EAST WEST BANCORP INC - Quarter Report: 2013 March (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 March 31, 2013
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
(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 x No o
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 x |
Accelerated filer o |
Non-accelerated filer ¨ |
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: 136,174,881 shares of common stock as of April 30, 2013.
4 | ||
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
9 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
56 | |
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80 | ||
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80 | ||
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81 | ||
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82 |
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 U.S. economy, including inflation;
· changes in government interest rate policies;
· changes in laws or the regulatory environment;
· changes in the economy of and monetary policy in the Peoples Republic of China;
· 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;
· impact of the European debt crisis;
· impact of potential federal tax increases and spending cuts;
· impact of adverse judgments or settlements in litigation against the Company;
· 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 Companys 2012 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.
PART I FINANCIAL INFORMATION
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
|
|
March 31, |
|
December 31, |
| ||
|
|
2013 |
|
2012 |
| ||
ASSETS |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
1,736,865 |
|
$ |
1,323,106 |
|
Short-term investments |
|
379,029 |
|
366,378 |
| ||
Securities purchased under resale agreements |
|
1,400,000 |
|
1,450,000 |
| ||
Investment securities available-for-sale, at fair value (with amortized cost of $2,578,384 at March 31, 2013 and $2,599,018 at December 31, 2012) |
|
2,588,993 |
|
2,607,029 |
| ||
Loans held for sale |
|
226,635 |
|
174,317 |
| ||
Loans receivable, excluding covered loans (net of allowance for loan losses of $228,796 at March 31, 2013 and $229,382 at December 31, 2012) |
|
12,119,903 |
|
11,710,190 |
| ||
Covered loans (net of allowance for loan losses of $10,110 at March 31, 2013 and $5,153 at December 31, 2012) |
|
2,752,269 |
|
2,935,595 |
| ||
Total loans receivable, net |
|
14,872,172 |
|
14,645,785 |
| ||
FDIC indemnification asset |
|
276,834 |
|
316,313 |
| ||
Other real estate owned, net |
|
32,324 |
|
32,911 |
| ||
Other real estate owned covered, net |
|
28,567 |
|
26,808 |
| ||
Total other real estate owned |
|
60,891 |
|
59,719 |
| ||
Investment in Federal Home Loan Bank stock, at cost |
|
96,795 |
|
107,275 |
| ||
Investment in Federal Reserve Bank stock, at cost |
|
48,036 |
|
48,003 |
| ||
Investment in affordable housing partnerships |
|
181,928 |
|
185,645 |
| ||
Premises and equipment, net |
|
109,485 |
|
107,517 |
| ||
Accrued interest receivable |
|
103,392 |
|
94,837 |
| ||
Due from customers on acceptances |
|
22,662 |
|
28,612 |
| ||
Premiums on deposits acquired, net |
|
53,875 |
|
56,285 |
| ||
Goodwill |
|
337,438 |
|
337,438 |
| ||
Cash surrender value of life insurance policies |
|
110,860 |
|
110,133 |
| ||
Other assets |
|
496,065 |
|
517,718 |
| ||
TOTAL |
|
$ |
23,101,955 |
|
$ |
22,536,110 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
| ||
Customer deposit accounts: |
|
|
|
|
| ||
Noninterest-bearing |
|
$ |
4,838,523 |
|
$ |
4,535,877 |
|
Interest-bearing |
|
14,097,179 |
|
13,773,477 |
| ||
|
|
|
|
|
| ||
Total deposits |
|
18,935,702 |
|
18,309,354 |
| ||
Federal Home Loan Bank advances |
|
313,494 |
|
312,975 |
| ||
Securities sold under repurchase agreements |
|
995,000 |
|
995,000 |
| ||
Other borrowings |
|
|
|
20,000 |
| ||
Bank acceptances outstanding |
|
22,662 |
|
28,612 |
| ||
Long-term debt |
|
137,178 |
|
137,178 |
| ||
Accrued expenses and other liabilities |
|
354,800 |
|
350,869 |
| ||
|
|
|
|
|
| ||
Total liabilities |
|
20,758,836 |
|
20,153,988 |
| ||
|
|
|
|
|
| ||
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
|
|
|
| ||
|
|
|
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|
| ||
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 2013 and 2012 |
|
83,027 |
|
83,027 |
| ||
Common stock, $0.001 par value, 200,000,000 shares authorized; 157,354,024 and 157,160,193 shares issued in 2013 and 2012, respectively; 136,578,350 and 140,294,092 shares outstanding in 2013 and 2012, respectively |
|
157 |
|
157 |
| ||
Additional paid in capital |
|
1,470,674 |
|
1,464,739 |
| ||
Retained earnings |
|
1,201,126 |
|
1,151,828 |
| ||
Treasury stock, at cost 20,775,674 shares in 2013 and 16,866,101 shares in 2012 |
|
(418,050 |
) |
(322,298 |
) | ||
Accumulated other comprehensive income, net of tax |
|
6,185 |
|
4,669 |
| ||
Total stockholders equity |
|
2,343,119 |
|
2,382,122 |
| ||
TOTAL |
|
$ |
23,101,955 |
|
$ |
22,536,110 |
|
See accompanying notes to condensed consolidated financial statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2013 |
|
2012 |
| ||
INTEREST AND DIVIDEND INCOME |
|
|
|
|
| ||
Loans receivable, including fees |
|
$ |
217,159 |
|
$ |
221,039 |
|
Investment securities |
|
10,210 |
|
21,232 |
| ||
Securities purchased under resale agreements |
|
5,529 |
|
4,314 |
| ||
Investment in Federal Home Loan Bank stock |
|
529 |
|
220 |
| ||
Investment in Federal Reserve Bank stock |
|
720 |
|
713 |
| ||
Due from banks and short-term investments |
|
4,276 |
|
6,532 |
| ||
|
|
|
|
|
| ||
Total interest and dividend income |
|
238,423 |
|
254,050 |
| ||
|
|
|
|
|
| ||
INTEREST EXPENSE |
|
|
|
|
| ||
Customer deposit accounts |
|
16,854 |
|
20,164 |
| ||
Federal funds purchased |
|
|
|
2 |
| ||
Federal Home Loan Bank advances |
|
1,039 |
|
2,142 |
| ||
Securities sold under repurchase agreements |
|
10,529 |
|
11,722 |
| ||
Long-term debt |
|
710 |
|
1,102 |
| ||
|
|
|
|
|
| ||
Total interest expense |
|
29,132 |
|
35,132 |
| ||
|
|
|
|
|
| ||
Net interest income before provision for loan losses |
|
209,291 |
|
218,918 |
| ||
(Reversal of) provision for loan losses, excluding covered loans |
|
(762 |
) |
16,479 |
| ||
Provision for loan losses on covered loans |
|
5,089 |
|
1,621 |
| ||
|
|
|
|
|
| ||
Net interest income after provision for loan losses |
|
204,964 |
|
200,818 |
| ||
|
|
|
|
|
| ||
NONINTEREST (LOSS) INCOME |
|
|
|
|
| ||
Impairment loss on investment securities |
|
|
|
(5,165 |
) | ||
Less: Noncredit-related impairment loss recorded in other comprehensive income |
|
|
|
5,066 |
| ||
|
|
|
|
|
| ||
Net impairment loss on investment securities recognized in earnings |
|
|
|
(99 |
) | ||
Decrease in FDIC indemnification asset and receivable |
|
(31,899 |
) |
(5,418 |
) | ||
Branch fees |
|
7,654 |
|
7,662 |
| ||
Net gain on sales of investment securities |
|
5,577 |
|
483 |
| ||
Letters of credit fees and commissions |
|
5,062 |
|
4,275 |
| ||
Foreign exchange income |
|
2,336 |
|
1,796 |
| ||
Ancillary loan fees |
|
2,052 |
|
2,008 |
| ||
Income from life insurance policies |
|
968 |
|
990 |
| ||
Net gain on sales of loans |
|
94 |
|
5,179 |
| ||
Other operating income |
|
6,057 |
|
4,864 |
| ||
|
|
|
|
|
| ||
Total noninterest (loss) income |
|
(2,099 |
) |
21,740 |
| ||
|
|
|
|
|
| ||
NONINTEREST EXPENSE |
|
|
|
|
| ||
Compensation and employee benefits |
|
45,731 |
|
46,409 |
| ||
Occupancy and equipment expense |
|
13,808 |
|
13,518 |
| ||
Amortization of investments in affordable housing partnerships and other investments |
|
4,283 |
|
4,466 |
| ||
Amortization of premiums on deposits acquired |
|
2,409 |
|
2,873 |
| ||
Deposit insurance premiums and regulatory assessments |
|
3,782 |
|
3,992 |
| ||
Loan related expenses |
|
3,584 |
|
4,481 |
| ||
Other real estate owned (gain on sale) expense |
|
(984 |
) |
10,865 |
| ||
Legal expense |
|
4,444 |
|
7,173 |
| ||
Prepayment penalty for FHLB advances |
|
|
|
1,321 |
| ||
Data processing |
|
2,437 |
|
2,464 |
| ||
Deposit related expenses |
|
1,574 |
|
1,427 |
| ||
Consulting expense |
|
454 |
|
1,467 |
| ||
Other operating expenses |
|
14,833 |
|
14,307 |
| ||
|
|
|
|
|
| ||
Total noninterest expense |
|
96,355 |
|
114,763 |
| ||
|
|
|
|
|
| ||
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
106,510 |
|
107,795 |
| ||
PROVISION FOR INCOME TAXES |
|
34,419 |
|
39,712 |
| ||
|
|
|
|
|
| ||
NET INCOME |
|
72,091 |
|
68,083 |
| ||
|
|
|
|
|
| ||
PREFERRED STOCK DIVIDENDS |
|
1,714 |
|
1,714 |
| ||
|
|
|
|
|
| ||
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS |
|
$ |
70,377 |
|
$ |
66,369 |
|
|
|
|
|
|
| ||
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS |
|
|
|
|
| ||
BASIC |
|
$ |
0.51 |
|
$ |
0.46 |
|
DILUTED |
|
$ |
0.50 |
|
$ |
0.45 |
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |
|
|
|
|
| ||
BASIC |
|
137,648 |
|
145,347 |
| ||
DILUTED |
|
143,519 |
|
151,996 |
| ||
|
|
|
|
|
| ||
DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
0.15 |
|
$ |
0.10 |
|
See accompanying notes to condensed consolidated financial statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2013 |
|
2012 |
| ||
Net income |
|
$ |
72,091 |
|
$ |
68,083 |
|
Other comprehensive income, net of tax: |
|
|
|
|
| ||
Unrealized gain on investment securities available-for-sale: |
|
|
|
|
| ||
Unrealized holding gains arising during period |
|
4,741 |
|
20,270 |
| ||
Reclassification adjustment for net gains included in net income |
|
(3,235 |
) |
(280 |
) | ||
Noncredit-related impairment loss on securities |
|
|
|
(2,938 |
) | ||
Unrealized gains on other investments |
|
10 |
|
10 |
| ||
Reclassification adjustment for net gains included in net income |
|
|
|
|
| ||
Other comprehensive income |
|
1,516 |
|
17,062 |
| ||
COMPREHENSIVE INCOME |
|
$ |
73,607 |
|
$ |
85,145 |
|
See accompanying notes to condensed consolidated financial statements.
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, 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 |
) |
|
|
|
| ||||||||
60,073 shares of restricted stock surrendered due to employee tax liability |
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
BALANCE, JANAURY 1, 2013 |
|
$ |
|
|
$ |
83,027 |
|
$ |
157 |
|
$ |
1,464,739 |
|
$ |
1,151,828 |
|
$ |
(322,298 |
) |
$ |
4,669 |
|
$ |
2,382,122 |
|
Net income |
|
|
|
|
|
|
|
|
|
72,091 |
|
|
|
|
|
72,091 |
| ||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,516 |
|
1,516 |
| ||||||||
Stock compensation costs |
|
|
|
|
|
|
|
2,504 |
|
|
|
|
|
|
|
2,504 |
| ||||||||
Tax benefit from stock compensation plans, net |
|
|
|
|
|
|
|
2,602 |
|
|
|
|
|
|
|
2,602 |
| ||||||||
Issuance of 193,831 shares of common stock pursuant to various stock compensation plans and agreements |
|
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
442 |
| ||||||||
Cancellation of 22,050 shares of common stock due to forfeitures of issued restricted stock |
|
|
|
|
|
|
|
387 |
|
|
|
(387 |
) |
|
|
|
| ||||||||
344,423 shares of restricted stock surrendered due to employee tax liability |
|
|
|
|
|
|
|
|
|
|
|
(8,365 |
) |
|
|
(8,365 |
) | ||||||||
Preferred stock dividends |
|
|
|
|
|
|
|
|
|
(1,714 |
) |
|
|
|
|
(1,714 |
) | ||||||||
Common stock dividends |
|
|
|
|
|
|
|
|
|
(21,079 |
) |
|
|
|
|
(21,079 |
) | ||||||||
Purchase of 3,543,100 shares of treasury stock pursuant to the Stock Repurchase Program |
|
|
|
|
|
|
|
|
|
|
|
(87,000 |
) |
|
|
(87,000 |
) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
BALANCE, MARCH 31, 2013 |
|
$ |
|
|
$ |
83,027 |
|
$ |
157 |
|
$ |
1,470,674 |
|
$ |
1,201,126 |
|
$ |
(418,050 |
) |
$ |
6,185 |
|
$ |
2,343,119 |
|
See accompanying notes to condensed consolidated financial statements.
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2013 |
|
2012 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
| ||
Net income |
|
$ |
72,091 |
|
$ |
68,083 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
23,908 |
|
19,459 |
| ||
(Accretion) of discount and amortization of premiums, net |
|
(48,390 |
) |
(34,660 |
) | ||
Decrease in FDIC indemnification asset and receivable |
|
31,899 |
|
5,418 |
| ||
Stock compensation costs |
|
2,504 |
|
3,637 |
| ||
Deferred tax expense (benefit) |
|
312 |
|
(20,159 |
) | ||
Provision for loan losses |
|
4,327 |
|
18,100 |
| ||
Impairment on other real estate owned |
|
1,321 |
|
7,389 |
| ||
Net gain on sales of investment securities, loans and other assets |
|
(8,592 |
) |
(7,014 |
) | ||
Prepayment penalty for Federal Home Loan Bank advances, net |
|
|
|
1,321 |
| ||
Originations and purchases of loans held for sale |
|
(43,604 |
) |
(15,782 |
) | ||
Proceeds from sales of loans held for sale |
|
6,272 |
|
|
| ||
Net proceeds from FDIC shared-loss agreements |
|
33,890 |
|
39,358 |
| ||
Net change in accrued interest receivable and other assets |
|
(12,525 |
) |
(27,165 |
) | ||
Net change in accrued expenses and other liabilities |
|
20,557 |
|
40,427 |
| ||
Other net operating activities |
|
(3,570 |
) |
(713 |
) | ||
|
|
|
|
|
| ||
Total adjustments |
|
8,309 |
|
29,616 |
| ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
|
80,400 |
|
97,699 |
| ||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
| ||
Net (increase) decrease in: |
|
|
|
|
| ||
Loans |
|
(147,933 |
) |
68,532 |
| ||
Short-term investments |
|
(12,651 |
) |
(115,742 |
) | ||
Federal funds sold |
|
|
|
(30,000 |
) | ||
Purchases of: |
|
|
|
|
| ||
Securities purchased under resale agreements |
|
(250,000 |
) |
|
| ||
Investment securities available-for-sale |
|
(267,882 |
) |
(8,018 |
) | ||
Loans receivable |
|
(106,206 |
) |
(116,486 |
) | ||
Investments in affordable housing partnerships |
|
(8,386 |
) |
(17,850 |
) | ||
Proceeds from sale of: |
|
|
|
|
| ||
Investment securities available-for-sale |
|
196,853 |
|
260,261 |
| ||
Loans receivable |
|
22,566 |
|
27,639 |
| ||
Loans held for sale originated for investment |
|
|
|
52,559 |
| ||
Other real estate owned |
|
22,313 |
|
22,791 |
| ||
Repayments, maturities and redemptions of investment securities available-for-sale |
|
87,889 |
|
138,650 |
| ||
Paydowns, maturities and termination of securities purchased under resale agreements |
|
300,000 |
|
136,434 |
| ||
Redemption of Federal Home Loan Bank stock |
|
10,480 |
|
6,391 |
| ||
Other net investing activities |
|
(4,929 |
) |
(832 |
) | ||
|
|
|
|
|
| ||
Net cash (used in) provided by investing activities |
|
(157,886 |
) |
424,329 |
| ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
| ||
Net increase (decrease) in: |
|
|
|
|
| ||
Deposits |
|
626,348 |
|
(113,801 |
) | ||
Short-term borrowings |
|
(20,000 |
) |
(25,208 |
) | ||
Proceeds from: |
|
|
|
|
| ||
Issuance of common stock pursuant to various stock plans and agreements |
|
442 |
|
1,539 |
| ||
Payment for: |
|
|
|
|
| ||
Repayment of FHLB advances |
|
|
|
(23,003 |
) | ||
Modification of Federal Home Loan Bank advances |
|
|
|
(37,678 |
) | ||
Repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan |
|
(87,000 |
) |
(100,978 |
) | ||
Cash dividends |
|
(22,782 |
) |
(16,495 |
) | ||
Other net financing activities |
|
(5,763 |
) |
(1,284 |
) | ||
|
|
|
|
|
| ||
Net cash provided by (used in) financing activities |
|
491,245 |
|
(316,908 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
(451 |
) | ||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
413,759 |
|
204,669 |
| ||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
1,323,106 |
|
1,431,185 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
1,736,865 |
|
$ |
1,635,854 |
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest |
|
$ |
28,885 |
|
$ |
34,140 |
|
Income tax payments, net of refunds |
|
1,716 |
|
23,422 |
| ||
Noncash investing and financing activities: |
|
|
|
|
| ||
Loans transferred to loans held for sale, net |
|
21,855 |
|
40,800 |
| ||
Transfers to other real estate owned |
|
23,230 |
|
39,572 |
| ||
Loans to facilitate sales of other real estate owned and short sales |
|
|
|
400 |
|
See accompanying notes to condensed consolidated financial statements.
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, 2013 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 Companys Annual Report on Form 10-K for the year ended December 31, 2012.
Certain prior year balances have been reclassified to conform to current year presentation.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Standards
In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.ASU 2012-06 clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The standard instructs that when a reporting entity recognizes an indemnification asset, it should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amended guidance is effective for interim and annual periods beginning on or after December 15, 2012. The adoption of this guidance did not have a material effect on the Companys condensed consolidated financial statements, as the Company had applied this methodology prior to the issuance of this ASU.
In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of ASU 2011-01 applies to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. The amended guidance is effective for interim and annual periods beginning on or after January 1, 2013. The adoption of this guidance did not have a material effect on the Companys condensed consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 enhances the reporting of reclassifications out of accumulated other comprehensive income by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The amendments are effective for interim and annual periods beginning on or after December 15, 2012. The adoption of this guidance did not have a material effect on the Companys condensed consolidated financial statements.
NOTE 3 FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or be 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 issuer 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, impaired loans and derivatives payable.
The Company records investment securities available-for-sale, equity swap agreements, derivative liabilities, foreign exchange options, interest rate swaps and short-term foreign exchange contracts at fair value on a recurring basis. Certain other assets such as 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, 2013 and December 31, 2012. 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 3 or Levels 2 and 3 during the first three months of 2013 and 2012.
|
|
Assets (Liabilities) Measured at Fair Value on a Recurring Basis |
| ||||||||||
|
|
as of March 31, 2013 |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
| ||||
|
|
Fair Value |
|
Active Markets |
|
Other |
|
Significant |
| ||||
|
|
Measurements |
|
for Identical |
|
Observable |
|
Unobservable |
| ||||
|
|
March 31, |
|
Assets |
|
Inputs |
|
Inputs |
| ||||
|
|
2013 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
(In thousands) |
| ||||||||||
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities |
|
$ |
470,764 |
|
$ |
470,764 |
|
$ |
|
|
$ |
|
|
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
197,537 |
|
|
|
197,537 |
|
|
| ||||
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities: |
|
|
|
|
|
|
|
|
| ||||
Commercial mortgage-backed securities |
|
145,044 |
|
|
|
145,044 |
|
|
| ||||
Residential mortgage-backed securities |
|
1,035,415 |
|
|
|
1,035,415 |
|
|
| ||||
Municipal securities |
|
206,758 |
|
|
|
206,758 |
|
|
| ||||
Other commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
| ||||
Investment grade |
|
51,359 |
|
|
|
51,359 |
|
|
| ||||
Corporate debt securities: |
|
|
|
|
|
|
|
|
| ||||
Investment grade |
|
453,323 |
|
|
|
453,323 |
|
|
| ||||
Non-investment grade |
|
18,000 |
|
|
|
12,716 |
|
5,284 |
| ||||
Other securities |
|
10,793 |
|
|
|
10,793 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total investment securities available-for-sale |
|
$ |
2,588,993 |
|
$ |
470,764 |
|
$ |
2,112,945 |
|
$ |
5,284 |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange options |
|
$ |
5,340 |
|
$ |
|
|
$ |
5,340 |
|
$ |
|
|
Interest rate swaps |
|
34,192 |
|
|
|
34,192 |
|
|
| ||||
Short-term foreign exchange contracts |
|
1,303 |
|
|
|
1,303 |
|
|
| ||||
Derivative liabilities |
|
(41,024 |
) |
|
|
(37,791 |
) |
(3,233 |
) |
|
|
Assets (Liabilities) Measured at Fair Value on a Recurring Basis |
| ||||||||||
|
|
as of December 31, 2012 |
| ||||||||||
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
| ||||
|
|
Fair Value |
|
Active Markets |
|
Other |
|
Significant |
| ||||
|
|
Measurements |
|
for Identical |
|
Observable |
|
Unobservable |
| ||||
|
|
December 31, |
|
Assets |
|
Inputs |
|
Inputs |
| ||||
|
|
2012 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
(In thousands) |
| ||||||||||
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities |
|
$ |
460,677 |
|
$ |
460,677 |
|
$ |
|
|
$ |
|
|
U.S. Government agency and U.S. Government sponsored enterprise debt securities |
|
197,855 |
|
|
|
197,855 |
|
|
| ||||
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities: |
|
|
|
|
|
|
|
|
| ||||
Commercial mortgage-backed securities |
|
180,665 |
|
|
|
180,665 |
|
|
| ||||
Residential mortgage-backed securities |
|
1,144,085 |
|
|
|
1,144,085 |
|
|
| ||||
Municipal securities |
|
167,093 |
|
|
|
167,093 |
|
|
| ||||
Other commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
| ||||
Investment grade |
|
17,084 |
|
|
|
17,084 |
|
|
| ||||
Corporate debt securities: |
|
|
|
|
|
|
|
|
| ||||
Investment grade |
|
411,983 |
|
|
|
411,983 |
|
|
| ||||
Non-investment grade |
|
17,417 |
|
|
|
12,617 |
|
4,800 |
| ||||
Other securities |
|
10,170 |
|
|
|
10,170 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total investment securities available-for-sale |
|
$ |
2,607,029 |
|
$ |
460,677 |
|
$ |
2,141,552 |
|
$ |
4,800 |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange options |
|
$ |
5,011 |
|
$ |
|
|
$ |
5,011 |
|
$ |
|
|
Interest rate swaps |
|
36,943 |
|
|
|
36,943 |
|
|
| ||||
Short-term foreign exchange contracts |
|
896 |
|
|
|
896 |
|
|
| ||||
Derivative liabilities |
|
(42,060 |
) |
|
|
(39,008 |
) |
(3,052 |
) |
|
|
Assets Measured at Fair Value on a Non-Recurring Basis |
| |||||||||||||
|
|
as of and for the Three Months Ended March 31, 2013 |
| |||||||||||||
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
Total Gains |
| |||||
|
|
Fair Value |
|
Active Markets |
|
Other |
|
Significant |
|
(Losses) for the |
| |||||
|
|
Measurements |
|
for Identical |
|
Observable |
|
Unobservable |
|
Three Months Ended |
| |||||
|
|
March 31, |
|
Assets |
|
Inputs |
|
Inputs |
|
March 31, |
| |||||
|
|
2013 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
2013 |
| |||||
|
|
(In thousands) |
| |||||||||||||
Non-covered impaired loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total residential |
|
$ |
12,969 |
|
$ |
|
|
$ |
12,969 |
|
$ |
|
|
$ |
(440 |
) |
Total commercial real estate |
|
23,382 |
|
|
|
23,382 |
|
|
|
(2,115 |
) | |||||
Total commercial and industrial |
|
2,566 |
|
|
|
1,432 |
|
1,134 |
|
(2,258 |
) | |||||
Total consumer |
|
665 |
|
|
|
665 |
|
|
|
(116 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total non-covered impaired loans |
|
$ |
39,582 |
|
$ |
|
|
$ |
38,448 |
|
$ |
1,134 |
|
$ |
(4,929 |
) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-covered OREO |
|
$ |
13,227 |
|
$ |
|
|
$ |
13,227 |
|
$ |
|
|
$ |
(1,385 |
) |
Covered OREO (1) |
|
$ |
3,720 |
|
$ |
|
|
$ |
3,720 |
|
$ |
|
|
$ |
(126 |
) |
|
|
Assets Measured at Fair Value on a Non-Recurring Basis |
| |||||||||||||
|
|
as of and for the Three Months Ended March 31, 2012 |
| |||||||||||||
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
Total Gains |
| |||||
|
|
Fair Value |
|
Active Markets |
|
Other |
|
Significant |
|
(Losses) for the |
| |||||
|
|
Measurements |
|
for Identical |
|
Observable |
|
Unobservable |
|
Three Months Ended |
| |||||
|
|
March 31, |
|
Assets |
|
Inputs |
|
Inputs |
|
March 31, |
| |||||
|
|
2012 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
2012 |
| |||||
|
|
(In thousands) |
| |||||||||||||
Non-covered impaired loans: |
|
|
|
|
|
|
|
|
|
|
| |||||
Total residential |
|
$ |
5,564 |
|
$ |
|
|
$ |
5,564 |
|
$ |
|
|
$ |
(1,903 |
) |
Total commercial real estate |
|
21,073 |
|
|
|
21,073 |
|
|
|
(1,343 |
) | |||||
Total commercial and industrial |
|
3,316 |
|
|
|
|
|
3,316 |
|
(984 |
) | |||||
Total consumer |
|
7 |
|
|
|
7 |
|
|
|
(57 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total non-covered impaired loans |
|
$ |
29,960 |
|
$ |
|
|
$ |
26,644 |
|
$ |
3,316 |
|
$ |
(4,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-covered OREO |
|
$ |
8,195 |
|
$ |
|
|
$ |
8,195 |
|
$ |
|
|
$ |
(855 |
) |
Covered OREO (1) |
|
$ |
25,585 |
|
$ |
|
|
$ |
25,585 |
|
$ |
|
|
$ |
(6,449 |
) |
Loans held for sale |
|
$ |
4,600 |
|
$ |
|
|
$ |
4,600 |
|
$ |
|
|
$ |
(4,730 |
) |
(1) Covered OREO results from the WFIB and UCB FDIC-assisted acquisitions for which the Company entered into shared-loss agreements with the FDIC whereby the FDIC will reimburse the Company for 80% of eligible losses. As such, the Companys liability for losses is 20% of the $126 thousand in losses, or $25 thousand, and 20% of the $6.4 million in losses, or $1.3 million, for the three months ended March 31, 2013 and 2012, respectively.
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 tables provide a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012:
|
|
Investment Securities |
|
|
| ||
|
|
Corporate Debt |
|
|
| ||
|
|
Non-Investment Grade |
|
Derivatives Payable |
| ||
|
|
(In thousands) |
| ||||
Opening balance, January 1, 2013 |
|
$ |
4,800 |
|
$ |
(3,052 |
) |
Total gains or (losses) for the period: (1) |
|
|
|
|
| ||
Included in earnings |
|
|
|
(181 |
) | ||
Included in other comprehensive income (unrealized) (2) |
|
549 |
|
|
| ||
Purchases, issues, sales, settlements (3) |
|
|
|
|
| ||
Purchases |
|
|
|
|
| ||
Issues |
|
|
|
|
| ||
Sales |
|
|
|
|
| ||
Settlements |
|
(65 |
) |
|
| ||
Transfer from investment grade to non-investment grade |
|
|
|
|
| ||
Transfers in and/or out of Level 3 |
|
|
|
|
| ||
|
|
|
|
|
| ||
Closing balance, March 31, 2013 |
|
$ |
5,284 |
|
$ |
(3,233 |
) |
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of March 31, 2013 |
|
$ |
|
|
$ |
181 |
|
|
|
Investment Securities |
|
|
| ||
|
|
Corporate Debt |
|
|
| ||
|
|
Non-Investment Grade |
|
Derivatives Payable |
| ||
|
|
(In thousands) |
| ||||
|
|
|
|
|
| ||
Opening balance, January 1, 2012 |
|
$ |
2,235 |
|
$ |
(2,634 |
) |
Total gains or (losses) for the period: (1) |
|
|
|
|
| ||
Included in earnings |
|
(99 |
) |
(488 |
) | ||
Included in other comprehensive loss (unrealized) (2) |
|
225 |
|
|
| ||
Purchases, issues, sales, settlements (3) |
|
|
|
|
| ||
Purchases |
|
|
|
|
| ||
Issues |
|
|
|
|
| ||
Sales |
|
|
|
|
| ||
Settlements |
|
(114 |
) |
|
| ||
Transfer from investment grade to non-investment grade |
|
|
|
|
| ||
Transfers in and/or out of Level 3 |
|
|
|
|
| ||
|
|
|
|
|
| ||
Closing balance, March 31, 2012 |
|
$ |
2,247 |
|
$ |
(3,122 |
) |
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of March 31, 2012 |
|
$ |
99 |
|
$ |
488 |
|
(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 condensed consolidated statements of income.
(2) Unrealized gains or losses on investment securities are reported in accumulated other comprehensive income (loss), net of tax, in the condensed consolidated statements of comprehensive income.
(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.
Valuation Methodologies
Investment Securities Available-for-Sale The fair values of available-for-sale investment securities are generally determined by prices obtained from independent external pricing service providers who have experience in valuing these securities or by comparison to the average of at least two quoted market prices obtained from independent external brokers. 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 four pooled trust preferred securities. The fair values of these investment securities represent less than 1% of the total available-for-sale investment securities. The fair values of the 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. As a result of the continued illiquidity in the pooled trust preferred securities market, it is the Companys view that current broker prices (which are typically non-binding) on certain pooled trust preferred securities are based on forced liquidation or distressed sale values in very inactive markets that are not representative of the fair value of these securities. As such, the Company considered what weight, if any, to place on transactions that are not orderly when estimating fair value.
For the pooled trust preferred securities, the fair value was derived based on discounted cash flow analyses (the income method) prepared by management. In order to determine the appropriate discount rate used in calculating fair values derived from the income method for the pooled trust preferred securities, the Company has made assumptions using an exit price approach related to the implied rate of return which have been adjusted for general changes in market rates, estimated changes in credit risk and liquidity risk premium, specific nonperformance, and default experience in the collateral underlying the securities. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for credit risk and liquidity risk. The actual Level 3 unobservable assumption rates used as of March 31, 2013 include: a constant prepayment rate of 0% for year 1-5 and 1% thereafter, a constant default rate of 1.2% for year 1-5 and 0.75% thereafter, and a recovery assumption of 0% for existing deferrals/defaults and 15% for future deferrals with a recovery lag of 60 months. Losses arising during the period, if any, are recognized in noninterest income.
Derivative Liabilities The Companys derivative liabilities include derivatives payable that fall within Level 3 and all other derivative liabilities which fall within Level 2. The derivatives payable are recorded in conjunction with certain certificates of deposit (host instrument). These CDs pay interest based on changes in either the Chinese currency Renminbi (RMB) or the Hang Seng China Enterprises Index (HSCEI), as designated, and are included in interest-bearing deposits on the condensed consolidated balance sheets. CDs paying interest based on changes in the HSCEI matured during the fourth quarter of 2012. The fair value of these embedded derivatives is based on the income approach. The payable is divided by the portion under FDIC insurance coverage and the non-insured portion. For the FDIC insured portion the Company applied a risk premium comparable to an agency security risk premium. For the non-insured portion, the Company considered its own credit risk in determining the valuation by applying a risk premium based on our institutional credit rating, which resulted in a nominal adjustment to the valuation of the derivative liabilities for the three months ended March 31, 2013. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. 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. The actual Level 3 unobservable input used as of March 31, 2013 was a credit risk adjustment with a range of 1.17% to 1.25%. The Level 2 derivative liabilities are mostly comprised of the offsetting interest rate swaps with other counterparties. Refer to Interest Rate Swaps within this footnote for complete discussion.
Equity Swap Agreements The Company has entered into equity swap agreements 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, which matured during the fourth quarter of 2012, and paid interest based on the performance of the 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 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. The fair value of the derivative contracts is provided by a third party.
Foreign Exchange Options The Company has entered into foreign exchange option contracts with major investment firms. The settlement amount is determined based upon the performance of the Chinese currency RMB relative to the U.S. Dollar (USD) over the 5-year term of the contract. The performance amount is computed based on the average quarterly value of the RMB per the USD as compared to the initial value. The fair value of the derivative contract is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, currency rate and time remaining to maturity. The Companys consideration of the counterpartys credit risk resulted in a nominal adjustment the valuation of the foreign exchange options for the three months ended March 31, 2013. The valuation of the option contract falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.
Interest Rate Swaps The Company has entered into pay-fixed, receive-variable swap contracts with institutional counterparties to hedge against interest rate swap products offered to bank customers. This product allows borrowers to lock in attractive intermediate and long-term interest rates by entering into a pay-fixed, receive-variable swap contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company has also entered into pay-variable, receive-fixed swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of the interest rate swap contracts is based on a discounted cash flow approach. The Companys consideration of the counterpartys credit risk resulted in a $0.4 million adjustment to the valuation of the interest rate swaps for the three months ended March 31, 2013. The valuation of the interest rate swap falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.
Short-term Foreign Exchange Contracts The Company entered into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. These contracts economically hedge against foreign exchange rate fluctuations. The Company enters into contracts with institutional counterparties to hedge against foreign exchange products offered to bank customers. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company does not assume any foreign exchange rate risk as the contract with the customer and the contract with the institutional party mirror each other. The fair value is determined at each reporting period based on the change in the foreign exchange rate. Given the short-term nature of the contracts, the counterparties credit risks are considered nominal and resulted in no adjustments to the valuation of the short-term foreign exchange contracts for the three months ended March 31, 2013. The valuation of the contract falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.
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. The fair values may be adjusted as needed based on factors such as the Companys historical knowledge and changes in market conditions from the time of valuation. Impaired loans fall within Level 2 or Level 3 of the fair value hierarchy as appropriate. Level 2 values are measured at fair value based on the most recent valuation information received on the underlying collateral. Level 3 values, additionally include adjustments by the Company for historical knowledge and for changes in market conditions.
Other Real Estate Owned The Companys OREO represents properties acquired through foreclosure or through full or partial satisfaction of loans and are recorded at estimated fair value less cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less cost to sell subsequent to acquisition. 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 department, or OREO department. OREO properties are classified as Level 2 assets in the fair value hierarchy.
Loans Held for Sale The Companys loans held for sale are carried at the lower of cost or market value. These loans are currently comprised of mostly student loans. For these loans, the fair value of loans held for sale is derived from current market prices and comparative current sales. For the remainder of the loans held for sale, which fall within Level 2, the fair value is derived from third party sale analysis, existing sale agreements, or appraisal reports on the loans underlying collateral. As such, the Company records any fair value adjustments on a nonrecurring basis.
Fair Value of Financial Instruments
The carrying amounts and fair values of the Companys financial instruments as of March 31, 2013 and December 31, 2012 were as follows:
|
|
March 31, 2013 |
|
December 31, 2012 |
| ||||||||
|
|
Carrying |
|
|
|
Carrying |
|
|
| ||||
|
|
Amount or |
|
|
|
Amount or |
|
|
| ||||
|
|
Notional |
|
Estimated |
|
Notional |
|
Estimated |
| ||||
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
| ||||
|
|
(In thousands) |
| ||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
1,736,865 |
|
$ |
1,736,865 |
|
$ |
1,323,106 |
|
$ |
1,323,106 |
|
Short-term investments |
|
379,029 |
|
379,029 |
|
366,378 |
|
366,378 |
| ||||
Securities purchased under resale agreements |
|
1,400,000 |
|
1,392,927 |
|
1,450,000 |
|
1,442,302 |
| ||||
Investment securities available-for-sale |
|
2,588,993 |
|
2,588,993 |
|
2,607,029 |
|
2,607,029 |
| ||||
Loans held for sale |
|
226,635 |
|
233,843 |
|
174,317 |
|
180,349 |
| ||||
Loans receivable, net |
|
14,872,172 |
|
14,818,860 |
|
14,645,785 |
|
14,743,218 |
| ||||
Investment in Federal Home Loan Bank stock |
|
96,795 |
|
96,795 |
|
107,275 |
|
107,275 |
| ||||
Investment in Federal Reserve Bank stock |
|
48,036 |
|
48,036 |
|
48,003 |
|
48,003 |
| ||||
Accrued interest receivable |
|
103,392 |
|
103,392 |
|
94,837 |
|
94,837 |
| ||||
Foreign exchange options |
|
85,614 |
|
5,340 |
|
85,614 |
|
5,011 |
| ||||
Interest rate swaps |
|
1,244,393 |
|
34,192 |
|
1,190,793 |
|
36,943 |
| ||||
Short-term foreign exchange contracts |
|
138,940 |
|
1,303 |
|
112,459 |
|
896 |
| ||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Customer deposit accounts: |
|
|
|
|
|
|
|
|
| ||||
Demand, savings and money market deposits |
|
12,901,076 |
|
12,901,076 |
|
12,187,740 |
|
12,187,740 |
| ||||
Time deposits |
|
6,034,626 |
|
6,016,426 |
|
6,121,614 |
|
6,115,530 |
| ||||
Federal Home Loan Bank advances |
|
313,494 |
|
326,527 |
|
312,975 |
|
333,060 |
| ||||
Securities sold under repurchase agreements |
|
995,000 |
|
1,174,984 |
|
995,000 |
|
1,173,830 |
| ||||
Other borrowings |
|
|
|
|
|
20,000 |
|
20,000 |
| ||||
Accrued interest payable |
|
11,103 |
|
11,103 |
|
10,855 |
|
10,855 |
| ||||
Long-term debt |
|
137,178 |
|
88,379 |
|
137,178 |
|
83,762 |
| ||||
Derivative liabilities |
|
1,576,769 |
|
41,024 |
|
1,392,494 |
|
42,060 |
| ||||
The following table shows the level in the fair value hierarchy for the estimated fair values of only financial instruments that are not already on the condensed consolidated balance sheets at fair value at March 31, 2013 and December 31, 2012.
|
|
March 31, 2013 |
| ||||||||||
|
|
Estimated |
|
|
|
|
|
|
| ||||
|
|
Fair Value |
|
|
|
|
|
|
| ||||
|
|
Measurements |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
(In thousands) |
| ||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
1,736,865 |
|
$ |
1,736,865 |
|
$ |
|
|
$ |
|
|
Short-term investments |
|
379,029 |
|
|
|
379,029 |
|
|
| ||||
Securities purchased under resale agreements |
|
1,392,927 |
|
|
|
1,392,927 |
|
|
| ||||
Loans held for sale |
|
233,843 |
|
|
|
233,843 |
|
|
| ||||
Loans receivable, net |
|
14,818,860 |
|
|
|
|
|
14,818,860 |
| ||||
Investment in Federal Home Loan Bank stock |
|
96,795 |
|
|
|
96,795 |
|
|
| ||||
Investment in Federal Reserve Bank stock |
|
48,036 |
|
|
|
48,036 |
|
|
| ||||
Accrued interest receivable |
|
103,392 |
|
|
|
103,392 |
|
|
| ||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Customer deposit accounts: |
|
|
|
|
|
|
|
|
| ||||
Demand, savings and money market deposits |
|
12,901,076 |
|
|
|
12,901,076 |
|
|
| ||||
Time deposits |
|
6,016,426 |
|
|
|
|
|
6,016,426 |
| ||||
Federal Home Loan Bank advances |
|
326,527 |
|
|
|
326,527 |
|
|
| ||||
Securities sold under repurchase agreements |
|
1,174,984 |
|
|
|
1,174,984 |
|
|
| ||||
Other borrowings |
|
|
|
|
|
|
|
|
| ||||
Accrued interest payable |
|
11,103 |
|
|
|
11,103 |
|
|
| ||||
Long-term debt |
|
88,379 |
|
|
|
88,379 |
|
|
| ||||
|
|
December 31, 2012 |
| ||||||||||
|
|
Estimated |
|
|
|
|
|
|
| ||||
|
|
Fair Value |
|
|
|
|
|
|
| ||||
|
|
Measurements |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
(In thousands) |
| ||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
1,323,106 |
|
$ |
1,323,106 |
|
$ |
|
|
$ |
|
|
Short-term investments |
|
366,378 |
|
|
|
366,378 |
|
|
| ||||
Securities purchased under resale agreements |
|
1,442,302 |
|
|
|
1,442,302 |
|
|
| ||||
Loans held for sale |
|
180,349 |
|
|
|
180,349 |
|
|
| ||||
Loans receivable, net |
|
14,743,218 |
|
|
|
|
|
14,743,218 |
| ||||
Investment in Federal Home Loan Bank stock |
|
107,275 |
|
|
|
107,275 |
|
|
| ||||
Investment in Federal Reserve Bank stock |
|
48,003 |
|
|
|
48,003 |
|
|
| ||||
Accrued interest receivable |
|
94,837 |
|
|
|
94,837 |
|
|
| ||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Customer deposit accounts: |
|
|
|
|
|
|
|
|
| ||||
Demand, savings and money market deposits |
|
12,187,740 |
|
|
|
12,187,740 |
|
|
| ||||
Time deposits |
|
6,115,530 |
|
|
|
|
|
6,115,530 |
| ||||
Federal Home Loan Bank advances |
|
333,060 |
|
|
|
333,060 |
|
|
| ||||
Securities sold under repurchase agreements |
|
1,173,830 |
|
|
|
1,173,830 |
|
|
| ||||
Other borrowings |
|
20,000 |
|
|
|
20,000 |
|
|
| ||||
Accrued interest payable |
|
10,855 |
|
|
|
10,855 |
|
|
| ||||
Long-term debt |
|
83,762 |
|
|
|
83,762 |
|
|
| ||||
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 Cash Equivalents The carrying amounts approximate fair values due to the short-term nature of these instruments. Due to the short-term nature, the estimated fair value is considered to be within Level 1 of the fair value hierarchy.
Short-Term Investments The fair values of short-term investments generally approximate their book values due to their short maturities. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Securities Purchased Under Resale Agreements Securities purchased under resale agreements with original maturities of 90 days or less are included in cash and cash equivalents. The fair value of securities purchased under resale agreements with original maturities of more than 90 days is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
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 pooled trust preferred securities, fair values are based on discounted cash flow analyses. Due to the unobservable inputs used within the discounted cash flow analysis, the estimate for pooled trust preferred securities is considered to be within Level 3 of the fair value hierarchy. The remainder of the portfolio is classified within Level 1 and Level 2, as discussed earlier in this footnote.
Loans Held for Sale The fair value of loans held for sale is derived from current market prices and comparative current sales or from third party sale analysis, existing sale agreements, or appraisal reports on the loans underlying collateral, as applicable. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Loans Receivable, net (includes covered and non-covered loans) The fair value of loans is determined based on a discounted cash flow approach considered for an entry price value. 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 any of the loan portfolios. It is managements opinion that the allowance for loan losses pertaining to performing and nonperforming loans results in a fair valuation of credit for such loans. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 3 of the fair value hierarchy.
Investment in Federal Home Loan Bank Stock and Federal Reserve Bank Stock The carrying amount approximates fair value, as the stock may be sold back to the Federal Home Loan Bank and the Federal Reserve Bank at carrying value. The valuation of these instruments is the carrying amount as these investments can only be sold and purchased from the Federal Home Loan Bank and Federal Reserve Bank respectively. The valuation of these investments is considered to be within Level 2 of the fair value hierarchy, as the restrictions and value of the investments are the same for all financial institutions which are required to hold these investments.
Accrued Interest Receivable The carrying amounts approximate fair values due to the short-term nature of these instruments, as such, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are considered to be within Level 2 of the fair value hierarchy.
Equity Swap Agreements Equity swap agreements matured during the fourth quarter of 2012. The fair value of the derivative contracts is provided by a 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 maturity. We also considered the counterpartys credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Foreign Exchange Options The fair value of the derivative contracts is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, and time remaining to maturity. We also considered the counterpartys credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Interest Rate Swaps The fair value of the interest rate swap contracts is provided by a third party and is determined based on a discounted cash flow approach. The Company also considered the counterpartys credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Short-term Foreign Exchange Contracts The fair value of short-term foreign exchange contracts is determined based on the change in foreign exchange rate. We also considered the counterpartys credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Customer Deposit Accounts The carrying amounts approximate fair value for demand and interest checking deposits, savings deposits, and certain money market accounts as the amounts are payable on demand at the reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value these instruments are considered to be within Level 2 of the fair value hierarchy. For time deposits, the cash flows are based on the contractual runoff and are discounted by the Banks current offering rates, plus spread. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 3 of the fair value hierarchy.
Federal Home Loan Bank Advances The fair value of Federal Home Loan Bank (FHLB) advances is estimated based on the discounted value of contractual cash flows, using rates currently offered by the FHLB of San Francisco for advances with similar remaining maturities at each reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
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 March 31, 2013 and December 31, 2012, 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. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Other Borrowings The carrying amounts approximate fair values due to the short-term nature of these instruments, as such, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are considered to be within Level 2 of the fair value hierarchy.
Accrued Interest Payable The carrying amounts approximate fair values due to the short-term nature of these instruments, as such, due to the observable nature of the inputs used in deriving the estimated fair value, these instruments are considered to be within Level 2 of the fair value hierarchy.
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. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.
Derivatives Liabilities The Companys derivative liabilities include derivatives payable and all other derivative liabilities. The Companys derivatives payable are recorded in conjunction with certain certificates of deposit (host instrument). These CDs pay interest based on changes in RMB or the HSCEI, as designated. CDs paying interest based on changes in the HSCEI matured during the fourth quarter of 2012. The fair value of derivatives payable is estimated using the income approach. Additionally, we considered our own credit risk in determining the valuation. The other derivative liabilities are mostly comprised of the off-setting interest rate swaps. The fair value of the interest rate swap contracts is provided by a third party and is determined based on a discounted cash flow approach. The Company also considered the counterpartys credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of the interest rate swaps within derivative liabilities, the estimate is considered to be within Level 2 of the fair value hierarchy. Due to the unobservable nature of the inputs used in deriving the estimated fair value of derivatives payable within derivative liabilities, this estimate is considered to be within Level 3 of the fair value hierarchy.
The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although we are 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.
NOTE 4 STOCK-BASED COMPENSATION
During the three months ended March 31, 2013, total compensation expense recognized in the condensed consolidated statements of income related to both stock options and restricted stock awards reduced income before taxes by $2.5 million and net income by $1.5 million.
During the three months ended March 31, 2012, total compensation expense recognized in the condensed consolidated statements of income related to both stock options and restricted stock awards reduced income before taxes by $3.6 million and net income by $2.1 million.
The Company received $442 thousand and $1.5 million during the three months ended March 31, 2013 and March 31, 2012, respectively, in cash proceeds from stock option exercises. The net tax benefit recognized in equity for stock compensation plans was $2.6 million and $29 thousand for the three months ended, March 31, 2013 and March 31, 2012, respectively.
As of March 31, 2013, there are 4,115,745 shares available to be issued, subject to the Companys current 1998 Stock Incentive Plan, as amended.
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 or 10 years. The Company issues new shares upon the exercise of stock options.