EAST WEST BANCORP INC - Quarter Report: 2014 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Mark One

 

 

For the quarterly period ended September 30, 2014

 

or

 

 

For the transition period from                  to              

 

Commission file number 000-24939

 

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

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 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.

 

 

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 issuer’s common stock on the latest practicable date: 143,552,945 shares of common stock as of October 31, 2014.

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION			5
	Item 1.	Consolidated Financial Statements (Unaudited)	5
		Notes to Consolidated Financial Statements (Unaudited)	10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	65
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	95
	Item 4.	Controls and Procedures	95
PART II - OTHER INFORMATION			95
	Item 1.	Legal Proceedings	95
	Item 1A.	Risk Factors	95
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96
	Item 3.	Defaults Upon Senior Securities	96
	Item 4.	Mine Safety Disclosures	96
	Item 5.	Other Information	96
	Item 6.	Exhibits	97
SIGNATURE			97

 

2

Table of Contents

 

Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report on Form 10-Q (this “Form 10-Q”) contain or incorporate statements that East West Bancorp, Inc. (the “Company”) believes are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remain,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “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 the Company may 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 the Company.

 

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 achieve the projected synergies of MetroCorp Bancshares, Inc. (“MetroCorp”) acquisition;

·                                        our ability to manage the loan portfolios acquired from Federal Deposit Insurance Corporation (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 People’s 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;

·                                          effect of government budget cuts and government shut down;

·                                          fluctuations of our stock price;

·                                          success and timing of our business strategies;

·                                         impact of reputational risk created by these developments on matters such as business generation and retention, funding and liquidity;

·                                          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

·                                         impact of political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions.

 

3

Table of Contents

 

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission on March 3, 2014 (the “2013 Annual Report”), under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “ITEM 1A. 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.

 

4

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

		September 30,			December 31,
		2014			2013
ASSETS
Cash and cash equivalents		$	1,115,753		$	895,820
Short-term investments		336,419			257,473
Securities purchased under resale agreements		1,475,000			1,300,000
Investment securities available-for-sale, at fair value (with amortized cost of $2,596,823 in 2014 and $2,786,490 in 2013)		2,592,667			2,733,797
Loans held for sale		239,649			204,970
Non-covered loans (net of allowance for loan losses of $249,268 in 2014 and $241,930 in 2013)		19,097,117			15,412,715
Covered loans (net of allowance for loan losses of $3,910 in 2014 and $7,745 in 2013)		1,636,399			2,187,898
Total loans receivable, net		20,733,516			17,600,613
FDIC indemnification asset, net		—			74,708
Other real estate owned, net		33,337			18,900
Other real estate owned covered, net		7,433			21,373
Total other real estate owned		40,770			40,273
Investment in Federal Home Loan Bank stock, at cost		34,691			62,330
Investment in Federal Reserve Bank stock, at cost		54,324			48,333
Investment in affordable housing partnerships		179,606			164,776
Premises and equipment, net		181,999			177,710
Accrued interest receivable		96,054			116,314
Due from customers on acceptances		25,112			21,236
Premiums on deposits acquired, net		47,792			46,920
Goodwill		458,467			337,438
Cash surrender value of life insurance policies		100,604			112,650
Other assets		768,707			534,707
TOTAL		$	28,481,130		$	24,730,068
LIABILITIES
Customer deposit accounts:
Noninterest-bearing		$	7,270,385		$	5,821,899
Interest-bearing		16,541,879			14,591,019
Total deposits		23,812,264			20,412,918
Federal Home Loan Bank advances		316,699			315,092
Securities sold under repurchase agreements		805,106			995,000
Payable to FDIC, net		64,460			—
Bank acceptances outstanding		25,112			21,236
Long-term debt		230,790			226,868
Accrued expenses and other liabilities		458,606			394,729
Total liabilities		25,713,037			22,365,843
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 200,000,000 shares authorized; 163,514,929 and 163,098,008 shares issued in 2014 and 2013, respectively; 143,405,133 and 137,630,896 shares outstanding in 2014 and 2013, respectively		163			163
Additional paid in capital		1,666,069			1,571,670
Retained earnings		1,531,637			1,360,130
Treasury stock, at cost – 20,109,796 shares in 2014 and 25,467,112 shares in 2013		(427,348		)	(537,279		)
Accumulated other comprehensive loss, net of tax		(2,428		)	(30,459		)
Total stockholders’ equity		2,768,093			2,364,225
TOTAL		$	28,481,130		$	24,730,068

 

See accompanying notes to consolidated financial statements.

 

5

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees		$	262,258		$	259,105		$	793,313		$	710,554
Investment securities		11,364			11,039			36,130			30,843
Securities purchased under resale agreements		5,344			5,168			14,756			16,132
Investment in Federal Home Loan Bank stock		663			1,395			2,559			2,945
Investment in Federal Reserve Bank stock		814			723			2,344			2,164
Due from banks and short-term investments		5,505			4,276			17,461			12,844
Total interest and dividend income		285,948			281,706			866,563			775,482
INTEREST EXPENSE
Customer deposit accounts		17,158			15,099			48,609			47,691
Federal Home Loan Bank advances		1,027			1,049			3,087			3,135
Securities sold under repurchase agreements		9,578			10,323			29,845			31,069
Long-term debt		1,211			985			3,632			2,402
Total interest expense		28,974			27,456			85,173			84,297
Net interest income before provision for loan losses		256,974			254,250			781,390			691,185
Provision for loan losses on non-covered loans		7,556			4,535			24,454			12,050
Provision for (reversal of) loan losses on covered loans		7,669			(964		)	5,704			4,848
Net interest income after provision for loan losses		241,749			250,679			751,232			674,287
NONINTEREST INCOME (LOSS)
Changes in FDIC indemnification asset and receivable/payable		(39,647		)	(74,456		)	(150,839		)	(154,260		)
Branch fees		9,515			8,123			28,480			23,896
Net gains on sales of investment securities		2,514			1,084			6,603			12,006
Letters of credit fees and commissions		6,844			5,615			19,110			16,103
Foreign exchange income		3,454			2,940			6,984			8,925
Ancillary loan fees		2,874			2,125			7,867			6,811
Income from life insurance policies		836			952			2,868			2,820
Net gains on sales of loans		7,726			3,945			20,715			3,685
Dividend and other investment income		4,113			99			5,339			327
Other commission and fee income		8,290			5,936			22,148			14,507
Other operating income		3,823			2,216			11,206			9,306
Total noninterest income (loss)		10,342			(41,421		)	(19,519		)	(55,874		)
NONINTEREST EXPENSE
Compensation and employee benefits		58,111			41,482			172,469			129,239
Occupancy and equipment expense		15,842			14,697			48,227			42,211
Amortization of investments in affordable housing partnerships and other tax credit investments		36,936			4,693			55,751			14,040
Amortization of premiums on deposits acquired		2,597			2,347			7,721			7,131
Deposit insurance premiums and regulatory assessments		5,247			4,191			16,761			11,848
Loan related expenses		1,127			2,752			2,604			9,909
Other real estate owned (income) expense		(1,422		)	157			695			(2,015		)
Legal expense		32,500			9,001			45,403			18,912
Data processing		2,211			2,159			13,351			6,796
Consulting expense		2,982			1,264			6,359			2,721
Other operating expenses		20,848			17,609			59,964			50,335
Total noninterest expense		176,979			100,352			429,305			291,127
INCOME BEFORE INCOME TAXES		75,112			108,906			302,408			327,286
INCOME TAX (BENEFIT) EXPENSE		(13,644		)	35,749			52,923			108,023
NET INCOME		$	88,756		$	73,157		$	249,485		$	219,263
PREFERRED STOCK DIVIDENDS		—			—			—			3,428
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS		$	88,756		$	73,157		$	249,485		$	215,835
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
BASIC		$	0.62		$	0.53		$	1.74		$	1.56
DILUTED		$	0.62		$	0.53		$	1.74		$	1.56
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC		143,210			137,036			142,791			137,404
DILUTED		143,810			137,467			143,377			140,199
DIVIDENDS DECLARED PER COMMON SHARE		$	0.18		$	0.15		$	0.54		$	0.45

 

See accompanying notes to consolidated financial statements.

 

6

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
Net income		$	88,756		$	73,157		$	249,485		$	219,263
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities available-for-sale:
Net unrealized holding gains (losses) arising during period		1,663			(2,876		)	31,980			(22,905		)
Reclassification adjustment for net gains included in net income		(1,457		)	(629		)	(3,829		)	(6,964		)
Net unrealized (losses) gains on other investments		(99		)	5			(120		)	22
Other comprehensive income (loss)		107			(3,500		)	28,031			(29,847		)
COMPREHENSIVE INCOME		$	88,863		$	69,657		$	277,516		$	189,416

 

See accompanying notes to consolidated financial statements.

 

7

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

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			Common			Common			Retained			Treasury			Income (Loss),			Stockholders’
		Stock			Stock			Stock			Earnings			Stock			Net of Tax			Equity
BALANCE, JANAURY 1, 2013		$	83,027		$	157		$	1,464,739		$	1,151,828		$	(322,298	)	$	4,669		$	2,382,122
Net income											219,263									219,263
Other comprehensive loss																	(29,847		)	(29,847		)
Stock compensation costs								9,263												9,263
Tax benefit from stock compensation plans, net								3,301												3,301
Issuance of 285,921 shares of common stock pursuant to various stock compensation plans and agreements								2,112												2,112
Issuance of 19,998 shares pursuant to Director retainer fee								630												630
Cancellation of 58,929 shares of common stock due to forfeitures of issued restricted stock								1,039						(1,039		)				—
368,932 shares of restricted stock surrendered due to employee tax liability														(9,049		)				(9,049		)
Preferred stock dividends											(3,428		)							(3,428		)
Common stock dividends											(62,499		)							(62,499		)
Conversion of 85,710 shares of Series A preferred stock into 5,594,080 shares of common stock		(83,027		)	6			83,021												—
Purchase of 8,026,807 shares of treasury stock pursuant to the Stock Repurchase Program														(199,992		)				(199,992		)
BALANCE, SEPTEMBER 30, 2013		$	—		$	163		$	1,564,105		$	1,305,164		$	(532,378	)	$	(25,178	)	$	2,311,876
BALANCE, JANAURY 1, 2014		$	—		$	163		$	1,571,670		$	1,360,130		$	(537,279	)	$	(30,459	)	$	2,364,225
Net income											249,485									249,485
Other comprehensive income																	28,031			28,031
Stock compensation costs								10,382												10,382
Tax benefit from stock compensation plans, net								3,916												3,916
Issuance of 398,012 shares of common stock pursuant to various stock compensation plans and agreements								1,249												1,249
Issuance of 18,909 shares pursuant to Director retainer fee								630												630
Cancellation of 17,337 shares of common stock due to forfeitures of issued restricted stock								323						(323		)				—
208,440 shares of restricted stock surrendered due to employee tax liability														(7,532		)				(7,532		)
Common stock dividends											(77,978		)							(77,978		)
Issuance of 5,583,093 shares pursuant to MetroCorp acquisition								73,044						117,786						190,830
Warrant acquired pursuant to MetroCorp acquisition								4,855												4,855
BALANCE, SEPTEMBER 30, 2014		$	—		$	163		$	1,666,069		$	1,531,637		$	(427,348	)	$	(2,428	)	$	2,768,093

 

See accompanying notes to consolidated financial statements.

 

8

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Nine Months Ended
		September 30,
		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	249,485		$	219,263
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		101,130			69,907
(Accretion) of discount and amortization of premiums, net		(155,365		)	(180,119		)
Changes in FDIC indemnification asset and receivable/payable		150,839			154,260
Stock compensation costs		10,382			9,263
Deferred tax (benefit) expense		(13,399		)	34,107
Tax benefit from stock compensation plans, net		(3,916		)	(3,301		)
Provision for loan losses		30,158			16,898
Impairment on other real estate owned		2,671			2,102
Net gain on sales of investment securities, loans and other assets		(35,182		)	(23,354		)
Originations and purchases of loans held for sale		(92,475		)	(99,258		)
Proceeds from sales and net changes in loans held for sale		186,498			40,850
Net proceeds from FDIC shared-loss agreements		787			51,890
Net change in accrued interest receivable and other assets		(17,282		)	48,757
Net change in accrued expenses and other liabilities		(169,709		)	(47,735		)
Other net operating activities		(1,378		)	(2,190		)
Total adjustments		(6,241		)	72,077
Net cash provided by operating activities		243,244			291,340
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash paid		138,465			—
Net (increase) decrease in:
Loans		(2,520,300		)	(1,549,830		)
Short-term investments		(78,946		)	73,286
Securities purchased under resale agreements		(375,000		)	150,000
Purchases of:
Investment securities available-for-sale		(504,820		)	(1,113,667		)
Loans receivable		(16,446		)	(577,811		)
Premises and equipment		(8,342		)	(87,443		)
Investments in affordable housing partnerships and other tax credit investments		(62,009		)	(25,860		)
Proceeds from sale of:
Investment securities available-for-sale		395,630			386,108
Loans receivable		220,680			184,679
Loans held for sale originated for investment		356,714			—
Other real estate owned		53,960			47,892
Repayments, maturities and redemptions of investment securities available-for-sale		353,031			376,593
Redemption of Federal Home Loan Bank stock		30,349			31,849
Surrender of life insurance policies		49,111			—
Other net investing activities		(5,436		)	1,608
Net cash used in investing activities		(1,973,359		)	(2,102,596		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in:
Deposits		2,080,497			2,049,786
Short-term borrowings		—			(20,000		)
Securities sold under repurchase agreements		(15,000		)	—
Proceeds from:
Issuance of long term borrowings		—			50,000
Issuance of common stock pursuant to various stock plans and agreements		1,249			2,112
Payment for:
Repayment of FHLB advances		(10,000		)	—
Repayment of long-term debt		(25,310		)	—
Repurchase of vested shares due to employee tax liability		(7,532		)	(9,049		)
Repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan		—			(199,992		)
Cash dividends		(77,772		)	(65,625		)
Tax benefit from stock compensation plans, net		3,916			3,301
Net cash provided by financing activities		1,950,048			1,810,533
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		219,933			(723		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		895,820			1,323,106
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	1,115,753		$	1,322,383
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	85,534		$	84,643
Income tax payments, net of refunds		279,954			118,408
Noncash investing and financing activities:
Loans transferred to loans held for sale, net		460,828			13,912
Loans transfers to other real estate owned		42,175			33,685
Issuance of stock related to acquisition		190,830			—
Conversion of preferred stock to common stock		—			83,027
Loans to facilitate sales of other real estate owned		2,000			139

 

See accompanying notes to consolidated financial statements.

 

9

Table of Contents

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The consolidated financial statements in this Form 10-Q include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly-owned subsidiaries, East West Bank and subsidiaries (the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and balances have been eliminated in the consolidations. As of September 30, 2014, East West has six wholly-owned subsidiaries that are statutory business trusts (the “Trusts”), one of which was the result of the acquisition of MetroCorp Bancshares, Inc. (“MetroCorp”) during the first quarter of 2014 as discussed in Note 3 to the Company’s consolidated financial statements. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, the Trusts are not consolidated into the Company.

 

The interim 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 statements for the interim periods. All adjustments are of a normal and recurring nature. The current period’s results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Events subsequent to the consolidated balance sheet date have been evaluated through the date the financial statements are issued for inclusion in the accompanying financial statements. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2013 Annual Report.

 

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

 

NOTE 2 — RECENT ACCOUNTING STANDARDS

 

In January 2014, the FASB issued ASU 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the amortization in the income statement as a component of income tax expense.  ASU 2014-01 is effective for interim and annual periods beginning after December 15, 2014 and if elected, should be applied retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies when an in—substance repossession or foreclosure occurs that would require a transfer of mortgage loans collateralized by residential real estate properties to other real estate owned. The standard permits the use of either a modified retrospective or prospective transition method.  ASU 2014-04 is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

 

10

Table of Contents

 

NOTE 3 — BUSINESS COMBINATION

 

On January 17, 2014, the Company completed the acquisition of MetroCorp, parent of MetroBank, N.A. and Metro United Bank. MetroCorp, headquartered in Houston, Texas, operated 19 branch locations within Texas and California under its two banks. The Company acquired MetroCorp to further expand its presence, primarily in Texas, within the markets of Houston and Dallas, and in California, within the San Diego market. The purchase consideration was satisfied two thirds in East West stock and one third in cash. The fair value of the consideration transferred in the acquisition of MetroCorp was $291.4 million, which consisted of 5,583,093 shares of East West common stock fair valued at $190.8 million at the date of acquisition and $89.4 million in cash, $2.4 million of additional cash to MetroCorp stock option holders and a MetroCorp warrant, fair valued at $8.8 million, assumed by the Bank.

 

Goodwill from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. As a result of the business combination, the Company recorded goodwill of $121.0 million.

 

The total fair value of assets acquired was $1.70 billion, which included $230.3 million in cash and due from banks, $64.3 million in investment securities available for sale, $2.7 million in Federal Home Loan Bank (“FHLB”) stock, $1.19 billion in loans receivable, $8.6 million in fixed assets, $8.6 million in premiums on deposits acquired, $9.4 million in other real estate owned (“OREO”), $30.0 million in bank owned life insurance, $13.0 million in deferred tax assets and $16.7 million in other assets. The total fair value of liabilities acquired was $1.41 billion, which included $1.32 billion in deposits, $10.0 million in FHLB advances, $25.9 million in repurchase agreements, $29.1 million in junior subordinated debt and $22.7 million in other liabilities. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the January 17, 2014 acquisition date. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The Company has included the financial results of the business combinations in the consolidated statements of income beginning on the acquisition date.

 

11

Table of Contents

 

NOTE 4 — FAIR VALUE MEASUREMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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 — Valuation is based on quoted prices for identical instruments traded in active markets.

 

·                  Level 2 — Valuation is based on 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 3 — Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities.  These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

 

In determining the appropriate hierarchy levels, the Company performs an analysis of the 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 basis.  These assets and liabilities are reported on the consolidated balance sheets at their fair values as of September 30, 2014 and December 31, 2013.  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 for assets measured on a recurring basis in and out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2014 and 2013.

 

12

Table of Contents

 

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of September 30, 2014
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		September 30,			Assets			Inputs			Inputs
		2014			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	603,647		$	603,647		$	—		$	—
U.S. government agency and U.S. government sponsored enterprise debt securities		412,981			—			412,981			—
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		125,567			—			125,567			—
Residential mortgage-backed securities		757,582			—			757,582			—
Municipal securities		296,597			—			296,597			—
Other residential mortgage-backed securities:
Investment grade		55,258			—			55,258			—
Other commercial mortgage-backed securities:
Investment grade		51,127			—			51,127			—
Corporate debt securities:
Investment grade		210,825			—			210,825			—
Non-investment grade		17,776			—			8,867			8,909
Other securities		61,307			—			61,307			—
Total investment securities available-for-sale		$	2,592,667		$	603,647		$	1,980,111		$	8,909
Foreign exchange options		$	6,155		$	—		$	6,155		$	—
Interest rate swaps and caps		29,170			—			29,170			—
Foreign exchange contracts		9,204			—			9,204			—
Derivative liabilities		(54,086		)	—			(50,660		)	(3,426		)

 

		Assets (Liabilities) Measured at Fair Value on a Recurring Basis
		as of December 31, 2013
					Quoted Prices in			Significant
		Fair Value			Active Markets			Other			Significant
		Measurements			for Identical			Observable			Unobservable
		December 31,			Assets			Inputs			Inputs
		2013			(Level 1)			(Level 2)			(Level 3)
		(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities		$	491,632		$	491,632		$	—		$	—
U.S. government agency and U.S. government sponsored enterprise debt securities		394,323			—			394,323			—
U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities		178,870			—			178,870			—
Residential mortgage-backed securities		885,237			—			885,237			—
Municipal securities		280,979			—			280,979			—
Other residential mortgage-backed securities:
Investment grade		46,327			—			46,327			—
Other commercial mortgage-backed securities:
Investment grade		51,617			—			51,617			—
Corporate debt securities:
Investment grade		309,995			—			309,995			—
Non-investment grade		15,101			—			8,730			6,371
Other securities		79,716			—			79,716			—
Total investment securities available-for-sale		$	2,733,797		$	491,632		$	2,235,794		$	6,371
Foreign exchange options		$	6,290		$	—		$	6,290		$	—
Interest rate swaps and caps		28,078			—			28,078			—
Foreign exchange contracts		6,181			—			6,181			—
Derivative liabilities		(50,262		)	—			(46,607		)	(3,655		)

 

13