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EAST WEST BANCORP INC - Quarter Report: 2010 September (Form 10-Q)

form10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

Mark One

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

For the quarterly period ended September 30, 2010

or

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

For the transition period from ________ to ________

Commission file number 000-24939

EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware
95-4703316
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

135 N. Los Robles Ave, 7th Floor, Pasadena, California 91101
(Address of principal executive offices) (Zip Code)

(626) 768-6000
(Registrant’s telephone number, including area code)

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

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 ¨   No ¨

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 ¨
Accelerated filer þ
Non-accelerated filer ¨
Smaller reporting company ¨

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

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 148,004,889 shares of common stock as of October 31, 2010.

 
 

 

TABLE OF CONTENTS
 
 
PART I - FINANCIAL INFORMATION
 
4
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
4-7
 
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
8-42
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
43-70
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
71
 
 
Item 4.
Controls and Procedures
71
 
PART II - OTHER INFORMATION
72
 
 
Item 1.
Legal Proceedings
72
 
 
Item 1A.
Risk Factors
72
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
72
 
 
Item 3.
Defaults Upon Senior Securities
73
 
 
Item 4.
(Removed and Reserved)
73
 
 
Item 5.
Other Information
73
 
 
Item 6.
Exhibits
73
 
SIGNATURE
74
 

 
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 we operate and projections of future performance including future earnings and financial condition. Our 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:
 
·  
our ability to integrate the former acquired institutions’, through Federal Deposit Insurance Corporation (“FDIC”) assisted acquisitions, and to achieve expected synergies, operating efficiencies or other benefits within expected time frames, or at all, or within expected cost projections;
 
·  
our ability to integrate and retain former depositors and borrowers of the acquired institutions;
 
·  
our ability to manage the loan portfolio acquired from these institutions within the limits of the loss protection provided by the FDIC;
 
·  
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 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 may disrupt or increase volatility in securities or otherwise affect economic conditions.
 
For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2009 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
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Cash and cash equivalents
  $ 859,694     $ 835,141  
Short-term investments
    381,799       510,788  
Fed funds sold
    75,000        
Securities purchased under resale agreements
    350,000       227,444  
Investment securities available for sale, at fair value (with amortized cost of $2,898,988 at
               
September 30, 2010 and $2,563,043 at December 31, 2009)
    2,907,349       2,564,081  
Loans held for sale, at fair value
    16,902       28,014  
                 
Loans receivable, excluding covered loans (net of allowance for loan losses of $240,286 at
               
September 30, 2010 and $238,833 at December 31, 2009)
    8,306,782       8,218,671  
Covered loans (net of allowance for loan losses of $3,900 at September 30, 2010)
    4,975,502       5,598,155  
                 
Total loans receivable, net
    13,282,284       13,816,826  
                 
FDIC indemnification asset
    874,759       1,091,814  
                 
Other real estate owned, net
    16,936       13,832  
Other real estate owned covered, net
    137,353       44,273  
                 
Total other real estate owned
    154,289       58,105  
                 
Accrued interest receivable
    79,879       82,370  
Due from customer acceptances
    50,698       40,550  
Investment in affordable housing partnerships
    152,944       84,833  
Premises and equipment, net
    138,474       59,099  
Premiums on deposits acquired, net
    82,755       89,735  
  Goodwill
    337,438       337,438  
Other assets
    672,982       732,974  
                 
TOTAL
  $ 20,417,246     $ 20,559,212  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Customer deposit accounts:
               
Noninterest-bearing
  $ 2,571,750     $ 2,291,259  
Interest-bearing
    12,726,221       12,696,354  
                 
Total deposits
    15,297,971       14,987,613  
                 
Federal Home Loan Bank advances
    1,018,074       1,805,387  
Securities sold under repurchase agreements
    1,045,664       1,026,870  
Notes payable and other borrowings
    73,550       74,406  
Bank acceptances outstanding
    50,698       40,550  
Long-term debt
    235,570       235,570  
Accrued interest payable, accrued expenses and other liabilities
    310,959       104,157  
                 
Total liabilities
    18,032,486       18,274,553  
                 
COMMITMENTS AND CONTINGENCIES (Note 10)
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative
               
convertible, 200,000 shares issued and 85,741 shares outstanding in 2010 and  2009; Series B,
               
cumulative, 306,546 shares issued and outstanding in 2010 and 2009; Series C, cumulative
               
convertible, 335,047 shares issued and outstanding in 2009
    370,882       693,803  
Common stock, $0.001 par value, 200,000,000 shares authorized; 155,092,439 and 116,754,403
               
shares issued in 2010 and 2009, respectively; 147,981,714 and 109,962,965 shares
               
outstanding in 2010 and 2009, respectively
    155       117  
Additional paid in capital
    1,428,893       1,091,047  
Retained earnings
    689,356       604,223  
Treasury stock, at cost - 7,110,725 shares in 2010 and 6,791,438 shares in 2009
    (109,661 )     (105,130 )
Accumulated other comprehensive income, net of tax
    5,135       599  
                 
Total stockholders’ equity
    2,384,760       2,284,659  
                 
TOTAL
  $ 20,417,246     $ 20,559,212  
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)
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
INTEREST AND DIVIDEND INCOME
                       
Loans receivable, including fees
  $ 210,086     $ 114,512     $ 731,813     $ 336,997  
Investment securities
    15,725       28,485       50,642       88,178  
Securities purchased under resale agreements
    2,410       2,153       11,303       4,695  
Short-term investments
    2,362       1,856       7,405       7,341  
Investment in Federal Reserve Bank stock
    623       552       2,042       1,604  
Investment in Federal Home Loan Bank stock
    194       366       431       365  
                                 
Total interest and dividend income
    231,400       147,924       803,636       439,180  
                                 
INTEREST EXPENSE
                               
Customer deposit accounts
    28,498       26,970       91,078       94,933  
Securities sold under repurchase agreements
    12,189       12,140       36,775       36,016  
Federal Home Loan Bank advances
    5,725       11,172       20,905       38,191  
Long-term debt
    1,685       1,760       4,823       6,211  
Other borrowings
    498       2       1,903       8  
                                 
Total interest expense
    48,595       52,044       155,484       175,359  
                                 
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    182,805       95,880       648,152       263,821  
Provision for loan losses
    38,648       159,244       170,325       388,666  
                                 
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES
    144,157       (63,364 )     477,827       (124,845 )
                                 
NONINTEREST INCOME (LOSS)
                               
Increase (decrease) in FDIC indemnification asset and receivable
    5,826             (47,170 )      
                                 
Impairment loss on investment securities
    (6,522 )     (45,199 )     (17,515 )     (82,846 )
Less: noncredit-related impairment loss recorded in other comprehensive income
    5,634       20,950       7,186       20,950  
                                 
Net impairment loss on investment securities recognized in earnings
    (888 )     (24,249 )     (10,329 )     (61,896 )
                                 
Net gain on sale of investment securities
    2,791       2,177       24,749       7,378  
Branch fees
    7,976       4,679       24,953       14,463  
Gain on acquisition
                27,571        
Letters of credit fees and commissions
    2,888       1,984       8,493       5,768  
Ancillary loan fees
    2,367       1,227       6,425       4,812  
Income from life insurance policies
    1,100       1,090       3,306       3,269  
Net gain on sale of loans
    4,177       8       12,250       19  
Other operating income
    3,078       1,204       6,301       1,902  
                                 
Total noninterest income (loss)
    29,315       (11,880 )     56,549       (24,285 )
                                 
NONINTEREST EXPENSE
                               
Compensation and employee benefits
    38,693       15,875       131,051       49,492  
Other real estate owned expense
    5,694       767       44,689       16,480  
Occupancy and equipment expense
    13,963       6,262       39,022       19,950  
Deposit insurance premiums and regulatory assessments
    5,676       6,057       21,785       18,950  
Prepayment penalty for Federal Home Loan Bank advances
                13,832        
Amortization of premiums on deposits acquired
    3,352       1,069       10,046       3,286  
Amortization of investments in affordable housing partnerships
    1,442       1,709       7,117       5,121  
Loan related expenses
    6,316       2,197       14,567       5,274  
Legal expense
    5,301       1,323       14,391       4,856  
Data processing
    2,646       1,079       8,174       3,362  
Consulting expense
    1,612       759       5,672       1,879  
Deposit-related expenses
    1,239       948       3,381       2,863  
Other operating expenses
    14,011       8,019       50,446       23,869  
                                 
Total noninterest expense
    99,945       46,064       364,173       155,382  
                                 
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
    73,527       (121,308 )     170,203       (304,512 )
Provision (benefit) for income taxes
    26,576       (52,777 )     61,988       (126,790 )
                                 
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS
    46,951       (68,531 )     108,215       (177,722 )
Extraordinary item – impact of desecuritization, net of tax
                      (5,366 )
                                 
NET INCOME (LOSS) AFTER EXTRAORDINARY ITEMS
    46,951       (68,531 )     108,215       (183,088 )
                                 
Preferred stock dividends, amortization of preferred stock discount and inducement of
                               
preferred stock conversion
    6,732       10,620       19,017       42,986  
                                 
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
  $ 40,219     $ (79,151 )   $ 89,198     $ (226,074 )
                                 
EARNINGS (LOSS) PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
                         
Basic
  $ 0.27     $ (0.91 )   $ 0.66     $ (3.19 )
Diluted
  $ 0.27     $ (0.91 )   $ 0.61     $ (3.19 )
Dividends declared per common share
  $ 0.01     $ 0.01     $ 0.03     $ 0.04  
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
                               
Basic
    146,454       86,538       134,396       70,967  
Diluted
    147,113       86,538       146,993       70,967  
See accompanying notes to condensed consolidated financial statements.
 
5

 
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share data)
(Unaudited)
         
Additional
                                           
         
Paid In
                           
Accumulated
   
Compre-
       
         
Capital
         
Additional
               
Other
   
hensive
   
Total
 
   
Preferred
   
Preferred
   
Common
   
Paid In
   
Retained
   
Treasury
   
Comprehensive
   
Income
   
Stockholders'
 
   
Stock
   
Stock
   
Stock
   
Capital
   
Earnings
   
Stock
   
Income (Loss)
   
(Loss)
   
Equity
 
                                                       
BALANCE AS OF 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 AS OF 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 of common stock from
                                                                       
private placement
                    5       27,495                                       27,500  
Issuance of 12,650,000 shares of common stock  from
                                                                       
public offering
                    12       80,316                                       80,328  
Issuance of 423,597 shares of common stock pursuant to
                                                                       
various stock plans and agreements
                    1       399                                       400  
Issuance of 22,386 shares of common stock in lieu of
                                                                       
Board of Director retainer fees
                            219                                       219  
Cancellation of 60,578 shares of common stock 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 AS OF SEPTEMBER 30, 2009
  $     $ 367,922     $ 98     $ 929,558     $ 351,721     $ (104,338 )   $ (23,179 )           $ 1,521,782  
                                                                         
BALANCE AS OF JANUARY 1, 2010
  $     $ 693,803     $ 117     $ 1,091,047     $ 604,223     $ (105,130 )   $ 599             $ 2,284,659  
                                                                         
Comprehensive income:
                                                                       
Net income
                                    108,215                     $ 108,215       108,215  
Net unrealized gain on investment securities
                                                                       
available-for-sale
                                                    7,142       7,142       7,142  
Noncredit-related impairment loss on investment
                                                                       
securities recorded in the current year
                                                    (3,268 )     (3,268 )     (3,268 )
Foreign currency translation
                                                    662       662       662  
                                                                         
Total comprehensive income
                                                          $ 112,751          
                                                                         
Stock compensation costs
                            6,164                                       6,164  
Tax provision from stock plans
                            (156 )                                     (156 )
Issuance of 1,234,302 shares of common stock pursuant
                                                                       
to various stock plans and agreements
                    1       2,526                                       2,527  
Conversion of 335,047 shares of Series C preferred
                                                                       
stock into 37,103,734 shares of common stock
            (325,299 )     37       325,262                                        
Cancellation of 293,105 shares of common stock due to
                                                                       
forfeitures of issued restricted stock
                            4,050               (4,050 )                      
Purchase of 26,182 shares of treasury stock due to the
                                                                       
vesting of restricted stock
                                            (481 )                     (481 )
Amortization of Series B preferred stock discount
            2,378                       (2,378 )                              
Preferred stock dividends
                                    (16,640 )                             (16,640 )
Common stock dividends
                                    (4,064 )                             (4,064 )
                                                                         
BALANCE AS OF SEPTEMBER 30, 2010
  $     $ 370,882     $ 155     $ 1,428,893     $ 689,356     $ (109,661 )   $ 5,135             $ 2,384,760  
                                                                         
                                                           
Nine Months Ended
 
                                                           
September 30,
 
                                                              2010       2009  
                                                           
(In thousands)
         
Disclosure of reclassification amounts:
                                                                       
Unrealized holding gain (loss) on securities arising during the period, net of tax expense of $(8,862) in 2010 and $(37,620) in 2009
                    $ 12,237     $ 51,952  
Less: Reclassification adjustment for gain (loss) included in net income (loss), net of tax expense of $6,057 in 2010 and $(22,898) in 2009
                      (8,363 )     31,620  
                                                                         
Net unrealized gain (loss) on securities, net of tax expense of $(2,805) in 2010 and $(60,518) in 2009
                                    $ 3,874     $ 83,572  
 
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,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss) after extraordinary items
  $ 108,215     $ (183,088 )
Adjustments to reconcile net income (loss) after extraordinary items to net cash provided by operating activities:
         
Depreciation and amortization
    48,153       16,847  
Accretion of discount and premium
    (159,226 )      
Decrease in FDIC indemnification asset and receivable
    47,170        
Gain on acquisition
    (27,571 )      
Net impairment loss on investment securities recognized in earnings
    10,329       61,896  
Impairment writedown on mortgage servicing assets
    348       660  
Stock compensation costs
    6,164       4,370  
Deferred tax expense (benefit)
    32,355       (16,886 )
Provision for loan losses and impact of desecuritization
    170,325       397,929  
Impairment on other real estate owned
    36,508       17,670  
Impairment loss on other equity investment
          581  
Net gain on sales of investment securities, loans and other assets
    (39,260 )     (2,827 )
Originations of loans held for sale
    (22,013 )     (33,248 )
Proceeds from sale of loans held for sale
    20,389       33,318  
Prepayment penalty for Federal Home Loan Bank advances
    13,832        
Tax provision from stock plans
    156       498  
Net change in accrued interest receivable and other assets
    278,386       (11,710 )
Net change in accrued expenses and other liabilities
    162,446       (97,694 )
                 
Total adjustments
    578,491       371,404  
                 
Net cash provided by operating activities
    686,706       188,316  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Acquisition of WFIB assets
    67,186        
Net decrease in loans
    662,655       318,232  
Net decrease in short-term investments
    103,989       (92,415 )
Purchases of:
               
Securities purchased under resale agreements
    (880,000 )     (50,000 )
Investment securities held-to-maturity
          (697,768 )
Investment securities available-for-sale
    (3,612,331 )     (1,314,263 )
Loans receivable
    (580,396 )     (350,000 )
Federal Reserve Bank stock
    (10,500 )     (9,196 )
Investments in affordable housing partnerships
    (473 )     (22 )
Premises and equipment
    (90,051 )     (433 )
Proceeds from sale of:
               
Investment securities
    1,047,173       336,710  
Securities purchased under resale agreements
    710,000       25,000  
Loans receivable
    427,087       105,227  
Loans held for sale originated for investment
    147,194        
Other real estate owned
    77,804       51,807  
Premises and equipment
    84       8  
Repayments, maturity and redemption of investment securities available-for-sale
    2,268,589       1,040,828  
Dividends/redemption of Federal Home Loan Bank stock
    13,427       182  
                 
Net cash provided by (used in) investing activities
    351,437       (636,103 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net (payment for) proceeds from:
               
Deposits
    (87,053 )     526,598  
Short-term borrowings
    2,214       (3,980 )
Proceeds from:
               
Issuance of long-term borrowings
    350,000        
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
    2,527       400  
Payment for:
               
Repayment of long-term borrowings
    (1,223,137 )     (430,000 )
Repayment of notes payable and other borrowings
    (37,300 )     (9,395 )
Purchase of treasury shares due to the vesting of restricted stock
    (481 )     (54 )
Preferred stock issuance cost
          (5,715 )
Cash dividends on preferred stock
    (16,640 )     (20,530 )
Cash dividends on common stock
    (4,064 )     (2,486 )
Tax benefit from stock plans
    (156 )     (498 )
                 
Net cash (used in) provided by financing activities
    (1,014,090 )     162,168  
Effect of exchange rate changes on cash and cash equivalents
    500        
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    24,553       (285,619 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    835,141       878,853  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 859,694     $ 593,234  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 159,742     $ 184,054  
Income tax (refunds) payments
    24,292       (13,126 )
Noncash investing and financing activities:
               
Transfers to real estate owned/affordable housing partnership
    203,276       116,124  
Conversion of preferred stock to common stock
    325,299        
Desecuritization of loans receivable
          635,614  
Loans to facilitate sales of real estate owned
    13,550       38,605  
Loans transferred to loans held for sale
    138,792        
Loans to facilitate sales of loans
    42,022       130,509  
Issuance of common stock in lieu of Board of Director retainer fees
    360       219  
 
See accompanying notes to condensed consolidated financial statements.
 
7

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)
 
NOTE 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, 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 that, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the three months and nine months ended September 30, 2010 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 the date the financial statements are issued for inclusion in the accompanying financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
Certain prior year balances have been reclassified to conform to current year presentation.
 
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
 
 
Recent Accounting Standards
 
In September 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 860 which requires additional 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 was effective for the Company on January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
 
In September 2009, the FASB issued ASC 810 that changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. It was effective for the Company on January 1, 2010. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.
 
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and reasons for the transfers and separate presentation of information about purchases, sales, issuances and settlements in the

 
8

 

reconciliation for Level 3 fair value measurements. Additionally, ASU 2010-06 clarifies existing disclosures regarding level of disaggregation and inputs and valuation techniques. The new disclosures and clarifications of existing disclosures under ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years ending after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the disclosure requirements of significant transfers in and out of Level 1 and Level 2 fair value measurements (see Note 3). The Company does not expect the adoption of the disclosure requirements to have a material effect on its condensed consolidated financial statements.
 
In April 2010, the FASB issued ASU 2010-18, Receivables, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, which amends ASC 310-30. This ASU clarifies the treatment of loan modifications for loans accounted for within a loan pool. Loans accounted for under ASC 310-30, should not be removed from the pool even if the loan modification would otherwise be considered a troubled debt restructuring. An entity is still required to assess the entire pool for impairment. The update does not require additional disclosures. This clarified treatment of loan modifications is effective for interim and annual reporting periods beginning after July 15, 2010. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.
 
In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivable and Allowance for Credit Losses, which amends ASC 310, Receivables. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. The disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The Company does not expect the adoption of the disclosure requirements to have a material effect on its condensed consolidated financial statements.
 

 
9

 

NOTE 3 — FAIR VALUE
 
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 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 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 information according to the fair value hierarchy noted below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
 
 
·
Level 1 – Quoted prices for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Level 1 financial instruments typically include U.S. Treasury securities.
 
 
·
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 2 financial instruments typically include U.S. Government debt and agency mortgage-backed securities, municipal securities, U.S. Government sponsored enterprise preferred stock securities, single issue trust preferred securities, equity swap agreements, foreign exchange options and other real estate owned (“OREO”).
 
 
·
Level 3 – Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are 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.
 
The Company records investment securities available-for-sale, equity swap agreements, derivatives payable and foreign exchange options at fair value on a recurring basis. Certain other assets such as mortgage servicing assets, impaired loans, other real estate owned, goodwill, premiums on acquired deposits and private equity investments are recorded at fair value on a nonrecurring basis. Nonrecurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed.
 
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 tables present 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 condensed consolidated balance sheets at their fair values as of September 30, 2010 and December 31, 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. There were no transfers in and out of Levels 1 and 2 during the first nine months of 2010. There were also no transfers in and out of levels 1 and 3 or levels 2 and 3.
 

 
10

 
 
   
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
as of September 30, 2010
 
   
Fair Value Measurements September 30, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
   
(In thousands)
 
Investment securities available-for-sale:
                       
U.S. Treasury securities
  $ 21,740     $ 21,740     $     $