charge for funds applied to the loan portfolio as a result of the declining interest rate environment. Although interest income on loans also decreased in response to declining interest rates, the interest rate floors on variable loans helped to support the interest income on these loans.
Noninterest income for this segment decreased 12% to $4.8 million during the third quarter of 2009, compared with $5.4 million recorded in the same quarter of 2008. For the first nine months of 2009, noninterest income decreased 19% to $15.2 million, from $18.9 million for the same period in 2008. The decrease in noninterest income is primarily due to a decrease in net gain on sale of loans as well as a decrease in letters of credit fees and commissions driven by a decline in the volume of standby letters of credit and commissions generated from trade finance activities due to the downturn in the economy.
55
Noninterest expense for this segment decreased 5% to $10.3 million during the third quarter of 2009, compared with $10.8 million recorded during the same quarter in 2008. The decrease in noninterest expense during the third quarter of 2009 is due to a decline in OREO expenses and compensation and employee benefits, partially offset by an increase in FDIC insurance premiums. For the first nine months of 2009, noninterest expense for this segment increased 1%, to $36.2 million, from $35.9 million for the same period in 2008 due to an increase in OREO expenses and FDIC insurance premiums, partially offset by a decrease in compensation and employee benefits for this segment.
Other
This segment reported a pretax loss of $(19.6) million during the quarter ended September 30, 2009, compared with a pretax loss of $(47.9) million recorded in the same quarter of 2008. The decrease in pretax loss during the third quarter of 2009 is primarily due to an increase in net interest income and decreases in both noninterest loss and noninterest expense. For the first nine months of 2009, the pretax loss for this segment amounted to $(83.2) million, compared to a pretax loss of $(66.7) million recorded during the same period in 2008. The increase in the pretax loss for the first three quarters of 2009 is primarily due to an increase in net interest expense, partially offset by decreases in noninterest loss and noninterest expense.
Net interest income for this segment amounted to $3.4 million during the quarter ended September 30, 2009, compared to net interest expense of $7.0 million recorded in the same quarter of 2008. For the first nine months of 2009, net interest expense for this segment amounted to $31.5 million, compared with net interest expense of $12.8 million recorded during the same period in 2008. Since this segment now includes the treasury function, which is responsible for the liquidity and interest rate risk management of the Bank, it bears the cost of adverse movements in interest rates affecting our net interest margin and supports the Retail Banking and Commercial Banking segments through funds transfer pricing.
Noninterest loss for this segment amounted to $22.5 million, compared with $56.4 million in noninterest loss recorded during the same quarter of 2008. For the first nine months of 2009, noninterest loss amounted to $59.9 million, compared with $72.9 million for the same period in 2008. The noninterest loss recorded for this segment is primarily due to the $24.2 million and $61.9 million in credit-related impairment losses recorded on our investment securities during the third quarter and nine months ended September 30, 2009, respectively. In comparison, we recorded $53.6 million and $63.5 million in impairment losses on our investment securities during the third quarter and first nine months of 2008, respectively. For the first nine months of 2009, noninterest loss is partially offset by a higher gain on sale of investment securities amounting to $7.4 million. This compares to $641 thousand in gains from investment securities sales for the same period in 2008.
Noninterest expense for this segment decreased 35% to $6.9 million, compared with $10.6 million recorded during the same quarter in 2008. For the first nine months of 2009, noninterest expense for this segment decreased 34%, to $22.0 million, from $33.0 million for the same period in 2008. The decrease in noninterest expense for both periods is primarily due to a decrease in compensation and employee benefits, partially offset by higher FDIC insurance premiums.
Balance Sheet Analysis
Total assets increased $63.1 million, or 1%, to $12.49 billion at September 30, 2009, relative to total assets of $12.42 billion at December 31, 2008. The increase in total assets is comprised predominantly of increases in interest-bearing deposits totaling $92.4 million, held-to-maturity investment securities totaling $659.0 million, and net loans receivable amounting to $87.5 million,
56
partially offset by decreases in short-term investments totaling $273.7 million, and available-for-sale investment securities totaling $583.2 million. A large portion of the net increase in total assets was funded by deposit growth of $526.6 million, partially offset by a decrease in FHLB advances of $430.1 million.
Fair Value Measurement and Fair Value Option
ASC 820 (previously SFAS 157, Fair Value Measurement) and ASC 825 (previously SFAS 159, Fair Value Option) became effective on January 1, 2008. We adopted ASC 820 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 adoption of ASC 820 did not have any impact on our financial condition, results of operations, or cash flows.
We adopted ASC 820-10 (previously FSP SFAS 157-2, Effective Date of FASB Statement No. 157) effective January 1, 2009, which provided for a one-year deferral of the implementation of ASC 820 for other nonfinancial assets and liabilities, effective for fiscal years beginning after November 15, 2008. As a result of adopting this guidance, we are now providing fair value disclosures related to our OREO properties. See Note 3 to our condensed consolidated financial statements presented elsewhere in this report.
We did not elect to adopt the fair value option, but to continue recording the financial instruments in accordance with current practice.
Securities Purchased Under Resale Agreements
We purchase securities under resale agreements (resale agreements) with terms that range from one day to several years. Total resale agreements increased to $75.0 million as of September 30, 2009, compared with $50.0 million as of December 31, 2008, all of which are long-term agreements. On June 26, 2009, we entered into a new resale agreement amounting to $25.0 million, which has a stated termination date of June 26, 2024. This resale agreement was called on September 26, 2009. On July 31, 2009, we entered into a new resale agreement amounting to $25.0 million, which has a stated termination date of July 31, 2024. The collateral for these resale agreements consists of U.S. Government agency and/or U.S. Government sponsored enterprise debt and/or mortgage-backed securities held in safekeeping by a third party custodian.
Purchases of securities under resale agreements are overcollateralized to ensure against unfavorable market price movements. We monitor the market value of the underlying securities which collateralize the related receivable on resale agreements, including accrued interest. In the event that the fair market value of the securities decreases below the carrying amount of the related repurchase agreement, our counterparty is required to designate an equivalent value of additional securities. The counterparties to these agreements are nationally recognized investment banking firms that meet credit eligibility criteria and with whom a master repurchase agreement has been duly executed.
Investment Securities
Income from investing activities provides a significant portion of our total income. We aim to maintain an investment portfolio with an adequate mix of fixed-rate and adjustable-rate securities with
57
relatively short maturities to minimize overall interest rate risk. Our investment securities portfolio primarily consists of U.S. Treasury securities, U.S. Government agency securities, U.S. Government sponsored enterprise debt securities, U.S. Government sponsored and other mortgage-backed securities, municipal securities, corporate debt securities, and U.S. Government sponsored enterprise equity securities. We classify certain investment securities as held-to-maturity, and accordingly, these securities are recorded based on their amortized cost. We also classify certain investments as available-for-sale, and accordingly, these securities are carried at their estimated fair values with the corresponding changes in fair values recorded in accumulated other comprehensive income, as a component of stockholders equity.
Investment securities held-to-maturity totaled $781.3 million and $122.3 million at September 30, 2009 and December 31, 2008, respectively, representing U.S. Government agency and U.S. Government sponsored enterprise debt securities, municipal securities, corporate debt securities and mortgage backed-securities, and other securities purchased during the first nine months of 2009 and fourth quarter of 2008. The increase in investment securities was funded by deposit growth and capital raised during 2008.
Total investment securities available-for-sale decreased 29% to $1.46 billion as of September 30, 2009, compared with $2.04 billion at December 31, 2008. The decrease is due to the desecuritization of our private-label mortgage backed securities in May 2009 which resulted in a $635.6 million increase in single and multifamily loan receivable with a corresponding decrease in available-for-sale investment securities. Total repayments/maturities and proceeds from sales of investment securities amounted to $1.04 billion and $336.7 million, respectively, during the nine months ended September 30, 2009.
We recorded net gains on sales of investment securities totaling $2.2 million during the third quarter of 2009. There were no sales of investment securities during the same period in 2008. For the first nine months of 2009, we recorded net gains on sales of investment securities totaling $7.4 million, compared with $7.8 million recorded during the first nine months of 2008.
A portion of the proceeds from repayments, maturities, sales, and redemptions of investment securities were applied towards additional investment securities purchases totaling $2.01 billion.
At September 30, 2009, investment securities held-to-maturity with an aggregate par value of $667.1 million and available-for-sale securities with an aggregate par value of $1.09 billion were pledged to secure public deposits, repurchase agreements, the FRB discount window, and other purposes required or permitted by law.
We perform regular impairment analyses on our portfolio of investment securities. If we determine that a decline in fair value is other-than-temporary, a credit-related impairment loss is recognized in current earnings. Noncredit-related impairment losses are charged to other comprehensive income. Other-than-temporary declines in fair value are assessed based on factors including the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, the probability that we will be unable to collect all amounts due, and our ability and intent to not sell the security before recovery of its amortized cost basis. For securities that are determined to have other-than-temporary declines in value, we have both the ability and the intent to hold these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost bases.
The fair values of 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. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices
58
represent a reasonable estimate of fair value. Our procedures include, but are not limited to, initial and ongoing review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes. We ensure that prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models that are developed based on spreads, and when available, market indices. As a result of this analysis, if we determine that there is a more appropriate fair value based upon available market data, the price received from third parties is adjusted accordingly.
Prices from third party pricing services are often unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding.
As a result of the global financial crisis and illiquidity in the U.S. markets, we believe that current broker prices obtained on one 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. 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, in light of these circumstances, we modified our approach in determining the fair values of these securities. For the pooled trust preferred securities, we believe that the cash flow analyses which demonstrate that the realizable value of these securities are equal to their carrying values should be the primary factor considered when making a judgment about other-than-temporary impairment. For the private-label mortgage-backed security, we 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. In calculating the fair value derived from the income approach, we made assumptions related to the implied rate of return, general change in market rates, estimated changes in credit quality and liquidity risk premium, specific non-performance and default experience in the collateral underlying the security, as well as broker discount rates.
Corporate Debt Securities (Available-for-Sale)
The majority of unrealized losses in the available-for-sale portfolio at September 30, 2009 are related to pooled trust preferred debt securities. As of September 30, 2009, the Company had $6.4 million in pooled trust preferred debt securities available-for-sale, representing less than 1% of the total investment securities available-for-sale portfolio. In April 2009, except for one security which was downgraded but remained at investment grade status, the ratings for the other twelve pooled trust preferred securities were downgraded to non-investment grade status due to increased deferral and default activity from the issuers of the underlying debt collateralizing these instruments. As of September 30, 2009, these debt instruments had gross unrealized losses amounting to $55.4 million, or 90% of the total amortized cost basis of these securities, comprised of $34.4 million in gross unrealized losses and $21.0 million, or $12.2 million on a net of tax basis, in noncredit-related impairment losses recorded during the first nine months of 2009 pursuant to the provisions of ASC 320-10-65.
Almost all of the pooled trust preferred securities held by us have underlying collateral issued by banks and insurance companies. Continued deterioration in market conditions have resulted in many more small banks either deferring or defaulting on their trust preferred debt during the third quarter of 2009. As a result of diminishing collateral values, deteriorating cash flows, and increasing estimates of future deferrals and defaults, we recorded an impairment loss of $45.2 million on our portfolio of trust preferred securities during the third quarter of 2009, of which $24.2 million was a pre-tax credit loss
59
recorded through earnings. The remaining $21.0 million, or $12.2 million on a net of tax basis, in noncredit-related impairment loss was recorded in other comprehensive income as of September 30, 2009. We determined the amount of credit-related impairment by discounting the expected future cash flows with the effective yield of the security in accordance with generally accepted accounting principles. During the first quarter of 2009, we recorded an impairment loss of $13.4 million on a non-investment grade pooled trust preferred security. During the second quarter of 2009, we recorded an impairment loss of $100.8 million on its portfolio of trust preferred securities, of which $37.4 million was a pre-tax credit loss recorded in other comprehensive income. As of March 31, 2009, of the total impairment loss amount, $200 thousand was a pretax credit loss recorded through earnings. The remaining $13.2 million, or $7.6 million on a net of tax basis, in noncredit-related impairment loss was recorded in other comprehensive income.
During 2008 and 2007, we recorded $13.6 million and $405 thousand, respectively, in non-credit related impairment losses on three pooled trust preferred securities due to rating downgrades caused by increases in market spreads, concerns regarding the housing market, and lack of liquidity in the market. None of these securities have experienced any credit-related losses for which OTTI was previously recorded. Upon the implementation of ASC 320-10-65, we reclassified the combined $14.0 million, or $8.1 million on a net of tax basis, in noncredit-related OTTI impairment losses recognized during 2008 and 2007 from the opening balance of retained earnings to other comprehensive income as of March 31, 2009.
Mortgage-backed Securities (Held-to-Maturity)
As of September 30, 2009, the aggregate fair value of the non-agency held-to-maturity mortgage-backed securities amounted to $105.5 million. These securities are collateralized by single family loans and secured by first liens on these residential properties. During the second and third quarter of 2009, three mortgage-backed securities were downgraded from investment grade to non-investment grade. Except for these three non-investment grade securities, the remaining held-to-maturity mortgage-backed securities are investment grade. As of September 30, 2009, these debt instruments had gross unrealized losses for less than twelve months amounting to $1.9 million, or 2% of the aggregate amortized cost basis of held-to-maturity mortgage-backed securities, comprised of $1.8 million and $115 thousand that are non-investment grade and investment grade, respectively.
The decline in fair values of these securities is due to widening market spreads, concerns regarding the downturn in the housing market, and lack of liquidity in the market. However, these securities have strong credit support, low loan-to-values, low delinquency, and low OREO ratios. We do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost bases. As such, we do not deem these securities to be other-than-temporarily impaired as of September 30, 2009.
Mortgage-backed Securities (Available-for-Sale)
As of September 30, 2009, we had one private-label available-for-sale mortgage-backed security with a fair value of $15.5 million, with a gross unrealized loss of $5.8 million, or 27% of the amortized cost basis of this security, for more than 12 months. During the second quarter of 2009, this security was downgraded from investment grade to non-investment grade. This security is collateralized by single family loans and secured by the first lien on these residential properties. Additionally, any principal and interest shortfall that may arise from the deterioration of the collateral will be covered by a monoline insurance provider. We do not intend to sell this security and it is not more likely than not that the Company will be required to sell this security before recovery of its amortized cost basis. As such, we do not deem this security to be other-than-temporarily impaired as of September 30, 2009.
60
In May 2009, we desecuritized our private-label mortgage backed securities which resulted in a $635.6 million increase in single and multifamily loans receivable with a corresponding decrease in available-for-sale investment securities. These single family and multifamily loans were previously originated by us and were securitized in 2006 and 2007 for additional liquidity purposes. All of the resulting securities were retained by us in our available-for-sale investment portfolio. Our decision to desecuritize these securities was prompted by the mark-to-market adjustments recorded on these securities that were based on price points observed in the general market for mortgage-backed securities that were not reflective of the better credit quality of the underlying loans. These loans had very low overall delinquency rates as of September 30, 2009. The accumulated mark-to-market adjustments on these securities, recorded in other comprehensive income, were negatively impacting our tangible common equity. The desecuritization added $30.6 million to the Companys tangible common equity.
Government-Sponsored Equity Preferred Stock (Available-for Sale)
In September 2008, liquidity and credit concerns led the U.S. Federal Government to assume a conservatorship role in Fannie Mae and Freddie Mac. The rating on Fannie Mae and Freddie Mac preferred stock securities was downgraded from investment grade to non-investment grade status reflecting the cessation of dividend payments on these securities. These securities are non-cumulative perpetual preferred stock in which unpaid dividends do not accumulate. The purchase agreement between the U.S. Treasury and these government-sponsored entities contains a covenant prohibiting the payment of dividends on existing preferred stock. As the assessment on the status of any resumption in dividend payments on these securities was uncertain, we recorded $55.3 million in OTTI charges on Fannie Mae and Freddie Mac preferred stock securities in 2008. As of September 30, 2009, the fair value of these preferred stock securities was $3.3 million. Gross unrealized losses on these securities amounted to $221 thousand as of September 30, 2009, or 7% of the aggregate amortized cost basis of these securities. The outlook for these preferred securities remains stable. We do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost bases. As such, we do not deem these remaining securities to be other-than-temporarily impaired as of September 30, 2009.
We have thirteen individual securities that have been in a continuous unrealized loss position for twelve months or longer as of September 30, 2009. These securities are comprised of ten corporate debt securities with a total fair value of $12.1 million, two government-sponsored equity preferred securities with a total fair value of $1.8 million, and one mortgage-backed security with a fair value of $15.5 million. As of September 30, 2009, there were also 28 securities that have been in a continuous unrealized loss position for less than twelve months. The unrealized losses on these securities are primarily attributed to changes in interest rates as well as the liquidity crisis that has impacted all financial industries. The issuers of these securities have not, to our knowledge, established any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. We do not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases. As such, we do not deem these securities to be other-than-temporarily impaired as of September 30, 2009.
The following table sets forth the amortized cost of investment securities held-to-maturity and the fair values of investment securities available-for-sale as of September 30, 2009 and December 31, 2008:
61
|
|
As of September 30, 2009 |
|
||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
|
||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
|
|
(In thousands) |
|
||||||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
||||
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
$ |
252,638 |
|
$ |
530 |
|
$ |
(1,145 |
) |
$ |
252,023 |
|
Municipal securities |
|
36,118 |
|
1,720 |
|
|
|
37,838 |
|
||||
Other residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
75,033 |
|
1,909 |
|
(115 |
) |
76,827 |
|
||||
Non-investment grade |
|
30,461 |
|
|
|
(1,770 |
) |
28,691 |
|
||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
377,947 |
|
17,417 |
|
(89 |
) |
395,275 |
|
||||
Non-investment grade |
|
4,625 |
|
|
|
(59 |
) |
4,566 |
|
||||
Other securities |
|
4,509 |
|
|
|
|
|
4,509 |
|
||||
Total investment securities held-to-maturity |
|
$ |
781,331 |
|
$ |
21,576 |
|
$ |
(3,178 |
) |
$ |
799,729 |
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury securities |
|
$ |
2,214 |
|
$ |
1 |
|
$ |
|
|
$ |
2,215 |
|
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
474,896 |
|
2,311 |
|
(472 |
) |
476,735 |
|
||||
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities |
|
|
|
|
|
|
|
|
|
||||
Commercial mortgage-backed securities |
|
26,107 |
|
873 |
|
|
|
26,980 |
|
||||
Residential mortgage-backed securities |
|
752,671 |
|
19,705 |
|
(2 |
) |
772,374 |
|
||||
Municipal securities |
|
17,759 |
|
193 |
|
(26 |
) |
17,926 |
|
||||
Other residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
27,099 |
|
|
|
(107 |
) |
26,992 |
|
||||
Non-investment grade |
|
21,329 |
|
|
|
(5,795 |
) |
15,534 |
|
||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
||||
Investment grade |
|
102,052 |
|
2,534 |
|
(1,308 |
) |
103,278 |
|
||||
Non-investment grade (1) |
|
69,824 |
|
|
|
(58,123 |
) |
11,701 |
|
||||
U.S. Government sponsored enterprise equity securities |
|
3,041 |
|
468 |
|
(221 |
) |
3,288 |
|
||||
Total investment securities available-for-sale |
|
$ |
1,496,992 |
|
$ |
26,085 |
|
$ |
(66,054 |
) |
$ |
1,457,023 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total investment securities |
|
$ |
2,278,323 |
|
$ |
47,661 |
|
$ |
(69,232 |
) |
$ |
2,256,752 |
|
|
|
As of December 31, 2008 |
|
||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
|
||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
|
|
(In thousands) |
|
||||||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
||||
Municipal securities |
|
$ |
5,772 |
|
$ |
118 |
|
$ |
|
|
$ |
5,890 |
|
Corporate debt securities |
|
116,545 |
|
904 |
|
(234 |
) |
117,215 |
|
||||
Total investment securities held-to-maturity |
|
$ |
122,317 |
|
$ |
1,022 |
|
$ |
(234 |
) |
$ |
123,105 |
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasury securities |
|
$ |
2,505 |
|
$ |
8 |
|
$ |
|
|
$ |
2,513 |
|
U.S. Government agency securities and U.S. Government sponsored enterprise debt securities |
|
1,020,355 |
|
4,762 |
|
(1,183 |
) |
1,023,934 |
|
||||
U.S. Government agency securities and U.S. Government sponsored enterprise mortgage-backed securities |
|
373,690 |
|
6,758 |
|
(397 |
) |
380,051 |
|
||||
Other mortgage-backed securities |
|
645,940 |
|
|
|
(108,614 |
) |
537,326 |
|
||||
Corporate debt securities (1) |
|
116,127 |
|
266 |
|
(73,849 |
) |
42,544 |
|
||||
U.S. Government sponsored enterprise equity securities (1) |
|
3,340 |
|
|
|
(2,156 |
) |
1,184 |
|
||||
Residual securities |
|
25,043 |
|
25,019 |
|
|
|
50,062 |
|
||||
Other securities (1) |
|
2,570 |
|
10 |
|
|
|
2,580 |
|
||||
Total investment securities available-for-sale |
|
$ |
2,189,570 |
|
$ |
36,823 |
|
$ |
(186,199 |
) |
$ |
2,040,194 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total investment securities |
|
$ |
2,311,887 |
|
$ |
37,845 |
|
$ |
(186,433 |
) |
$ |
2,163,299 |
|
(1) As of December 31, 2008, the Company recorded an OTTI charge of $13.6 million for corporate debt securities, $55.3 million for U.S. Government sponsored enterprise equity securities, and $4.3 million for other securities. Upon adoption of ASC 320, the Company reclassified the noncredit portion of previously recognized OTTI for pooled trust preferred securities totaling $8.1 million, on a net of tax basis, from the opening balance of retained earnings to other comprehensive income as of March 31, 2009. Additionally, the Company recorded $61.9 million, on a pre-tax basis, of the credit portion of OTTI through earnings and $12.2 million, net of tax, of the non-credit portion of OTTI for pooled trust preferred securities in other comprehensive income for the nine months ended September 30, 2009.
62
The following table sets forth certain information regarding the amortized cost of our investment securities held-to-maturity and fair values of our investment securities available-for-sale, as well as the weighted average yields, and contractual maturity distribution, excluding periodic principal payments, of our investment securities held-to-maturity and available-for-sale portfolio at September 30, 2009. Securities with no stated maturity dates, such as equity securities, are included in the indeterminate maturity category.
|
|
|
|
After One |
|
After Five |
|
|
|
|
|
|
|
||||||||||||||||||
|
|
Within |
|
But Within |
|
But Within |
|
After |
|
Indeterminate |
|
|
|
||||||||||||||||||
|
|
One Year |
|
Five Years |
|
Ten Years |
|
Ten Years |
|
Maturity |
|
Total |
|
||||||||||||||||||
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
||||||
|
|
(Dollars in thousands) |
|
||||||||||||||||||||||||||||
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
$ |
100,000 |
|
4.38 |
% |
$ |
25,000 |
|
4.00 |
% |
|
|
|
|
$ |
127,638 |
|
5.50 |
% |
|
|
|
|
$ |
252,638 |
|
4.91 |
% |
||
Municipal securities |
|
3,472 |
|
4.21 |
% |
15,301 |
|
5.27 |
% |
14,690 |
|
6.67 |
% |
2,655 |
|
7.11 |
% |
|
|
|
|
36,118 |
|
5.87 |
% |
||||||
Other residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment grade |
|
|
|
|
|
|
|
|
|
32,277 |
|
5.91 |
% |
42,756 |
|
7.00 |
% |
|
|
|
|
75,033 |
|
6.53 |
% |
||||||
Non-investment grade |
|
|
|
|
|
|
|
|
|
|
|
|
|
30,461 |
|
10.77 |
% |
|
|
|
|
30,461 |
|
10.77 |
% |
||||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Investment grade |
|
114,084 |
|
6.01 |
% |
258,790 |
|
5.47 |
% |
5,073 |
|
4.31 |
% |
|
|
|
|
|
|
|
|
377,947 |
|
5.61 |
% |
||||||
Non-investment grade |
|
|
|
|
|
4,625 |
|
8.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
4,625 |
|
8.11 |
% |
||||||
Other securities |
|
2,576 |
|
0.17 |
% |
1,933 |
|
0.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
4,509 |
|
0.30 |
% |
||||||
Total investment securities held-to-maturity |
|
$ |
220,132 |
|
5.17 |
% |
$ |
305,649 |
|
5.34 |
% |
$ |
52,040 |
|
5.97 |
% |
$ |
203,510 |
|
6.63 |
% |
|
|
|