EAST WEST BANCORP INC - Quarter Report: 2012 March (Form 10-Q)

 

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 March 31, 2012

 

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 þ   No ¨

 

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

 

Large accelerated filer þ

Accelerated filer ¨

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: 144,580,471 shares of common stock as of April 30, 2012.

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION				4
Item 1.		Condensed Consolidated Financial Statements (Unaudited)		4
		Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		53
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		77
Item 4.		Controls and Procedures		78
PART II - OTHER INFORMATION				78
Item 1.		Legal Proceedings		78
Item 1A.		Risk Factors		78
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		79
Item 3.		Defaults Upon Senior Securities		79
Item 4.		Mine Safety Disclosures		79
Item 5.		Other Information		79
Item 6.		Exhibits		80
SIGNATURE				81

 

2

 

Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report contain or incorporate statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”), and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.

 

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

·                                          our ability to manage the loan portfolio acquired from FDIC-assisted acquisitions 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;

 

·                                          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 2011 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)

 

		March 31,			December 31,
		2012			2011
ASSETS
Cash and cash equivalents		$	1,635,854		$	1,431,185
Short-term investments		177,576			61,834
Federal funds sold		30,000			—
Securities purchased under resale agreements		650,000			786,434
Investment securities available-for-sale, at fair value (with amortized cost of $2,737,687 at March 31, 2012 and $3,132,968 at December 31, 2011)		2,706,720			3,072,578
Loans held for sale		280,830			278,603
Loans receivable, excluding covered loans (net of allowance for loan losses of $214,253 at March 31, 2012 and $209,876 at December 31, 2011)		10,264,826			10,061,788
Covered loans (net of allowance for loan losses of $8,268 at March 31, 2012 and $6,647 at December 31, 2011)		3,683,698			3,923,142
Total loans receivable, net		13,948,524			13,984,930
FDIC indemnification asset		457,265			511,135
Other real estate owned, net		46,343			29,350
Other real estate owned covered, net		55,586			63,624
Total other real estate owned		101,929			92,974
Investment in affordable housing partnerships		160,672			144,445
Premises and equipment, net		116,266			118,926
Accrued interest receivable		95,337			89,686
Due from customers on acceptances		179,880			198,774
Premiums on deposits acquired, net		64,317			67,190
Goodwill		337,438			337,438
Other assets		807,174			792,535
TOTAL		$	21,749,782		$	21,968,667
LIABILITIES AND STOCKHOLDERS’ EQUITY
Customer deposit accounts:
Noninterest-bearing		$	3,690,131		$	3,492,795
Interest-bearing		13,648,438			13,960,207
Total deposits		17,338,569			17,453,002
Federal Home Loan Bank advances		394,719			455,251
Securities sold under repurchase agreements		995,000			1,020,208
Bank acceptances outstanding		179,880			198,774
Long-term debt		212,178			212,178
Accrued expenses and other liabilities		346,139			317,511
Total liabilities		19,466,485			19,656,924
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative convertible, 200,000 shares issued and 85,710 shares outstanding in 2012 and 2011.		83,027			83,027
Common stock, $0.001 par value, 200,000,000 shares authorized; 157,003,114 and 156,798,011 shares issued in 2012 and 2011, respectively; 144,870,621 and 149,327,907 shares outstanding in 2012 and 2011, respectively.		157			157
Additional paid in capital		1,449,971			1,443,883
Retained earnings		986,195			934,617
Treasury stock, at cost 12,132,493 shares in 2012 and 7,470,104 shares in 2011		(219,175		)	(116,001		)
Accumulated other comprehensive loss, net of tax		(16,878		)	(33,940		)
Total stockholders’ equity		2,283,297			2,311,743
TOTAL		$	21,749,782		$	21,968,667

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended
		March 31,
		2012			2011
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees		$	221,039		$	227,526
Investment securities		21,232			18,857
Securities purchased under resale agreements		4,314			4,270
Investment in Federal Home Loan Bank stock		220			233
Investment in Federal Reserve Bank stock		713			709
Short-term investments		6,532			2,740
Total interest and dividend income		254,050			254,335
INTEREST EXPENSE
Customer deposit accounts		20,164			25,982
Federal funds purchased		2			—
Federal Home Loan Bank advances		2,142			5,778
Securities sold under repurchase agreements		11,722			12,017
Long-term debt		1,102			1,571
Other borrowings		—			153
Total interest expense		35,132			45,501
Net interest income before provision for loan losses		218,918			208,834
Provision for loan losses		18,100			26,506
Net interest income after provision for loan losses		200,818			182,328
NONINTEREST INCOME
Impairment loss on investment securities		(5,165		)	(5,555		)
Less: Noncredit-related impairment loss recorded in other comprehensive income		5,066			5,091
Net impairment loss on investment securities recognized in earnings		(99		)	(464		)
Decrease in FDIC indemnification asset and receivable		(5,418		)	(17,443		)
Branch fees		8,294			7,754
Net gain on sales of investment securities		483			2,515
Letters of credit fees and comissions		4,275			3,044
Foreign exchange income		1,796			1,927
Ancillary loan fees		2,008			1,991
Income from life insurance policies		990			984
Net gain on sales of loans		5,179			7,410
Other operating income		4,232			3,323
Total noninterest income		21,740			11,041
NONINTEREST EXPENSE
Compensation and employee benefits		46,409			38,270
Occupancy and equipment expense		13,518			12,598
Amortization of investments in affordable housing partnerships and other investments		4,466			4,525
Amortization of premiums on deposits acquired		2,873			3,185
Deposit insurance premiums and regulatory assessments		3,992			7,191
Loan-related expenses		4,481			3,099
Other real estate owned expense		10,865			10,664
Legal expense		7,173			4,101
Prepayment penalty for FHLB advances		1,321			4,022
Data processing		2,464			2,603
Deposit-related expenses		1,427			1,159
Consulting expense		1,467			1,626
Other operating expenses		14,307			13,746
Total noninterest expense		114,763			106,789
INCOME BEFORE PROVISION FOR INCOME TAXES		107,795			86,580
PROVISION FOR INCOME TAXES		39,712			30,509
NET INCOME		68,083			56,071
PREFERRED STOCK DIVIDENDS		1,714			1,715
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS		$	66,369		$	54,356
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
BASIC		$	0.46		$	0.37
DILUTED		$	0.45		$	0.37
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC		145,347			146,837
DILUTED		151,996			153,334
DIVIDENDS DECLARED PER COMMON SHARE		$	0.10		$	0.01

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except share data)

(Unaudited)

 

		Three Months Ended
		March 31,
		2012			2011
Net income		$	68,083		$	56,071
Other comprehensive income, net of tax:
Unrealized gain on investment securities available-for-sale:
Unrealized holding gains arising during period		16,611			2,333
Reclassification adjustment for net losses/(gains) included in net income		3,379			3,611
Noncredit-related impairment loss on securities		(2,938)			(2,953		)
Foreign currency translation adjustments		10			(732		)
Other comprehensive income		17,062			2,259
COMPREHENSIVE INCOME		$	85,145		$	58,330

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

					Additional						Additional									Accumulated
					Paid In						Paid In									Other
					Capital						Capital									Comprehensive			Total
		Preferred			Preferred			Common			Common			Retained			Treasury			Income (Loss),			Stockholders’
		Stock			Stock			Stock			Stock			Earnings			Stock			Net of Tax			Equity
BALANCE, JANAURY 1, 2011		$	—		$	83,058		$	156		$	1,434,277		$	720,116		$	(111,262	)	$	(12,414	)	$	2,113,931
Net income														56,071									56,071
Other comprehensive income																				2,259			2,259
Stock compensation costs											2,287												2,287
Tax benefit from stock compensation plans, net											43												43
Issuance of 158,878 shares of common stock pursuant to various stock compensation plans and agreements											1,575												1,575
Conversion of 31 shares of Series A preferred stock into 2,014 shares of common stock					(31		)				31												—
Cancellation of 42,524 shares of common stock due to forfeitures of issued restricted stock											727						(727		)				—
Purchase of 23,676 shares of treasury stock due to the vesting of restricted stock																	(548		)				(548		)
Preferred stock dividends														(1,715		)							(1,715		)
Common stock dividends														(1,486		)							(1,486		)
Repurchase of 1,517,555 common stock warrants											(14,500		)										(14,500		)
BALANCE, MARCH 31, 2011		$	—		$	83,027		$	156		$	1,424,440		$	772,986		$	(112,537	)	$	(10,155	)	$	2,157,917
BALANCE, JANAURY 1, 2012		$	—		$	83,027		$	157		$	1,443,883		$	934,617		$	(116,001	)	$	(33,940	)	$	2,311,743
Net income														68,083									68,083
Other comprehensive income																				17,062			17,062
Stock compensation costs											3,637												3,637
Tax benefit from stock compensation plans, net											29												29
Issuance of 205,103 shares of common stock pursuant to various stock compensation plans and agreements											1,539												1,539
Cancellation of 47,489 shares of common stock due to forfeitures of issued restricted stock											883						(883		)				—
Purchase of 60,073 shares of treasury stock due to the vesting of restricted stock																	(1,313		)				(1,313		)
Preferred stock dividends														(1,714		)							(1,714		)
Common stock dividends														(14,791		)							(14,791		)
Purchase of 4,554,827 shares of treasury stock pursuant to the Stock Repurchase Program																	(100,978		)				(100,978		)
BALANCE, MARCH 31, 2012		$	—		$	83,027		$	157		$	1,449,971		$	986,195		$	(219,175	)	$	(16,878	)	$	2,283,297

 

See accompanying notes to condensed consolidated financial statements.

 

7

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three Months Ended
		March 31,
		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	68,083		$	56,071
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,459			15,429
(Accretion) of discount and amortization of premiums, net		(34,660		)	(45,236		)
Decrease in FDIC indemnification asset and receivable		5,418			17,443
Stock compensation costs		3,637			2,287
Deferred tax (benefit) expense		(20,159		)	26,901
Provision for loan losses		18,100			26,506
Impairment on other real estate owned		7,389			7,816
Net gain on sales of investment securities, loans and other assets		(7,014		)	(9,070		)
Originations and purchases of loans held for sale		(15,782		)	(6,150		)
Proceeds from sales of loans held for sale		—			7,235
Prepayment penalty for Federal Home Loan Bank advances, net		1,321			4,022
Prepayment penalty on modification of Federal Home Loan Bank advances		(37,678		)	—
Net proceeds from FDIC shared-loss agreements		39,358			44,399
Net change in accrued interest receivable and other assets		(27,165		)	26,138
Net change in accrued expenses and other liabilities		40,427			(15,143		)
Other net operating activities		(713		)	(338		)
Total adjustments		(8,062		)	102,239
Net cash provided by operating activities		60,021			158,310
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in:
Loans		68,532			(8,348		)
Short-term investments		(115,742		)	2,975
Federal funds sold		(30,000		)	—
Purchases of:
Securities purchased under resale agreements		—			(268,369		)
Investment securities available-for-sale		(8,018		)	(590,045		)
Loans receivable		(116,486		)	(297,690		)
Investments in affordable housing partnerships		(17,850		)	(8,828		)
Proceeds from sale of:
Investment securities available-for-sale		260,261			312,870
Loans receivable		27,639			92,840
Loans held for sale originated for investment		52,559			143,244
Other real estate owned		22,791			33,612
Repayments, maturities and redemptions of investment securities available-for-sale		138,650			228,320
Paydowns, maturities and termination of securities purchased under resale agreements		136,434			—
Redemption of Federal Home Loan Bank stock		6,391			6,330
Other net investing activities		(832		)	(982		)
Net cash provided by (used in) investing activities		424,329			(354,071		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in:
Deposits		(113,801		)	795,971
Short-term borrowings		(25,208		)	(2,526		)
Proceeds from:
Issuance of common stock pursuant to various stock plans and agreements		1,539			1,575
Payment for:
Repayment of FHLB advances		(23,003		)	(420,887		)
Repurchase of common stock warrants		—			(14,500		)
Repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan		(100,978		)	—
Cash dividends		(16,495		)	(3,201		)
Other net financing activities		(1,284		)	(505		)
Net cash (used in) provided by financing activities		(279,230		)	355,927
Effect of exchange rate changes on cash and cash equivalents		(451		)	(1,193		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		204,669			158,973
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,431,185			1,333,949
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	1,635,854		$	1,492,922
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	34,140		$	46,347
Income tax payments, net of refunds		23,422			3,282
Noncash investing and financing activities:
Loans transferred to loans held for sale		40,800			243,119
Transfers to other real estate owned		39,572			68,534
Loans to facilitate sales of other real estate owned		400			7,562
Loans to facilitate sales of loans		—			13,154
Conversion of preferred stock to common stock		—			31

 

See accompanying notes to condensed consolidated financial statements.

 

8

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(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 (“East West Bank” or the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and accounts have been eliminated in consolidation. East West also has seven wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) 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 ended March 31, 2012 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, 2011.

 

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

 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

 

Derivative Financial Instruments—As part of its asset and liability management strategy, the Company uses derivative financial instruments to mitigate exposure to interest rate and foreign currency risks. All derivative instruments, including certain derivative instruments embedded in other contracts, are recognized on the condensed consolidated balance sheet at fair value with the change in fair value reported in earnings. When master netting agreements exist, the Company nets counterparty positions with any cash collateral received or delivered.

 

The Company’s interest rate swaps on certain certificates of deposit qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging. The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. This includes designating the derivative contract as a “fair value hedge” which is a hedge of a recognized asset or liability. All derivatives designated as fair value hedges are linked to specific hedged items or to groups of specific assets and liabilities on the balance sheet. Both at inception and quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in the fair value of the hedged item. Retroactive effectiveness is also assessed as well as the continued expectation that the hedge will remain effective prospectively. Any ineffective portion of the changes of fair value hedges is recognized immediately in interest expense in the condensed consolidated statements of income.

 

9

 

The Company discontinues hedge accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value, (ii) a derivative expires or is sold, terminated, or exercised, or (iii) the Company determines that designation of a derivative as a hedge is no longer appropriate. If a fair value hedge derivative instrument is terminated or the hedge designation removed, the previous adjustments to the carrying amount of the hedged liability would be subsequently accounted for in the same manner as other components of the carrying amount of that liability. For interest-bearing liabilities, such adjustments would be amortized into earnings over the remaining life of the respective liability.

 

The Company adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs and has made the accounting policy election to use the exception in ASC 820 with respect to measuring counterparty credit risk for derivative instruments. That exception permits the Company to measure the fair value of a group of financial assets and liabilities on the basis of the price that would be received to sell an asset position or to transfer a liability position for a particular risk exposure, based on specified criteria, which have been met by the Company.

 

Comprehensive Income—The term “comprehensive income” describes the total of all components of comprehensive income, including net income and other comprehensive income. “Other comprehensive income” refers to revenues, expenses, and gains and losses that are included in comprehensive income but are excluded from net income because they have been recorded directly in equity under the provisions of other Financial Accounting Standards Board statements. In accordance with the adoption of ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, the Company presents comprehensive income in the condensed consolidated statements of comprehensive income, which was formerly presented in the condensed consolidated statements of changes in stockholders’ equity.

 

Recent Accounting Standards

 

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance on the two conditions that must exist in evaluating whether a restructuring constitutes a troubled debt restructuring:  that the restructuring constitutes a concession and that the debtor is experiencing financial difficulties. In addition, ASU 2011-02 clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments in ASU 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Additionally, ASU 2011-02 finalizes the effective date for the disclosures required by paragraphs 310-10-50-33 through 50-34, which were deferred by ASU 2011-01, for interim and annual periods beginning on or after June 15, 2011. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860):  Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 removes the transferor’s ability criterion from the consideration of effective control for repos and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity. The amendments in ASU 2011-03 remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The FASB indicates that eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repos and other similar transactions.

 

10

 

The amendments in ASU 2011-03 are effective for the first interim or annual period beginning on or after December 15, 2011 and are to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 addresses convergence between GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. The amendments in ASU 2011-04 are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured, or when they must be reclassified to net income. The FASB amended ASU 2011-05 in December 2011, with the issuance of ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. Both standards are effective for interim and annual periods beginning after December 15, 2011. The adoption of these standards only affected the presentation of the Company’s condensed consolidated financial statements and did not have an impact on the financial amounts presented in the statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 gives both public and nonpublic companies the option to qualitatively determine whether they can bypass the two-step goodwill impairment test under ASC 350-20, Intangibles – Goodwill and Other: Goodwill. Under ASU 2011-08, if a company chooses to perform a qualitative assessment and determines that it is more likely than not (a more than 50 percent likelihood) that the fair value of a reporting unit is less than its carrying amount, it would then perform Step 1 of the annual goodwill impairment test in ASC 350-20 and, if necessary, proceed to Step 2. Otherwise, no further evaluation would be necessary. The amended guidance is effective for interim and annual periods beginning after December 15, 2011. The Company has elected to continue to assess the two-step goodwill impairment, quantitatively. As such, this guidance did not have an impact on the Company’s condensed consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 addresses the differences in offsetting requirements between GAAP and IFRS by enhancing disclosures about financial instruments and derivative instruments that are either offset in accordance with GAAP or are subject to an enforceable master netting arrangement or similar agreement.

 

11

 

Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013, and must be applied retrospectively to all comparative periods presented. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on its condensed consolidated financial statements.

 

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 following 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, corporate debt securities, single issue trust preferred securities, equity swap agreements, foreign exchange options, interest rate swaps, impaired loans and other real estate owned (“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 pooled trust preferred securities and derivatives payable.

 

The Company records investment securities available-for-sale, equity swap agreements, derivative liabilities, foreign exchange options, interest rate swaps, short-term foreign exchange contracts and short-term call option at fair value on a recurring basis. Certain other assets such as mortgage servicing assets, impaired loans, other real estate owned, loans held for sale, goodwill, premiums on acquired deposits and other 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 nonfinancial assets and liabilities that are measured at fair value on a recurring and nonrecurring basis. These assets and liabilities are reported on the condensed consolidated balance sheets at their fair values as of March 31, 2012 and December 31, 2011. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

 

12

 

There were no transfers in and out of Levels 1 and 2 during the first three months of 2012. There were also no transfers in and out of Levels 1 and 3 or Levels 2 and 3 during the first three months of 2012.

 

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of March 31, 2012
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		March 31,			Assets			Inputs			Inputs
		2012			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	20,618		$	20,618		$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities		514,322			—			514,322			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		49,383			—			49,383			—
Residential mortgage-backed securities		924,631			—			924,631			—
Municipal securities		82,772			—			82,772			—
Corporate debt securities:
Investment grade		1,090,609			—			1,090,609			—
Non-investment grade		13,922			—			11,675			2,247
Other securities		10,463			—			10,463			—
Total investment securities available-for-sale		$	2,706,720		$	20,618		$	2,683,855		$	2,247
Equity swap agreements		$	204		$	—		$	204		$	—
Foreign exchange options		4,695			—			4,695			—
Interest rate swaps		18,432			—			18,432			—
Short-term foreign exchange contracts		2,045			—			2,045			—
Derivatives liabilities		(25,291		)	—			(22,169		)	(3,122		)

 

 

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of December 31, 2011
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		December 31,			Assets			Inputs			Inputs
		2011			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	20,725		$	20,725		$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities		576,578			—			576,578			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		49,315			—			49,315			—
Residential mortgage-backed securities		993,770			—			993,770			—
Municipal securities		79,946			—			79,946			—
Corporate debt securities:
Investment grade		1,322,561			—			1,322,561			—
Non-investment grade		19,615			—			17,380			2,235
Other securities		10,068			—			10,068			—
Total investment securities available-for-sale		$	3,072,578		$	20,725		$	3,049,618		$	2,235
Equity swap agreements		$	202		$	—		$	202		$	—
Foreign exchange options		3,899			—			3,899			—
Interest rate swaps		20,474			—			20,474			—
Short-term foreign exchange contracts		1,403			—			1,403			—
Derivatives liabilities		(24,164		)	—			(21,530		)	(2,634		)

 

13